What Is Seller's Note (Seller Financing)?Definition and Examples

Seller financing bridges the gap between what a buyer can secure from bank financing and the total purchase price. In a typical SBA-financed small business acquisition, the bank provides 70-80% of the purchase price, the buyer contributes 10-15% as a down payment, and the seller finances the remaining 10-20%. Without seller financing, many transactions would fail because the buyer cannot secure enough bank financing or does not have sufficient cash for a larger down payment.

From a seller's perspective, offering financing converts a lump-sum transaction into an income-producing investment. A $200,000 seller note at 7% interest over five years generates approximately $39,600 in interest income, increasing the total proceeds from $1,000,000 to $1,039,600 while spreading the tax liability over multiple years. Additionally, if the deal is structured as an installment sale, the seller defers capital gains tax on the financed portion until payments are received.

The structure of the seller note can also serve as a deal-making tool when negotiations stall on price. If the buyer cannot meet the seller's asking price at closing, the seller can maintain their price by offering more generous financing terms — a lower interest rate, longer repayment period, or interest-only standby period. This flexibility often resolves price disagreements and allows both parties to achieve their objectives through creative deal structuring.