We have agreed to carry a substantial seller note to help the buyer get their SBA loan approved, but the bank requires us to stand in a secondary position. How do we secure collateral outside the company assets, like a personal guarantee or a stock pledge, without violating the bank's subordination terms?

Question

Tyler Smith · Accepted Answer

When you agree to carry a seller note behind an SBA lender, you are subordinated, meaning you cannot foreclose on the company's operating assets if the buyer defaults. However, you can secure your note with personal or non-corporate assets that do not interfere with the senior bank's primary lien. Your first move is to secure your note with secondary collateral structures:
- An unconditional personal guarantee from the individual buyers backed by personal financial statements.
- A stock pledge agreement allowing you to take back equity control if they default, subject to senior lender rights.
- A key-person life insurance policy with you named as the primary beneficiary.
While you still have to satisfy the bank first, owning the stock gives you a seat at the table and the ability to take back control of the operations if the business deteriorates. Finally, establishing a covenant that requires the buyer to maintain a life insurance policy with you as the primary beneficiary, covering the remaining balance of the seller note, ensures that if the key operator passes away, your note is paid off immediately. These structures provide genuine recourse without violating the subordination terms required by the bank.