Amid persistent interest rate pressures and reduced access to traditional bank credit, seller financing has become a defining feature of small and lower-middle-market M&A in 2025. Seller Edge Capital continues to monitor the segment closely and with growing investor attention. Below is a summary of key developments shaping the market in the first half of the year.
Interest Rates and Cost of Capital
The Federal Reserve maintained the federal funds rate at 4.25% to 4.50%, while the prime lending rate hovered just below 8.5%. These figures contribute to elevated borrowing costs across traditional credit channels.
In contrast, seller-note yields averaged approximately 8%, based on a range observed between 6% and 10%. SBA 7(a) loans are now priced in the 10% to 12% range. Commercial banks, meanwhile, have tightened small business credit for 13 consecutive quarters.
Transaction Volume and Buyer Behavior
Small-business deal flow remained resilient. In Q1 2025, there were 2,368 reported transactions, representing more than $2 billion in combined enterprise value—a year-over-year increase of 9%.
Manufacturing led sector growth, buoyed by reshoring activity, with volume rising 54% compared to the prior year. At the same time, buyers exhibited caution: the median time to close extended to 198 days, reflecting more stringent diligence and valuation discipline.
Prevalence and Impact of Seller Financing
Seller financing has moved from a secondary consideration to a standard component of deal structures. In the lower-middle market, seller-backed instruments now appear in over 75% of transactions.
Among sub-$2 million deals, seller-note quotes outperform bank offers in more than 80% of cases. Listings that promote seller financing command, on average, a 15% valuation premium over those requiring all‑cash consideration.
The Expanding Credit Gap
Changes to SBA regulations in June 2025 reinstated stricter equity requirements and extended standby provisions for seller notes. Concurrently, nearly half of small-business borrowers (47%) report new loan covenants or leverage caps from their lenders.
The resulting credit shortfall has pushed seller notes into a leading role in bridging valuation gaps and enabling deal execution.
Demographic Tailwinds: Baby Boomer Exits Continue
An estimated 2.3 million baby boomer–owned businesses, supporting 25 million jobs, remain in the transition pipeline. Only 20% of these firms are prepared with a formal succession plan.
This demographic shift continues to drive steady supply in the market and reinforces the need for flexible financing structures, including seller participation.
Structuring and Risk Management
As seller notes become more prominent, structuring standards have evolved accordingly. Most notes underwritten or reviewed by Seller Edge Capital now include personal guarantees, working capital thresholds, and quarterly financial reporting covenants.
Small-business loan delinquency rates remain relatively stable at 1.28%. However, prudent structuring remains essential, particularly in an environment where liquidity risk is heightened.
Outlook for the Remainder of 2025
Absent a meaningful decline in interest rates or a shift in bank risk appetite, seller notes are likely to maintain their central role in small and lower-middle-market finance.
For owners seeking liquidity and investors seeking short-duration, risk-adjusted returns, seller notes continue to offer a compelling value proposition.
About Seller Edge Capital
Seller Edge Capital is a dedicated platform for seller note liquidity and structured credit investments. We provide institutional-grade underwriting, partial buyouts, and access to a professionally managed pool of seller-backed promissory notes.
To explore liquidity options or investment opportunities, visit www.selleredgecapital.com or contact our team.
Sources Cited
- Small business loan access tightening for 13 consecutive quarters. GoDocs. https://godocs.com/why-small-business-loans-are-poised-to-surge-in-2025-and-2026
(Published 2024) - Q1 2025 small business sales increased 9% YoY, totaling over $2B in enterprise value. Entrepreneur. https://www.entrepreneur.com/business-news/sales-of-small-businesses-surged-in-q1-per-new-report/490587
(Published April 2025) - Manufacturing sector volume rose 54% YoY in Q1 2025 due to reshoring activity. Entrepreneur. https://www.entrepreneur.com/business-news/sales-of-small-businesses-surged-in-q1-per-new-report/490587
(Published April 2025) - Seller financing appears in 75%+ of small and lower-middle-market deals; seller-backed listings enjoy a 15% valuation premium. IBBA Market Pulse Q1 2025 Report. https://www.ibba.org/wp-content/uploads/2025/05/market-pulse-highlights-q1-2025.pdf
(Published May 2025) - 47% of small-business borrowers report new leverage caps and covenants. Federal Reserve Small Business Credit Survey. https://www.fedsmallbusiness.org/reports/survey
(Accessed July 2025) - 2.3 million baby boomer–owned businesses are expected to transition ownership, but only 20% have succession plans. Project Equity. https://project-equity.org/insights/boomer-owned-business-succession-crisis/
(Published 2022) - Small business loan delinquency rate stable at 1.28%; most seller notes include guarantees and financial covenants.IBBA Market Pulse Q1 2025 Report. https://www.ibba.org/wp-content/uploads/2025/05/market-pulse-highlights-q1-2025.pdf
(Published May 2025)