The Trump Administration on Friday August 14th released their second set of major changes to the Small Business Administration’s (“SBA”) Standard Operating Procedure (“SOP”) since taking office. Although the number of changes from a quantitative perspective were not huge, the impact the changes made will have to the SBA lending programs going forward is huge.
We plan to discuss those changes in detail below. Please note we went through over 400 pages in the current SOP and the previous SOP each to figure out what the key changes are, and condensed them here for you to try and make it easy to understand them. Before diving into the specific changes, there are a few things I want to point out.
First, the new SOP states in the footers throughout that the effective date is October 1st, 2026. However, the “Effective Date” on page 2 of the SOP document itself states “TBD” / “To Be Determined”. So it is unclear if this new SOP will go into effect on October 1st or the start date may change. We will let you know when we get clarity here. At this point we are assuming the October 1st deadline is correct.
Secondly, the new SOP was pretty sloppily put together. We found several glaring errors in the SOP, a few places where changes in rules appear to contradict each other, and two Appendices “missing” from the document. The Table of Contents does not show Appendix numbers 9 and 13, and those Appendices are not in the SOP. It is not clear if the SBA just misnumbered the Appendices or if there were additional Appendices left out of this version of the SOP. I am confident the SBA will clarify and clean up some of these items in the next few weeks.
Third, the SBA reorganized the location of many of the policies and guidelines in this version of the SOP. Although it appears they were attempting to simplify the document by combining general rules that impact multiple programs into Appendices, and shrinking the total size of the SOP by about 54 pages from the previous version, this made it very hard to compare the previous version of the SOP with the current version as many sections have been moved within the document. It is likely we have missed some changes even though we have done a thorough search of the document both directly and using AI. In fact, we found that AI had a very hard time tracking the actual changes due to how much information was moved from section to section. So I would be cautious with relying on AI to give you an accurate read of this new SOP.
Lastly, the SBA usually releases an explanation memo with a new SOP going over the changes that have been made, which often works to help clarify some of the new rules. Such a memo did not accompany this updated version of the SOP, so it has left all of us fending for ourselves to understand the changes made. Hopefully additional clarity will come out of the SBA this week on the changes made.
Because of the above four items, I do expect additional clarifications from the SBA in the coming weeks. However, in the meantime we have to assume the core rule changes are not going to stick.
“So I would be cautious with relying on AI to give you an accurate read of this new SOP.”
The largest rule changes in this version of the SBA SOP have to do with “Change of Ownership” transactions. The largest percentage of loans running through the SBA 7A loan program over the past several years has been by far Change of Ownership transactions. The SBA has seen a large early default rate and general default rate increase in these transactions. Because of that the SBA has significantly tightened the guidelines around Change of Ownership transactions, and it is related to these transactions where the largest percentage of rule changes has been made, so we will discuss these changes first. In fact, the SBA has created a whole new addendum titled “Change of Ownership” to address these transactions. Below are the key changes and some commentary afterwards in italic.
Change of Ownership
You can no longer use the SBA Small Loan Program (loans $350,000 and less) to finance business acquisitions.
- This appears to be an appropriate change and we found few Banks would use this program for business acquisitions to begin with. Going forward that means you would need a minimum loan of $350,000 to qualify for SBA financing for a business acquisition.
You can no longer borrow more than the value of a business, even if it includes seller notes on partial standby or with forgiveness. The total debt including seller notes cannot exceed the business valuation. The only way to get around this would be via the use of seller-notes on full standby for the life of the SBA 7A loan or by providing additional equity. Seller notes on full standby are viewed as equity by the SBA, so by using these notes or bringing more than 10% cash to the table, you can pay more for the business then the business valuation.
- This is going to make it hard to get sellers the prices they are looking for on quickly growing businesses or businesses that have only been profitable for a limited period of time. The benefit to buyers is that sellers are going to have to be more reasonable in the prices they are seeking if they wish to allow buyers to use SBA financing on their transaction.
The transitional period for sellers to stay in a deal has been extended to 24-months.
- This is a big change and will provide buyers more time to deal with potential licensing issues for license heavy businesses.
