SBA Policy Changes Effective June 1st, 2025
Below is a summary of the new SBA 7A policy changes going into effect on June 1st, 2025. If you can get your loan approved and an SBA Authorization pulled prior to June 1st, you can still close under the old rules. I have highlighted the major changes below. Please note we have reviewed the updated SOP set to go into effect on June 1st as well as a summary of the changes provided by the SBA. There are a lot of changes and some of the language is a bit confusing, but this analysis is an attempt to give you the most up to date rule changes. There is also a chance that the SBA rolls back some of these changes prior to the new SOP going into effect. We have already heard an update is forthcoming from the SBA. However, I would expect any update to be more about clarifying some of the language and confusion in these updated rules.
Lastly, I would like to point out that many of these changes are taking the SBA SOP back to policies that were in place prior to the roll-out of changes starting in 2021 by the previous administration. Some of these changes are not new but resuming past policies and rules. Here are the major changes. I have provided a quick synopsis of the change and then my comments (in blue italic) on the change afterwards.
No Foreign Ownership - SBA Lenders must now certify via E-Tran that no Direct or Indirect Owner is an ineligible person. Ineligible persons include, but are not limited to, foreign nationals, those granted asylum, refugees, nonimmigrant aliens under 8 U.S.C. & 1101(a)(15), those under Deferred Action for Childhood Arrivals (DACA), and undocumented aliens who are in the U.S. illegally. There is a six month look back now for qualifying someone as ineligible. U.S. Citizens, U.S. Nationals (born in American Samoa or Swains Island), Naturalized Citizens, and Lawful Permanent Residents (typically “green card holders”) qualify for SBA financing. However, individuals with a 2-year Green Card are not eligible because a 2-year Green Card is a temporary “Conditional” Green Card and the individual must apply to have the conditional status removed. – This rule provides concise clarification of who can own a business when an SBA loan is involved. Based on this update you cannot have anyone in your capital stack that is not a U.S. citizen or permanent Green Card holder, and someone cannot use a foreign entity to invest in the business. All investors and capital must come from U.S. based owners and investors.
Enhanced Delegated Authority - SBA Lenders that have Delegated Authority (also referred to as PLP / Preferred Lender Provider status) must approve all loans using their delegated authority with only two exceptions: a) refinance of the same institution debt; and b) For 7(a) International Trade Loans only when the SBA is not in a first lien position on the collateral. There is a way lenders can submit questions and request exemptions without having to submit the full file to the SBA for underwriting. – This is a positive change. It gives more power to the PLP lenders to approve loans directly and limits the reasons loans must be submitted to the SBA directly for approval.
SBA Small Loan Maximum Loan Amount is Down - The Maximum 7(a) Small Loan amount has been lowered from $500,000 to $350,000. – This will force more loans to go through the full SBA 7A loan approval process versus the more streamlined scoring process allowed for smaller loans.
SBA Small Loan Higher Qualifications - The Minimum acceptable SBSS score (score used to qualify for a low documentation loan) has been raised from 165 to 155 for the loan to qualify under the 7(a) Small Loan program. If the score falls below 165 the loan needs to be treated as a standard 7(a) loan – This means it will be slightly more difficult for loans to qualify under the small loan program and loans with lower scores will have to be underwritten and approved like standard SBA 7A loans with the higher underwriting and documentation requirements that come with a standard SBA 7A.
Reinstatement of the SBA Franchise Directory - The SBA Franchise Directory is being reinstated as of June 1st, 2025. Temporary procedures for dealing with franchises are in place through July 31st, 2025. Franchisors and Distributors will have until July 31st, 2025, to sign a Franchisor or Distributor Certification to be included in the Directory. Any franchisor or distributor who has not signed a new certification will be removed from the Directory. Lenders can only lend to Franchisors and Distributors approved and contained in the directory. There is additional clarification provided as well for when Distributors need to be in the directory. SBA lenders can request franchisors not already approved to apply to be in the directory, and the franchisors can sign up at any time. However, they must meet the SBA’s qualifications. –This will limit the number of franchisors and distributors that qualify for SBA financing as not all distributors and franchisors have historically been willing to follow the SBA guidelines and requirements. I suspect there will be many franchisors and distributors that Banks were allowed to lend to over the past two years that they will no longer be allowed to lend to once this change goes into effect.
