For SBA lenders
Short answer
A lender needs a formal, executed subordination agreement from the seller, explicitly stating no principal or interest payments will be made on the seller note until the SBA loan is paid in full.
For a seller note to count towards the buyer's equity or be considered full standby, it must be fully subordinated to the SBA loan. The subordination agreement is the critical document, clearly outlining the terms of standby, including the absence of principal and interest payments. This ensures the SBA loan has priority and the seller note does not negatively impact the borrower's debt service capacity.
For a $100,000 seller note, the lender would obtain a signed subordination agreement from the seller, stipulating that the note has a zero interest rate and deferred principal payments for the entire term of the SBA loan, or at least for 24 months, with no payments until the SBA loan is retired.
Insider move
Lenders must prevent situations where a seller note could compete with the SBA loan for repayment. Inadequate or ambiguous subordination documentation can lead to a finding of insufficient equity or an unallowable debt structure, risking a guaranty repair.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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