Some SBA 7A Misconceptions on the New Rules

I often get a lot of questions on the most recent update to the SBA Standard Operating Procedure ("SOP") that went into effect on June 1st of###-###-#### There are two misconceptions from the new rules I pretty consistently am hearing from people, and this includes not only buyers but even business brokers. I want to try and clarify those two items here. Misconception 1: Any seller note on an SBA 7A loan must be on full standby for the life of the loan? - This is not true. The only seller note that is required to be on standby for the life of the SBA 7A loan is a seller note that is being used to offset the required 10% equity downpayment on the loan. The SBA now requires 10% down on a business acquisition. If the seller carries back a note for 5% or more of the purchase price on full-standby (meaning no payments) for the life of the SBA 7A loan, then the buyer can get away with as little as 5% down. This seller note being used as part of the required equity is the only type of seller note that needs to be on standby for the life of the SBA loan. So long as the seller note is not part of the required equity down, the seller note can have standard payment terms. It can be in repayment on day 1, it can have two years standby, it can have forgiveness built into it, it can have a longer-term amortization and a balloon after so many years, it can still be on standby for the life of the loan if both parties agree to it (just not required), etc. So long as there is a maximum note amount, a set payment structure, the note works with the cash flow and you still hit the required debt service coverage ratios, and you and the seller agree to the structure, you can create any note or notes that are in repayment post-closing so long as the note is not being used to reduce the required 10% equity contribution. Misconception 2: If there is a seller note at 20% or more of the purchase price then the seller is required to guarantee the loan? - This is not true. Seller notes have nothing to do with the requirements that the seller might need to guarantee the loan. The only time the seller is required to guarantee the loan would be if there is a partial business acquisition. If the seller retains 20% or more equity on a partial business acquisition then they are required to guarantee the entire loan amount for the life of the loan. If the seller retains under 20% of the ownership interest and they were paid out for a portion of their ownership interest as part of the sale, they are required to sign a guarantee on the full loan amount that will be in place for two years and will automatically roll off / expire at the end of two years so long as the loan has been maintained current during the last 12-months leading up to the two-year anniversary. If you have a seller with a minority ownership interest under 20% and they do not receive any proceeds from the sale, then they can retain their ownersip in the new entity without being required to guarantee the loan. Seller notes have nothing to do with determining the requirement to guarantee the loan. You can have a seller note at 50% and no guarantee would be required from the seller so long as the seller is not retaining ownership under a partial business acquisition scenario. I hope this post helps to clarify these misconceptions that are out there. If you have additional technical questions please do not hesitate to reach out to me at any time here or directly at redacted