Reinstatement of the 10% Minimum Down Payment for Business Start-Ups - The required minimum down payment for starting a business is back to 10% - although the requirement was reduced to 0%, most lenders still required a minimum of 10% or more for new business start-ups prior to this change, so I do not believe this change will have a huge impact. This change only applies to brand new businesses and not business expansions. Business expansions can still qualify for 100% financing.
Certain Management Agreements Now Make Businesses Ineligible for SBA Financing - A management agreement makes a business an ineligible passive business when the agreement gives the management company sole discretion over business operations. An eligible management agreement means the management company does not have sole discretion to manage the operations of the business and the Applicant exercises meaningful oversight of the business – This affirms that the owners need to be in full control and there cannot be a management agreement in place that takes away that control from the owners. If a third party is managing the entire business, then the business would not qualify for SBA financing. This affirms the SBA’s goal that owners are involved in the day-to-day management of the businesses they own. This could impact transactions like home healthcare where there are sometimes third party managers or possibly even the use of Medical Service Organizations depending on how the agreements are drafted.
Clarification on Passive Real Estate Transactions - Shopping centers, office suites, salon suites, ghost kitchens, and similar business models that lease space are not eligible unless: a) the revenue is earned through membership dues and not rent; and b) the business’s customers do not have an assigned space; and c) the business is responsible for the necessary equipment. Businesses are either fully eligible or fully ineligible, so if any part of the revenue is from rent the business is ineligible. – Historically salon suites, ghost kitchens and the like were not eligible. This provides some clarification on when they are or are not eligible and does open the door for some of these businesses to get SBA financing.
Ability to Sell Marijuana Related Products is Now Allowed - Marijuana, hemp and CBD Businesses continue to be ineligible. However, if an applicant sells products made from hemp or CBD or devices associated with consuming marijuana, the SBA lender is responsible for obtaining documentation to demonstrate that the products sold by the business are not illegal under federal, state or local laws, in order to be eligible. – This provides the opportunity for businesses that sell products in the marijuana industry that were not eligible before to now be eligible, but it does require a burden of proof those items are legal for the lender to get, so it is not clear if lenders will start working with these businesses unless that burden of proof is easy to get. Many lenders still have policies that restrict their institutions from doing Banks with these types of businesses, so even if the SBA allows it, that does not mean the institutions will allow it.
Criminal Record Qualifications for Eligibility - Businesses owned by an individual currently on parole or probation may be eligible. If the success of the business operations is primarily dependent on the individual, Applicant must provide; a) a plan for the continued operations of the business in the event of reincarceration; and b) the SBA lender should consider adding additional guarantors. – This provides more stringent requirements for Banks to lend to individuals that are on parole or probation but leaves the door open for them to get financing. However, keep in mind many institutions have their own internal policies that prevent them from lending to individuals with criminal records, so just because the SBA allows it, that does not mean lending institutions will approve it.
SBA Loans Must Remain Current for Future Financing - A business is ineligible for SBA financing if the Applicant business has an existing 7(a) or 504 loan that is not current. Also, if owners of the Applicant have other SBA loans that are not current, that can disqualify the loan as well. Current means a payment has not remained unpaid for 29 days (or in layman’s terms, is not 30 days or more past due). A loan that has matured and has not been paid within 29 days of the maturity date is not current and is not eligible for refinancing. – Borrowers seeking to refinance with an SBA 7A loan must keep the debt current and even if it matures, must make payments beyond maturity or get it renewed by the current lender before refinancing. This can impact loans that have deferred payments. You will want to be sure you have been making monthly payments from business cash flow, preferably for the last 12 months, to qualify for a refinance or additional financing.
