New SBA Guidelines: Using Seller Notes as Down Payment for 0% Down Business Acquisitions

The Small Business Administration (SBA) has introduced game-changing updates to how seller notes can be used when purchasing a business. These changes, implemented in May 2023, have dramatically simplified the process of financing business acquisitions by making it easier to use seller financing as part of the down payment requirement.

Understanding Seller Notes in Business Acquisitions

A seller note is fundamentally a loan provided by the business seller to the buyer. When purchasing a business, buyers often face a gap between their available financing and the total purchase price. A seller note bridges this gap by allowing the buyer to pay a portion of the purchase price over time, with interest, directly to the seller. This arrangement has become increasingly valuable under the new SBA guidelines.

The New Guidelines: A Major Shift in Seller Financing

The most significant change in the SBA’s policy relates to how seller notes can now be used as equity injection (down payment). Under the new guidelines, a seller note can qualify as your entire equity injection requirement, provided it meets certain conditions. This represents a dramatic shift from previous requirements and opens up new possibilities for business buyers with limited cash resources.

Full Standby Seller Notes: Maximum Flexibility

The most notable change involves full standby seller notes. Under the new framework, a seller note can serve as your entire equity injection if it’s placed on a two-year standby period. During this standby period, no payments are made to the seller, and the note must be subordinate to the SBA loan. This is a significant improvement from the previous requirement of a ten-year standby period, making it much more attractive for sellers to participate in the financing process.

Partial Standby Notes: A Balanced Approach

For buyers and sellers who prefer some ongoing payments, the SBA now offers a partial standby option. Under this arrangement, the buyer can make interest-only payments to the seller, but there are some specific requirements. The seller note can cover up to 75% of the required equity injection, but a minimum of 25% must come from other sources such as cash or other eligible assets. This provides flexibility while ensuring buyers maintain some skin in the game.

Real-World Application: How It Works

Let’s consider a practical example of purchasing a business for $1,000,000. Traditionally, you would need to provide $100,000 as a 10% equity injection. Under the new guidelines, you have two primary options:

The first option allows for a full standby seller note of $100,000, requiring no cash down payment. This can be particularly attractive for buyers with limited liquid assets but strong business acumen and income-generating potential.

Alternatively, you could structure a partial standby arrangement with a $75,000 seller note and $25,000 in cash. This approach might be more attractive to sellers as it provides some immediate cash flow while still significantly reducing the buyer’s upfront cash requirement.

Key Considerations for Success

When structuring a deal using seller notes, several factors require careful consideration. First, ensure that all parties understand the standby requirements. For full standby notes, this means no payments to the seller for two years, while partial standby arrangements allow for interest-only payments with specific restrictions.

The terms of the seller note must be acceptable to your SBA lender, and proper documentation is crucial. Working with experienced legal counsel to review and structure the agreement can help prevent issues down the line.

Moving Forward with Your Acquisition

If you’re considering using a seller note as part of your business acquisition strategy, start by discussing the structure with your SBA lender early in the process. This ensures everyone is aligned on the requirements and prevents surprises during the approval process. You’ll need to:

• Discuss the proposed structure with your lender
• Ensure the seller understands and agrees to standby requirements
• Prepare proper documentation
• Have terms reviewed by qualified legal counsel

Expert Guidance Through GoSBA Loans

Navigating these new guidelines requires expertise and careful planning. At GoSBA Loans, we specialize in helping buyers structure their business acquisitions to take full advantage of these favorable changes. Our team can help you understand the nuances of seller notes, ensure compliance with SBA requirements, and maximize your financing options.

The new seller note guidelines have created significant opportunities for business buyers who previously might have struggled with down payment requirements. By working with experienced professionals, you can structure a deal that benefits both buyer and seller while meeting all SBA requirements.

Contact GoSBA Loans today to discuss how these new seller note guidelines can work for your business acquisition. Our experts will guide you through the process, ensuring you understand all your options and helping you structure the most advantageous deal possible.