For SBA lenders
Short answer
The subordination agreement must explicitly state that the seller note is on 'full standby,' meaning no payments of principal or interest are allowed for the full term of the SBA loan, or until the SBA loan is paid in full.
For a seller note to count as equity injection, it must be on 'full standby.' This requires a written agreement stipulating that all payments of principal and interest are deferred until the SBA loan is paid in full, or for the entire term of the SBA loan, whichever is shorter. The agreement must also subordinate the seller's lien (if any) to the SBA lender's lien.
A seller note's subordination agreement includes a clause stating: 'No payments of principal or interest shall be made on the Seller Note for the entire term of the SBA Loan, or until the SBA Loan is paid in full, whichever occurs first. The Seller's lien is expressly subordinate to Lender's security interest.'
Insider move
Lenders must ensure the standby agreement precisely meets SBA requirements to properly count the seller note as equity. Any deviation, such as allowing interest payments or an early payment clause, will disqualify it as full standby equity and expose the lender to 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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