For SBA lenders
Short answer
A full standby seller note cannot accrue or pay interest during the SBA loan term; however, a partial standby note may accrue and make interest-only payments.
For a seller note to count as equity (full standby), it cannot accrue or pay any interest during the life of the SBA loan. If the seller note is on 'partial standby' (i.e., not counting as equity but subordinate to the SBA loan), it may accrue and pay interest only, but no principal payments. This ensures the business's cash flow is prioritized for the SBA loan during the crucial initial years.
A $100,000 seller note is on full standby for a 10-year SBA loan; it cannot accrue or pay any interest. If the note was only on partial standby, it could accrue interest at 5% and pay $5,000 annually in interest-only payments, with principal still deferred.
Insider move
Lenders must carefully review the standby agreement for clear language on interest accrual and payment. Any payments of principal or interest on a full standby note are considered a violation and can lead to a guaranty repair or denial.
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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