Full standby stops every payment on the seller note

Full standby means no principal and no interest reaches the seller on the standby portion of the seller note while your SBA-guaranteed loan is outstanding. That silence is the price of counting seller paper toward your equity injection. Stated as of August 2026, and worth reconfirming. Four choices decide whether the note protects you: term, accrual, subordination, setoff.

What does full standby actually do to a seller note?

Full standby stops payments on the standby portion of the note. Not reduced payments. Not interest only. Nothing moves to the seller while the guaranteed loan is outstanding, unless the lender consents in writing. Stated as of August 2026, full standby is the condition SBA attaches before a lender may credit seller paper as equity.

The mechanism is cash flow. Your lender underwrites the business on its ability to service the guaranteed loan. A check to the seller competes with that debt service.

As of August 2026 the rulebook in force is SOP 50 10 8. It requires an equity injection of at least ten percent of total project cost on a complete change of ownership. Seller debt counts only if it is on full standby, no principal and no interest for the term of the 7(a) loan, and it may supply no more than half the injection. The edition effective October 1, 2026 adds subordination to the lender.

The other half is not yours to improvise. It must come from a source SBA does not limit: unborrowed cash, a personal loan repaid from outside the business, or a grant with no clawback.

Law: SBA SOP 50 10 8, effective June 1, 2025; SBA Information Notice 5000-866746.

Law: 13 CFR 120.10 (Loan Program Requirements include SOPs, notices and forms, as revised).

Which SOP edition applies to my loan, and what changes on October 1, 2026?

SOP 50 10 8 governs applications through September 30, 2026. SBA published SOP 50 10 8.1 on August 14, 2026, effective for applications issued an SBA loan number on or after October 1, 2026. The trigger is the loan number, not your signature date. Files numbered earlier stay under SOP 50 10 8.

That is not trivia. It decides which rulebook your note is drafted against, and a note signed now may be numbered later. Ask your lender in writing which edition your file will sit under. Under 50 10 8.1, change-of-ownership deals get a dedicated appendix that controls conflicts.

• Subordinated full-standby seller debt still counts as equity, but the half-of-injection cap is shared with other standby debt and with equity from investors SBA treats as non-controlling minority. Every dollar of seller note is a dollar they cannot supply.
• Seller debt becomes eligible for refinancing only after thirty-six months in place and current, up from twenty-four. A note paying nothing builds no payment history, so do not assume a standby note gets there. Ask your lender how it reads “in place and current.”

SBA revises this document and issues notices between editions. None of it is permanent. Confirm the edition and its current text before counsel finalizes the note.

Law: SBA SOP 50 10 8.1, published August 14, 2026, effective October 1, 2026, Appendix 15; SBA Information Notice 5000-880695.

Should the seller carry one blended note or two separate instruments?

Two notes or one is a lender question, not a rule question. The slice credited to your equity injection stands by while the guaranteed loan is outstanding. Seller principal above that slice is governed by your lender’s credit approval and its standby form, not by a published standby period you can look up. Lender practice diverges here.

Two instruments buy clarity: each carries its own maturity, schedule and standby covenant. One blended note is simpler, and some lenders prefer it. Get the lender’s standby form before drafting.

What goes wrong when a repurposed form note meets a standby rider?

The common failure is a payment schedule that contradicts the standby covenant. A recycled note promises principal and interest quarterly, starting ninety days after closing. A standby rider bolted on top forbids every payment while the guaranteed loan is outstanding. Both get signed. The contradiction closes with the deal.

Trace the damage. The note says an installment is owed. The standby agreement says the seller may not accept it. If nonpayment is an event of default, the note manufactures a default you cannot cure. If maturity falls inside the standby period, the balance comes due when it cannot be paid.

Courts read the words the parties chose. Delaware’s Supreme Court enforces an unambiguous contract as written and will not create ambiguity to rescue a party from what it signed. Your note names a governing law, though, and at this size it is rarely Delaware. Ask counsel what that state’s courts do with a self-contradicting note.

Case: Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010) (illustrative; Delaware law governs only if your note says so).

The fix is not a longer rider. Draft the schedule and the standby covenant as one instrument. Nothing due or payable until the guaranteed loan is paid in full. Maturity outside standby.

A note promising quarterly installments and a rider forbidding them do not cancel out. They leave a contradiction in your closing file, and the bank’s closing counsel will find it.

One structural point. A promise to pay that says it is subject to another record is conditional under Article 3 as enacted in your state, which takes the note outside negotiability. That is usually what you want: no transferee can be a holder in due course, so a buyer of the note takes it subject to your defenses, including setoff. Make it a decision, not an accident.

Law: UCC 3-104, 3-106(a), 3-106(b); UCC 9-339, as enacted in your state.

Does interest accrue during standby, and who pays tax on it?

Interest treatment has two workable answers, and the note must choose one. Either interest accrues during standby and is payable at maturity, or the note states no interest. Silence is not a third option. Tax consequences follow the words in the note, and the size of the note changes them. Get an accountant on this before drafting.