Securing a 25-year blended amortization by combining real estate and the business acquisition is no longer possible under the new SOP. If the real estate and business are financed into one loan, even if the real estate is more than 51% of the purchase price, a standard blended amortization will be used going forward.
- This will take away a major advantage in real estate heavy transactions where the 25-year amortization could significantly reduce the monthly debt service on the business acquisition portion of the debt. We are likely to see more two note structures, one for the business and one for the real estate, and more SBA 504 mortgages when real estate is included in the transaction going forward.
Seller notes on business acquisitions will not be eligible for refinancing until they have 36 months of repayment (this excludes standby periods). So SBA financing cannot be used to take-out seller notes in short order.
- This rule will remove one option that was available for sellers to refinance their debt sooner.
For an “Initial Acquisition” for a buyer (appears to refer to a buyer that does not already own a business), the required 10% down payment can no longer be reduced or eliminated. At least 5% of the required down payment must come from the buying principals / guarantors. It can take the form of cash that is not borrowed, cash that comes from a personal loan (so long as there is another repayment source other than the business or a salary from that business to repay that debt), or grants that do not have any conditional repayment requirements.
- Buyers are going to need to have seasoned equity (cash in their bank accounts for at least 60 days) or a loan from a third-party in place in advance of going under contract that meets the 5% requirement in order to qualify going forward.
If the full 10% required equity does not come from the sources stated above in #6, then the remaining required 5% equity on an acquisition can come from standby debt agreements where no repayment is required during the term of the SBA loan (and does not provide any equity interest in the business), seller debt on full standby for the life of the SBA 7A loan, or a minority equity investment in the business. Minority Equity Investments can only be considered equity if they meet the following criteria: 1) the investor must have less than 20% equity and exert no control over the business; and 2) distributions to the investor outside of distributions for tax obligations are prohibited until the SBA 7(a) loan is paid off.
- Up to 5% of the required equity came from any individual or combination of the above sources.
If additional equity is required or desired, additional standby-seller notes and investor equity can be used in the transaction to lower the loan-to-cost or to cover the difference when a valuation comes in below the purchase price. Additional equity investments beyond what is required to meet the minimum equity requirements, may receive standard distributions subject to any conditions of the lender (like a minimum DSCR).
- This is an improvement over the prior SBA SOP which provided for no guaranteed distributions during the term of the SBA 7A loan.
The debt service coverage ratio (“DSCR”) must be satisfied using either the last fiscal year-end or an average of the last two fiscal year-end statements on either a historical or adjusted basis. Initial Acquisitions will require a 1.25x DSCR, Business Expansion a 1.15x DSCR, Owner Buyouts a 1.25x DSCR, and ESOP and Cooperatives a 1.25x DSCR.
- This is tightened from a 1.15x minimum DSCR under the previous SOP
Any seller debt not in full repayment such as interest only for an extended period of time, must now be included in the DSCR calculation based on an amortization not to exceed 10-years. This does not include seller debt on full standby for the life of the SBA loan.
- This will eliminate the ability to use interest-only short-term balloon notes to lower the DSCR on seller debt.
On any business acquisition where the business purchase price (excluding real estate) is $3 million or greater, the SBA lender will be required to order a Quality of Earnings report with the only exception being Owner Buyout and ESOP & Cooperative transactions. In addition, the lender must use the earnings from the QofE to meet the DSCR requirements for the loan.
- This is a substantial change and will likely require buyers to front significant cash for QofE’s without knowing if the transaction will still qualify. There will also likely need to be some discussion about what is contained in the QofE report to benefit both parties. It will be interesting to see if lenders approve loans prior to receipt of the QofE or if they will not underwrite and approve loans until after the QofE is received.
The SBA is requiring lenders to meet the tax transcript requirements for change of ownership. So tax transcripts will be required in all cases.
- For changes of ownership sellers are going to have to have their taxes in order and transcripts are going to need to be available.
For Business Expansions and Owner Buyouts, the Lender may reduce or eliminate the 10% equity requirement “...if they have determined that the Borrower has sufficient liquidity and working capital to sustain operations following the transaction.” However, when eliminating the equity requirement the lender cannot include permanent working capital in the loan, but a separate line of credit can be provided. To qualify for the reduction or elimination of equity the balance sheet must not have a negative net worth as of the last fiscal year-end.
