For SBA lenders
Short answer
A non-SBA third-party standby agreement must include explicit language prohibiting payments of principal and interest for a specified period, typically until the SBA loan is repaid or a specific date.
For a third-party loan to be treated as equity (or near-equity) for SBA purposes, a formal standby agreement is required. This agreement must clearly state that no payments of principal or interest will be made on the third-party debt for at least the full term of the SBA loan, or for a specified, extended period. This reinforces the business's capital base and prioritizes SBA loan repayment.
A borrower's relative provides a $50,000 loan to the business. The lender requires a standby agreement stating, 'No payments of principal or interest shall be made on this $50,000 loan from [Relative's Name] for the entire 10-year term of the SBA loan.'
Insider move
Lenders must scrutinize third-party standby agreements for clarity, enforceability, and compliance with SBA requirements. Ambiguous language or a shorter standby period than required can negate the agreement's purpose and impact the borrower's equity calculation and overall eligibility.
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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