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A seller note or a lender for the purchase price?
A seller note is financed by the person who knows whether the business can actually pay it. That alignment is the point — and the security they keep is the catch.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
Should I ask the seller to carry part of the purchase price, or finance all of it through a lender?
Ask the seller to carry part of the price in almost every acquisition: it lowers the amount you must borrow, signals the seller's own confidence, and where the note is on full standby it can reduce the cash injection a lender requires. Take the all-lender route when the seller demands security that lets them retake the business on a missed payment, or when their continued involvement is itself a risk. Read the seller note's remedies before its rate.
A seller note is debt provided by the one party who knows with certainty whether the business can service it. That is not sentiment — it is the structural point. A seller who carries paper has bet on their own numbers, and every lender in the transaction reads it that way. A seller who insists on every dollar at closing has told you something too.
So the useful question is not whether a seller note is cheaper. It usually is. The question is what the seller keeps in exchange, and whether their remedy on a missed payment is worse for you than a lender's.
Where the seller note wins
- Structure with a note: lender funds $585,000 (65%), seller carries $225,000 (25%) on full standby, buyer injects $90,000 (10%). Lender portion over ten years at 8.75%: $7,331.61 a month. The seller note, once standby ends, at 6% over five years: $4,349.88 a month.
- All-lender structure: $810,000 financed over ten years at 8.75%: $10,151.47 a month.
In the first years — while the seller note is on standby and paying nothing — monthly debt service is $2,819.86 lower. That is the cash that funds the transition, the working capital gap and the mistakes every new owner makes in year one.
There is a second benefit that does not show in the payment. Where a seller note is on full standby for the term, program rules have allowed part of it to count toward the equity injection required on a change of ownership. The conditions are specific and they are set out in the current SBA SOP — read the version in force, because the treatment has changed over time and a broker's recollection is not a source. If it applies, your cash at closing can fall materially.
And the seller who carries paper stays interested in the business performing. That is worth more in year one than most buyers expect.
Where the all-lender route wins
Miss a payment to a lender and you face demand, acceleration, collection and eventually a judgment — slow, expensive, survivable, and negotiable throughout. Miss a payment to a seller holding a security interest in the shares and you can lose the business itself, to a person who knows exactly how to run it and may be pleased to have it back at a discount to what you paid.
That is a genuinely different risk, and it is not priced into the interest rate. If the note's remedies are severe, the cheaper money is the more dangerous money.
The second case is the seller whose involvement is the problem. A note keeps them financially attached for years. If the transition plan involves changing what they built, and they hold paper with covenants attached, you have bought a business with a supervisor.
What to negotiate in the note
The questions that settle it
- Will the seller carry paper at all? Ask early. The answer tells you what they believe about the business.
- What security does the note carry, and what happens on default? Read the remedies before the rate.
- Will the senior lender accept the note, on standby, and in what form? Get this confirmed in writing before the purchase agreement is signed.
- Do I have offset rights against the note for breaches of the reps and warranties? If not, ask for them.
What to ask for, and what to have ready
Ask for the note to be unsecured, or subordinated with no enforcement rights while senior debt is outstanding. Ask for a right of offset. Ask for the standby period to cover at least the senior lender's early years.
Have your lender involved before you agree the structure. A purchase agreement that promises the seller something the lender will not permit has to be renegotiated, and renegotiation after handshake is how deals die.
Have the price allocation settled early — it drives the collateral picture and the tax outcome for both sides.
Refuse a seller note with a step-in right you have not had reviewed by a lawyer. Refuse to sign a purchase agreement before the senior lender has confirmed the structure works. And refuse to treat the seller note's rate as the important term in the document; the remedies are what will matter if anything goes wrong, and the rate never will.
Where this applies
Related questions
Should I ask the seller to carry part of the purchase price, or finance all of it through a lender?
Ask the seller to carry part of the price in almost every acquisition: it lowers the amount you must borrow, signals the seller's own confidence, and where the note is on full standby it can reduce the cash injection a lender requires. Take the all-lender route when the seller demands security that lets them retake the business on a missed payment, or when their continued involvement is itself a risk. Read the seller note's remedies before its rate.
Which funding products does this apply to?
Term Loan, SBA Loan. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.
Is this specific to retail?
It is written around how a retail business actually generates and collects cash, which is what makes its funding problem different. The mechanics transfer; the arithmetic may not.
Who writes this?
The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.
How do I know a figure here is right?
Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.
Are the examples real deals?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.
Why do you never say what a typical rate is?
Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.
Is this financial or legal advice?
No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.
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