Date of Birth Data Collection - Date of Birth is now required for all owners and date of formation for all entities when seeking an SBA authorization through the E-Tran system. – This is a new verification requirement.
The Credit Elsewhere Test Returns - SBA Lenders must now complete the “Credit Elsewhere” test again to verify the Borrower could not get credit from other sources to qualify for SBA funding. This includes verifying that the 20% or greater owners do not have sufficient liquidity to support the loan. For exceptions the lender can include funds set aside for future living expenses, working capital needs as well as retirement funds to reduce liquidity. – This will limit the types of Guarantors that can qualify for SBA financing going forward. If the Guarantors have more liquidity than the requested loan amount after reasonable adjustments are made for personal expenses and working capital, it appears they may no longer qualify for SBA financing.
Leasehold Improvement Requirement - When the Borrower is leasing space and $500,000 or 30% of the loan proceeds will be used for leasehold improvements or $500,000 or 30% of the collateral consists of leasehold improvements, fixtures, machinery, or equipment that is attached to the leased real estate, the SBA lender must: a) obtain a copy of the written lease; b) verify the term of the lease matches the term of the loan; c) get an assignment of the lease and landlord’s waiver; and d) the lender must document the file as to why the landlord waiver was not obtained if the lender did not get one. – Most lenders followed these requirements previously, but this makes it official it has to be done.
Tenant Reimbursement New Rule - If loan proceeds finance improvements on leased space and the landlord will reimburse the Borrower for such tenant improvements, the landlord reimbursement must be used to pay down the loan. – This clarifies how landlord to tenant reimbursements are to be handled.
Ownership Changes for a Business Division - For a change of ownership when there is an acquisition of a division or a segment of an existing business, the SBA lender may use alternative forms of third-party verification such as third-party CPA-prepared or reviewed financial statements, sales tax payment records, transient occupancy tax, credit reporting services, etc. to verify the seller’s financial data. Tax returns are not required to verify this data. – This should make it easier to get partial business acquisitions completed.
No Merchant Cash Advance of Factoring Refinancing Allowed - Merchant cash advances and factoring agreements are no longer eligible to be refinanced into SBA loans. – This will hurt companies looking to consolidate this type of debt into more traditional debt.
Changes to the Partial Change of Ownership Rules - Under partial changes of ownership transactions, both the Operating Company and the Person(s) (including any existing owner) who is acquiring or gaining any direct and/or indirect ownership interest in the Operating Company must be Co-Borrowers on the new loan, regardless of the percentage of ownership being gained. Any selling owner (one who receives loan proceeds in exchange for selling part of their ownership) who remains as a direct or indirect owner and owns less than 20% of the business post-sale, must provide a guaranty for the full loan amount for a period of 2-years after the loan disbursement. For any new owners, the percentage of ownership for guarantying the loan will be based on the post-sale percentage of ownership of the business. (If there is a minority investor or partner than owns less than 20% of the business after acquisition, they will not be required to guaranty the loan, however, they are required to be a co-borrower on the loan based on this rule, which could make them personally liable). – This is a huge change. In order for sellers to complete the sale on a partial acquisition, they will have to be willing to guarantee the full loan amount for two years regardless of the ownership they retain. This may make it hard to get partial business acquisitions completed going forward as I believe many sellers will be unwilling to sign a full guaranty on the loan. In addition, minority investors coming in with the buyer will be required to be co-borrowers on the loan even if their ownership interest is below 20%. This last portion of the rule I ultimately think is going to change because the language in the SBA SOP is somewhat contradictory, so I expect this to be cleared up and I think ultimately investors who own less than 20% will not end up required to guarantee.
