The Closing Argument

Half the Down Payment Has to Be the Buyer's Own Money

Key takeaways

• Under SBA rules in effect since October 1, three sources together can cover at most 50% of the required 10% equity injection. They are standby debt, seller debt on full standby, and minority investor equity.
  

• On a $2.5 million purchase, a buyer with $60,000 of personal cash and a $190,000 investor falls $65,000 short. A seller note cannot close that gap.
  

• Before signing an LOI with an SBA buyer, ask for a written breakdown of the injection by source..

Imagine you accept an attractive letter of intent from a buyer acquiring your firm for $2.5 million, funded with an SBA 7(a) facility of $2.25 million. The deal structure shows the mandatory 10% down payment of $250,000 fully accounted for. The buyer puts up $60,000 from their personal checking account, while a minority backer supplies the remaining $190,000. It looks bulletproof on paper, yet under the SBA’s updated regulatory standards, underwriters must reject this capitalization plan.

The framework divides down payment capital into two distinct baskets. Personal unencumbered savings, personal loans serviced strictly by third-party earnings outside the company, and certified grants can back the entire down payment. Conversely, standby promissory notes, full-standby seller financing, and passive non-operating equity are lumped together under a strict collective ceiling of 50% of the mandatory injection. In this scenario, the buyer must bring at least $125,000, representing 5% of enterprise value, from qualifying personal reserves. Because the buyer holds only $60,000 and passive equity contributions are capped at $125,000, the investor's surplus $65,000 cannot legally satisfy the requirement.

Before granting exclusivity or signing an LOI with a buyer leveraging an SBA 7(a) loan, you must look past the total purchase price and demand that the buyer document the origin of every committed dollar, clearly separating their personal, unborrowed cash reserves from outside capital pools such as passive minority investors, third-party debt, or requested seller financing. Vetting this breakdown upfront exposes hidden capitalization gaps before you pull your company off the market, sign a restrictive exclusivity clause, and burn critical deal momentum.

If an audit of the buyer's funds reveals a shortfall in their personal contribution, you have three clear remedies to get the transaction across the finish line. The cleanest path is requiring the buyer to bridge the deficit personally by liquidating outside assets, tapping unencumbered home equity, or securing outside personal debt that meets the SBA’s independent repayment test. If the buyer cannot produce the cash and relies heavily on a wealthy backer, the second option is restructuring the ownership table: the passive backer must transition into an active equity partner owning 20% or more of the company, which satisfies the equity requirement but legally binds them to sign a personal guarantee on the SBA debt. If neither path is feasible, the final alternative is to pivot away from the SBA program altogether to conventional commercial financing or asset-based lending, where loan-to-value ratios, down payment sources, and seller-note standby terms can be negotiated on commercial merits rather than federal underwriting mandates.

A fully funded down payment on paper means nothing if the underlying capital violates federal equity sourcing rules. Requiring transparency into the buyer’s cash reserves before executing an LOI protects your leverage, prevents costly underwriting delays, and ensures that when you finally take your business off the market, you are doing so with an acquirer who can actually close.

By the Numbers

69.9% of independent sponsors used a seller note in their acquisitions this year, down from 79.0% in 2025, according to Axial's 2026 Independent Sponsor Report. That 9.1-point drop was the largest change in any debt type the survey tracked. Junior debt use fell to 53.8% from 58.0%, and traditional senior debt fell to 86.0% from 88.9%. SBA loans were the only source that grew, rising to 30.1% from 28.4%. Respondents could choose more than one type. Seller notes are still used in most sponsor deals, but fewer sponsors are relying on them..

The Reader’s Sentiment

A buyer offers your asking price but wants you to finance 20% through a seller note. What is your first move?

1. Review whether the business can support repayments alongside the buyer’s other debt

2. Negotiate security and guarantees before discussing the interest rate

3. Counter with a lower price in exchange for full payment at closing

4. Decline seller financing and look for another buyer

Essential Reading

Axial's 2026 Independent Sponsor Report tracks how independent sponsors source, finance, and structure their acquisitions. The report finds that 88.2% of sponsors now source deals through deal networks. 74.3% provide capital support letters before signing an LOI, up from 60.8% last year, and 56% of the LOIs Axial analyzed included rollover equity. For an owner weighing an offer from an independent sponsor, it shows how these buyers fund deals and what proof of capital and equity terms to expect in their LOIs.