SBA 7(a) Q&A
Short answer
If the seller's note holder files for bankruptcy, the standby agreement protecting the SBA loan typically remains in effect, meaning the SBA lender's claim is still primary.
Seller notes used as equity are typically fully subordinated to the SBA loan via a standby agreement. In the event of the seller's bankruptcy, the SBA lender's lien and repayment priority remain superior. The bankruptcy court should uphold the standby agreement, preventing any distributions to the seller from the business until the SBA loan is satisfied.
You purchased a business with a $100,000 seller note on full standby. Two years later, the seller files for personal bankruptcy. The standby agreement ensures that the SBA lender retains its first lien position, and no payments can be made on the seller note, even to the bankruptcy trustee, until your SBA loan is fully repaid.
Insider move
Lenders confirm that the standby agreement is robust and enforceable against third parties, including bankruptcy trustees. They ensure it includes language solidifying the SBA lender's superior position in all circumstances, protecting the loan's seniority.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-14. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-14 · SBA sources checked through 2026-06-14. 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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