SBA 7(a) vs. seller financing for a funeral home purchase

A buyer who has found the right funeral home usually faces the same question next: borrow from a bank under the SBA program, ask the owner to carry the price, or blend the two. Each choice changes how much cash you bring, how fast you close, and who loses money if the first years go badly.

This page compares the options side by side and runs the payment math on one illustrative deal. For the full rulebook on each, see our guides to SBA loans for buying a funeral home and, from the owner’s side, seller financing in funeral home sales.

How do SBA 7(a) and seller financing compare?

SBA money is cheaper in cash and longer in term but heavier in process. A seller note is lighter and faster but shorter, and it depends on one person’s willingness to wait for their money.

Two rules drive most of the differences. SOP 50 10 8.1, effective Oct. 1, 2026, sets the equity, valuation, earnout, and seller-role limits in its change-of-ownership appendix. SBA’s lender terms page publishes the variable-rate maximums and the prepayment fee schedule of 5%, 3%, and 1% in years one through three.

What does each structure cost the buyer every year?

On the same deal, annual debt service can land within about 10% across structures. The bigger differences are cash at closing and whether the lender’s coverage test still passes.

Structure B shows why standby notes exist: the buyer halves the cash needed, and the seller waits 10 years for $80,000 with no interest paid in the meantime. Test your own figures with the SBA loan DSCR calculator.

How long does each path take to close?

A seller-financed deal can close as soon as the purchase agreement, licensing, and preneed transfers are ready. An SBA deal adds third-party work that, in our experience, often adds 60 to 120 days.

The SBA lender must order an independent business valuation from a credentialed source, a Phase I environmental assessment for death-care property that embalms or cremates, and a separate real estate appraisal if property is included. If the price is $3 million or more, a quality of earnings report is also required. Any one of these can surface a finding that resets the timeline.

SBA’s own 7(a) program page also lists a “credit elsewhere” test: the business must be unable to obtain the credit on reasonable terms from non-government sources. Lenders document that as part of underwriting.

What can a seller note do inside an SBA deal?

It can do two jobs, but not at once. On full standby it counts as equity for up to half of the injection; with payments it counts as debt and must fit inside both the coverage test and the valuation cap.

The SOP limits total debt, including any seller debt not on full standby, to the business valuation amount. If the agreed price exceeds the valuation, the buyer must cover the gap with equity, not with a bigger seller note. A seller note can be refinanced only after 36 months in place and current. Earnouts are off the table entirely, so a disagreement about future call volume has to be settled through price or a note.

Who carries the risk in each structure?

In an SBA deal, the buyer carries it personally through an unlimited guaranty from every 20%-plus owner, and the bank sits first in line. In a seller-financed deal, the seller carries most of it.

A seller holding a $1.2 million note is, in effect, still invested in the funeral home without control over it. Sellers should charge at least the applicable federal rate the IRS publishes each month and understand the tax timing: Publication 537 lets gain be reported as payments arrive, but depreciation recapture is reported in full in the year of sale. Buyers, for their part, should know that a seller who is nervous about the note may push for tight covenants and a quick right to take the business back.

Which financing should you choose?

Match the structure to the deal’s size, your cash, and the seller’s patience. Most first-time buyers end up with SBA money plus a modest seller note.

Choose an SBA 7(a) loan if…

• You have 10% of project cost in cash or can pair 5% cash with a standby note.
• The firm’s adjusted EBITDA clears 1.25x coverage with room for a bad year.
• You need a 10-year term, or 25 years on real estate, to make payments work.
• You can wait for the valuation, Phase I, and appraisal.

Choose seller financing if…

• The seller knows and trusts you, often as a long-time employee.
• The price is modest and the seller wants interest income more than cash today.
• The deal would fail SBA’s valuation cap or coverage test but still cash-flows.
• Speed matters, or the parties want an earnout or a longer seller role.

What do most owners get wrong about SBA versus seller financing?

They treat it as either-or. The strongest structures often use SBA debt for most of the price and a seller note sized so the seller is paid but the coverage test still passes.

Sellers also underestimate standby. A note on full standby pays nothing, principal or interest, until the SBA loan term ends, which can mean 10 years. Agree to it only on an amount you can wait for. Buyers, meanwhile, often discover too late that a paying seller note counts against coverage, as Structure C shows. Model the full stack before you sign the LOI, and use our guide to negotiating price from diligence findings if the numbers need to move.

For the profile of buyer who uses these structures most, see the licensed funeral director buying a first firm, and for an end-to-end case, our illustrative example of a director buying an employer’s firm with SBA financing. The buyer’s guide places financing in the full acquisition sequence.