SBA 7(a) Q&A
Short answer
A seller's standby note must be on 'full standby' to count as equity. This means no principal or interest payments can be made on the note for the entire term of the SBA loan, and it must be fully subordinated to the SBA loan.
The SBA requires true equity injection to demonstrate the borrower's personal stake. A seller note can count if it's explicitly structured as 'full standby,' meaning all payments are deferred for the life of the SBA loan, and it is fully subordinated in repayment priority to the SBA loan. This is critical for the seller's note to be treated as quasi-equity.
A buyer is purchasing a business for $1,000,000. They provide $50,000 in cash, and the seller agrees to a $50,000 standby note. This note must state that no payments of principal or interest will be made to the seller until the $900,000 SBA loan is fully repaid, and the note is legally subordinated.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
7(a) Loan Program — Terms, Conditions, and Eligibility
U.S. Small Business Administration · Official SBA source
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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