Take accrual first. Stated interest is qualified stated interest only if unconditionally payable at least annually. Interest that accrues for a decade and is paid at maturity is not. It falls into the original issue discount rules, and the holder takes that discount into income as it accrues. Your seller can owe tax on money not yet received.

One escape valve exists, and it is narrow. Where the note sits under an indexed principal ceiling and the seller is neither a dealer nor an accrual-method taxpayer, the parties may jointly elect cash-method treatment, deferring the seller’s income and your deduction until cash moves. Ask your accountant whether it fits.

Absent that election you deduct the discount as it accrues, subject to the business interest limitation, which excepts taxpayers under an indexed gross receipts threshold.

Now the rate, because stating no interest does not make interest disappear. A note issued for the purchase of property must carry adequate stated interest measured against the applicable federal rate for its term. Where there is a binding written contract, the test looks to the lowest rate in the three months ending with that contract, not the closing month. Set it too low and interest is imputed anyway, and part of what you called purchase price becomes interest.

Law: 26 U.S.C. 1272(a); 26 CFR 1.1273-1(c).

Law: 26 U.S.C. 1274, 1274(d), 1274A, 483, 163(e), 163(j).

What is the seller really agreeing to when the letter of intent promises subordination?

Your letter of intent probably commits the seller to subordinate to a lender who has not yet been identified. That promise is open-ended. The seller is agreeing, months ahead, to sign whatever subordination, standby and standstill documents an unnamed bank later produces. Surface it at the letter of intent stage. Do not spring it at closing.

Name what the package contains.

• A standby agreement. SBA publishes Form 155, the Standby Creditor’s Agreement; a lender may use it or its own. Form 155 makes the creditor elect one payment treatment, so read which box is checked. It also makes the seller hand back any payment taken in breach.
• A lien subordination. If the seller takes a security interest, that lien sits behind the lender’s. Form 155 commits the seller to sign what the lender requires rather than subordinating the lien itself, so confirm that document exists too.
• A standstill. The seller agrees not to accelerate, sue, foreclose or move against collateral while the guaranteed loan is outstanding, absent lender consent.
• Payment blockage. Any payment right outside standby is cut off on a default under the loan.

Raise it with arithmetic, not argument. If the seller refuses, you need to know in week two.

If the seller misled me, can I take it out of the seller note?

Setoff against the seller note is usually your most practical post-closing recourse, and it is not self-executing. A judgment against a seller who has spent the money is paper. A reduction of principal on a note you have not yet paid is worth more, but only if the setoff language and the standby language are reconciled in one document.

Here is the trap. Most setoff clauses are a right to withhold payments. Under full standby there are no payments to withhold. A right to withhold what you were already forbidden to pay is worth nothing.

Draft the remedy instead as a permanent reduction of principal, effective when a claim is determined, whether or not any payment is due. Then align the paper. The purchase agreement should say indemnity claims may be satisfied by reducing the note, and the note should say its principal is subject to reduction under that agreement. Then get the lender’s written position: standby forms commonly bar any change to standby debt without consent, and consent is discretionary.

The seller note is the only asset in the deal still in your hands after closing. Draft it as recourse, not as a formality.

Escrows and holdbacks turn up here, but the SBA funds flow leaves little room and a seller carrying a long standby note has limited appetite. Representation and warranty insurance is a larger-deal tool, uncommon at this size. The note is your leverage.

Where does full standby cut against me?

Full standby cuts against you on price. A seller asked to wait out a ten-year loan wants more dollars. Expect the standby request to be priced into the headline number, into the rate on the seller note, or into a flat refusal. That is a real cost, not a technicality you can paper over.

Three further costs. First, the balloon: a full-standby note with accrued interest matures as one large obligation once the guaranteed loan is retired. Second, refinancing is not a reliable escape, because the seasoning rule wants payment history a standby note does not build. Third, it sits alongside your personal guaranty.

One thing cuts your way. The standby ends when the guaranteed loan is paid in full, so an early payoff releases the seller sooner. Draft for it. Do not plan on it.

What should I tell my lawyer and my lender this week?

Four instructions, in order. Ask the lender first. Decide the structure second. Price the tax third. Draft the remedies last. Get the answers in writing before counsel starts drafting, because they change the document, and because nothing you draft binds the lender or SBA on what they approve.

• Ask which SOP edition and which standby form apply. Which edition your file will be numbered under, whether the lender uses SBA Form 155 or its own, and whether a separate lien subordination is required. Ask for the blank forms.
• Decide one note or two, then match the payment schedule to the standby term. No installments inside the standby period. No maturity inside it. No default triggered by nonpayment the standby agreement forbids.
• Pick the interest treatment and price it with your accountant. Accrue and pay at maturity, or state no interest and accept imputation. Check the rate on the right measuring date, and tell the seller who may owe tax on it.
• Build setoff as a principal reduction, and clear it with the lender. The note, the purchase agreement and the standby agreement should describe the same remedy.

Then raise subordination with the seller before diligence starts. That answer changes your cash requirement, the one number you cannot borrow your way out of. What you control is whether the note says what you think it says.