SBA 7(a) Q&A
Short answer
If a seller's standby note is not properly subordinated or documented, it cannot count towards the required equity injection, potentially jeopardizing the SBA 7(a) loan approval.
A seller note intended to count as equity must be on full standby, meaning it is formally subordinated to the SBA loan, prohibiting any payments until the SBA loan is repaid. Improper documentation or failure to subordinate means the note is not treated as equity, and the buyer will be short on their required injection.
A buyer's loan approval depends on a $75,000 seller note on full standby. If at closing, the subordination agreement is missing or incorrectly states that interest payments can begin in year two, the lender will halt the closing. The buyer would need to either correct the note terms or find an alternative $75,000 equity source.
Insider move
Lenders perform thorough due diligence on all standby agreements to ensure they are legally binding and fully subordinated. Any discrepancies or missing documentation are red flags, as the SBA will not guarantee a loan where equity requirements are not met.
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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