Seller financing
Part of the purchase price paid over time by the buyer to the seller under a promissory note, rather than in cash at closing.
Also called: Seller note · Vendor take-back · Owner financing
In a seller-financed deal the seller effectively becomes a lender for part of the price. A promissory note sets out the principal, interest rate, term, amortisation, and what happens on default. Terms in small-company transactions commonly run three to seven years, with interest typically somewhere between a bank rate and a private credit rate, though everything here is negotiated case by case.
It exists because it solves problems on both sides. Buyers use it to bridge a funding gap and to reduce the equity they need. Lenders — SBA lenders in particular — often require it, because a seller willing to leave money in the deal is a seller who believes the business will keep performing. And sellers use it to widen the buyer pool or to support a price a pure-cash buyer would not pay.
The trade-off is real and should not be glossed over: a seller note is unsecured or second-position risk on a business you no longer control. If the buyer mismanages the company, the note is what suffers. Sellers who accept notes should negotiate the security package — personal guarantees, a security interest in the assets, financial covenants, and clear default remedies — with the same care they give the headline price.
Where sellers get caught
- Accepting a note with no personal guarantee and no security interest, on the strength of liking the buyer.
- Standby provisions in SBA deals that can prevent you from collecting for years — read them before agreeing the note.
- Not modelling the tax treatment. Instalment reporting can help or hurt depending on your situation; ask an accountant before the LOI, not after.
Common questions
How much of a deal is typically seller-financed?
It varies widely with the buyer, the lender, and the business. It is common enough to be unremarkable in owner-operator transactions, and unusual in deals funded entirely by an institutional buyer. There is no standard percentage, and any number quoted without context is a guess.
Is seller financing a sign of a weak buyer?
Not necessarily. Bank lenders frequently require it precisely because it aligns the seller with the transition. What matters more is whether the buyer can service the note from the business as it actually performs.
Related terms
SBA 7(a) loan
A US Small Business Administration guaranteed loan programme widely used to finance acquisitions of small businesses by individual buyers.
Earnout
Part of the purchase price paid only if the business hits agreed performance targets after closing.
Escrow and holdback
A portion of the purchase price kept back at closing to cover claims that arise afterwards, released once the claim period passes.
Letter of intent
A mostly non-binding document setting out the proposed price, structure, and process, whose binding provisions typically cover exclusivity and confidentiality.
Guides that use this term
Where seller financing comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.