Selling a Business With Debt: 7 Issues Buyers and Lenders Raise

You can sell a business with debt. But you should be aware of the potential downsides. A creditor can file a lien against your business assets. This lien acts as a kind of insurance. It ensures the creditor gets paid first in the event you can’t repay the debt. Lenders can place liens on all assets or just a handful. Buyers and their lenders consider seven issues. They revolve around who is liable for debt, whether assets are owned outright, and who needs to sign off on the sale.

Whether the Lien Follows the Assets

The first issue is whether the lien follows the assets. Normally, in the Uniform Commercial Code, the lender’s security interest in the collateral stays with the collateral, even after the collateral is sold. Your business might be able to sell off its assets free of it, but only if the lender first agrees to release the lien.

The second issue is whether a lien search will catch the existing lien. UCC searches show the world who claims what. If a lender finances the purchase, the lien shows up in its UCC search and can be addressed in closing. In an all-cash deal there is no lender and no built-in check. Without it, the buyer may end up owning an asset still under lien with only a claim against the seller. The UCC-1 is only good for five years. But it will be continued if the lender files a continuation. If your creditors are paid off, ask them to terminate their UCC filings. You have to demand the termination, and they have to file it within 20 days of your written request.

SBA Lien

The third issue is that the SBA requires some form of security for their COVID disaster relief loans. For loans between $25,000 and $200,000 they require a general lien on business assets, but no personal guarantee. For loans above $200,000, they require both a personal guarantee and a lien on business assets. You may see that as great news. It’s just an illusion. The lien will remain in effect until the SBA formally releases it.

When it comes time to sell, you file a release of collateral request before closing. You’ll need to provide proof of the sale (a signed agreement); a current UCC search showing your lien; and two years of tax returns. Often, the release will require payment to the SBA. The request must be approved before the deal closes. Asking for a release after the deal is done can look like fraud. It can turn what started as a civil problem into a criminal one.

The fourth issue is whether the new owner will be allowed to take over the SBA loan. Ask for an assumption request as far in advance as possible. In an SBA loan assumption, the original borrower is not released from liability on the loan. You have to spend the loan proceeds the way you said you would. You can be held liable even if you didn’t sign a guarantee. Closing the business itself doesn’t clear it. Selling the business without telling the SBA of the sale leaves you responsible.

The fifth issue is the buyer’s lender. A lender will get a UCC search on the assets. Any collateral with an existing lien will stand out. If the new lender wants to go ahead of the SBA lien, they will need a subordination request approved by the SBA. The SBA does not guarantee your request for subordination will be approved, or that there will be no strings attached (such as curing a delinquency or making a payment). But if you have a properly perfected purchase-money loan for a specific new piece of equipment, it can get priority over the SBA loan on that item without its approval. The SBA also has rules about who can buy your business with a 7(a) loan. Seller and buyer obligations are set out in SOP 50 10 8.1 effective October 1, 2026.

Whether the Company Has Paid Its Taxes

The sixth issue is whether the company has paid its taxes. A federal tax lien reaches all business property, including receivables. The IRS will release the lien within 30 days after the tax is paid in full, so it’s best to get it all cleared up before going to market.

Last but not least is the seventh issue. In California, the buyer may inherit the seller’s unpaid sales taxes. To avoid this, a buyer withholds enough of the sales price to cover the unpaid sales tax until the seller either produces a receipt or a no-tax-due certificate from the California Department of Tax and Fee Administration. The buyer can ask the state in writing. If they don’t get back either a certificate of no amount due or notice of amount due within 60 days (counted from the latest trigger date), the buyer is off the hook for the tax. Some states, called bulk sale states, require the buyer to notify the seller’s creditors at least 45 days before the sale.

Before you go into the details of a deal, pull the UCC-1 lien search and get your SBA lien release request submitted. Until you do, you can’t know what liens are on your assets. Skip that step, and the lien can surface afterwards to cloud your title and unravel the deal. Title and UCC lien searches before closing are insurance against unpleasant surprises that can derail your deal. Liens complicate the sale of an asset or a business. There are many ways to get them straightened out, but only if you know to look for them.