Seller financing — also called an owner-carried note or seller note — occurs when the seller of a business accepts a promissory note for a portion of the purchase price rather than requiring all cash at closing. The buyer makes monthly payments (principal plus interest) to the seller over a defined term, typically 3–7 years.
Why Sellers Offer Financing
Sellers provide financing to expand their buyer pool (reaching buyers who cannot fully finance the purchase through third-party lending), signal confidence in the business's future performance, and earn interest income above what they might receive from other investments. For SBA transactions, seller notes on standby may be required to make the deal structure work within SBA guidelines.
How Seller Notes Are Structured
A seller note typically specifies: principal amount, interest rate (typically 5–8% for small business notes), repayment term, monthly payment schedule, security (collateral — often the business assets through a UCC lien), personal guarantee (the buyer personally guarantees the note), and subordination provisions if SBA or bank financing is also present.
The seller note should always be documented by a business attorney — not just a handshake agreement. Proper documentation with security provisions gives the seller meaningful recourse in the event of default. An unsecured seller note to a buyer who defaults is essentially an uncollected debt with limited recovery options.