Updated Equity Requirements for a Complete Change of Ownership - For a complete change of ownership, the SBA requires an equity injection of 10% of the total project costs (all costs required to complete the change of ownership except for lines of credit and 504 loans). Seller debt can only be counted as part of the required equity injection if it is on full standby for the life of the SBA loan and it does not exceed half of the SBA-required equity injection. – Getting away with as little as 0% or 2.5% down is now gone. You will need to have at least 5% down on all business acquisitions and get the seller to agree to take a seller note back for 5% of the purchase price on full standby for the life of the loan in order to get away with 5% down. Otherwise. 10% will be required down. This equity can be buyer equity or investor equity, so long as the source is verified prior to closing. You can continue to have other seller notes on partial standby, in repayment, or that have forgiveness in them, but those notes cannot count as part of the required equity.
Changes to Required Equity Under a Partner Buyout Loan - Under a complete partner buyout transaction (existing owner buying out another owner or owners), if the loan will finance 90% or more of the purchase price from a partner, the remaining owner(s) must certify that they have been actively participating in the business operation and had the same or increasing ownership for the last 24 months; and the business balance sheet from the most recently completed fiscal year-end and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change of ownership. If these conditions are not met, then the Borrower must bring in sufficient equity that the debt-to-net worth meets the 9:1 ratio or the Borrower must bring in 10% of the purchase price, whichever is less. – This rule provides additional clarification for partner buyouts on the required equity contribution, which can be $0 if the balance sheet supports the acquisition.
Changes to Required Equity Under a Partial Change of Ownership - Under Partial Changes of Ownership, the business balance sheet must reflect on the most recent completed fiscal year and current quarter balance sheets a debt-to-worth ratio of no greater than 9:1 prior to the change of ownership. In the event the Lender is unable to document the above, the new and/or existing owners must contribute cash either sufficient to reflect a debt-to-worth ratio of no greater than 9:1 or in an amount of at least 10% of the purchase price of the business, whichever is less. – This clarifies equity requirements for partial changes of ownership and decreases the amount of equity required if the balance sheet has equity in it already. You cannot use seller notes on partial changes of ownership to reduce the required equity, but you can use the equity already in the business as described here.
Clarification on Approved Sources of Equity Going Forward - Sources of equity have been further defined as: a) Equity can be from Standby Agreements so long as the debt is on standby for the life of the SBA loan (it may accrue interest); b) cash that is not borrowed, whether on the business’s balance sheet or from other sources; c) cash that comes from a personal loan where repayment can be demonstrated to come from a source other than the cash flow of the business; d) Grants that do not have repayment or claw-back provisions during the life of the 7(a) loan; e) Assets other than cash, such as land already purchased and being used as part of the project; and f) Prepaid expenses that the lender has verified by obtaining paid invoices, canceled checks, or bank statements (usually associated with projects, equipment purchased in advance, or escrow deposits on purchases). – The repayment of borrowed debt now needs to be supported from other sources. This appears to apply to home equity loans as well, which will make it more difficult to use home equity loan proceeds for business acquisitions going forward unless those funds are drawn and seasoned or you can verify there is another source of cash flow to make those home equity loan payments.
Life Insurance Requirements Updated - Life insurance is now required on all SBA 7A loans above $350,000 if the loan is not fully secured by hard collateral. – Most lenders were still requiring life insurance, but the SBA had made it, so it was not mandatory with the last revision last year.
You Can No Longer Do Multi-Step Changes of Ownership - Multi-Step partial changes of ownership are no longer eligible (historically referred to as roll-over equity where the seller owns a portion of the business doing the acquisition). This means you can only do a partial business acquisition via a stock or membership interest purchase going forward. The SBA has provided a provision where you can complete a partial change of ownership transaction first and then ask SBA for permission to use a new entity to complete the rest of the acquisition at a later date, but this change would need to be approved by the SBA. – This change makes it much harder to do partial business acquisitions and now requires them to be done as a stock or membership purchase versus an asset purchase.
All Employees of an Applicant Business Must Be U.S. Citizens or Legal U.S. Residents - A business with any employees that are not legal citizens are ineligible for SBA financing. – This is an additional change to enforce immigration laws.
If you have additional questions regarding these changes, please do not hesitate to reach out to me at any time at 630-988-4852 or via email.