24d • General discussion
How seller standby financing works for the 10% down
In the context of SBA 7(a) lending, seller standby financing is a creative deal-structuring tool that allows you to meet the mandatory 10% equity requirement while preserving your own cash.
Here is how the mechanism works:
- The 10% Equity Requirement: Standard SBA 7(a) rules for business acquisitions typically require a 10% down payment (equity injection).
- The Seller’s Contribution: You can negotiate for the seller to "carry" a portion of that 10% as a secondary loan to you. According to our previous discussions, if a seller carries 5% of the deal on standby, you may only need to provide the remaining 5% from your own cash to reach the 10% threshold.
- The "Full Standby" Condition: For the lender to count the seller’s loan toward your down payment, that note must be on full standby. This means the seller agrees to receive no principal or interest payments on their portion for a set period—often the entire duration of the SBA loan.
- Bank Approval: This structure is a key part of deal architecture that banks look at when deciding what to approve. It reduces the buyer's immediate cash burden while ensuring the seller still has "skin in the game" regarding the business's long-term success.
- Expert Structuring: Navigating these "creative funding options" requires expert guidance to ensure the capital stack is aligned with bank standards and your own financial goals.
Conclusion: Leverage the seller’s equity to keep your cash in your pocket. By using a standby note, you can acquire a high-performing business with half the typical upfront capital. To see if your deal qualifies for this structure, book a clarity call at https://beaueckstein.com/bookwithbeau/
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How seller standby financing works for the 10% down
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