Glossary
What is Standby Seller Note?
Also called: seller note on standby, subordinated seller note
In one sentence: Seller financing in which the seller agrees not to be paid for a set period and ranks behind the bank loan, so it does not draw on the buyer’s cash flow.
In plain English
In many acquisitions the seller finances part of the price. A standby seller note is a version in which the seller agrees to wait: no payments on the note, or limited ones, while the bank loan is outstanding. The note also sits behind the bank loan, which is called subordination.
Why lenders care
A note that pays on schedule adds to the buyer’s debt payments, which lowers coverage. A note on standby does not, so it is treated more like equity than debt. To count, it must be on full standby, meaning no payments of principal or interest for the full term of the SBA loan (interest can accrue), and the exact terms are in the rules and the lender’s documents.
Pros and cons
| Standby note | Paying note | |
|---|---|---|
| Effect on your payments while on standby | None | Adds to debt service |
| Can count toward your equity | In some structures, within limits | Generally not |
| Seller’s cash today | Deferred | Received over time |
| Seller’s incentive | Stays invested in a smooth handover | Same |
Hypothetical example
A buyer needs $115,000 of equity. The buyer brings $57,500 in cash and the seller carries $57,500 on full standby. During the standby, the note adds nothing to the buyer’s yearly payments. If the seller instead insisted on a $57,500 note with payments, it would not count toward the equity, the buyer would need more cash, and the payments would add to debt service.
Common mix-ups
- Standby is not forgiveness. The seller is still owed the money under the written terms.
- “Seller financing” is not one thing. Standby vs paying is the distinction lenders care about.
- Earnouts are different. Seller earnouts are not allowed in an SBA-financed purchase under SOP 50 10 8.1. See earnout.
What to do with it
Settle the structure before the letter of intent. See equity injection and seller notes.
Common questions
What is the difference between a standby note and a regular seller note?
A regular seller note pays on a schedule, so its payments add to the debt your cash flow must cover. A standby note waits, so it does not compete with the bank loan for cash while the standby lasts.
Does a standby note count toward my equity injection?
It can, in some structures, within limits. It must be on full standby: no principal or interest paid to the seller for the full term of the SBA loan. Confirm the current rule with your lender.
Does the seller get paid eventually?
That depends on the written terms. Standby periods, interest accrual and what happens at the end are negotiated and documented, and the lender must approve the language.
Related terms
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General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.