- This is a change from the previous rules that were in place and gives lenders more latitude in determining when to require equity in certain transactions.
You can now add additional Guarantors with a business expansion. Previously the ownership had to stay the exact same for a Business Expansion to qualify for less money down.
- This is a positive change in growing businesses.
For an Owner-Buyout transaction where you are buying out the other owners, you can now bring in outside investors but the outside investors cannot own more than 49% of the business and would be required to sign a full personal guarantee on the loan whether they own 1% or 49%.
- This provides some additional support for owner-buyout transactions that was not available before.
Real estate associated with a change of ownership must have been owned by the seller for at least 36-months prior to sale.
- This will put a restriction on the sale of owner-occupied real estate that did not exist with the last SOP.
Cash that comes from a personal loan to a guarantor where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify) can count as equity and can count as the full 10% equity. This likely includes home equity loans, personal loans, family member loans, etc.
- I am not sure how practical it is for buyers to use such a loan unless they have a spouse with outside income that can support this loan and act as a guarantor as well.
As you can see from the above, the changes to business acquisitions are quite substantial. The SBA now has a whole Addendum dedicated to the Change of Ownership transaction. Most of the changes are negative in nature, but there are a few positive ones.
In addition to the Change of Ownership transaction changes, there are some other minor changes that were made to other portions of the SBA SOP. Most were somewhat minimal in nature or were language clarifications, but below are a few other key changes we thought it is worth noting:
Other Key Changes
Another business type is now ineligible. “Businesses that provide a leveled model where the small business owner relies on the services of a middle level operator (e.g. cleaning service models) and does not have ownership of the contracts that support the business operation”.
- It appears they want to be sure all business owners actually own the contracts and are responsible for the work and it is not a pass-through entity.
Lenders must now verify Federal Motor Carrier Safety Administration licensing and USDOT numbers for all commercial vehicle companies.
- This appears to be another crackdown on truckers who do not meet federal requirements.
All Agents that work on providing SBA loans must be located in the United States or its territories.
- It appears the SBA is cracking down on foreigners playing a role in SBA lending, likely so they can enforce US laws against everyone participating.
Lenders can now use signed copies of amended tax returns for companies versus waiting for the transcript of the amended return.
- This will speed up the process of getting to closing.
Added a new clause about interest only periods for SBA term debt. “All 7(a) term (non-revolving) loans may be structured with a period of interest-only payments on the front end of the loan. The Lender may sell the loan on the secondary market after the interest-only period ends.”
- The fact lenders cannot sell the loan until after the interest only period, this may make it harder for buyers to get interest only on the front-end of term debt.
The SBA added additional guidance regarding reviewing credit scores and that credit must be current within 90 days of closing.
- It appears the SBA wants lenders doing more of a review of credit going forward.
Removed the use of the following as equity: “Expenses related to education, advisory services, or fees paid by the Applicant to an Agent are not eligible prepaid expenses and are not considered equity.”
The SBA has added details on the Builders Cap Lines that open up lines of credit for home builders and home remodelers to use. Some of the rules related to this program are a bit confusing, but this now provides a financing option for home builders to secure access to a line of credit from the SBA.
- It is unclear how many lenders will participate in this program as it is part of the CAPLine product that many Banks do not currently participate in.
The loan maturity of the Bank portion of an SBA 504 loan cannot exceed 25 years. This is a change as there was no limit on the Bank maturity on their portion of the loan in the past.
- This is unlikely to impact many lenders but there were a few lenders that provided loan terms beyond 25-years on the Bank portion of the SBA 504 loan.
SBA 504 lenders can now build in 15% contingency for new construction instead of the previous 10% contingency maximum.
- This provides additional support for construction projects where costs have continued to go up the last couple of years.
This above list covers the other major changes included in the updated SOP. As can be seen, most of these are relatively minor in nature but since they could impact some customers we wanted to share them.
Although most of the changes are somewhat negative in nature, specifically those related to the Change of Ownership transactions, all this means is that there is a new reality and we will all need to learn to adapt to it. I think in the long run those acquiring businesses could benefit from some of these changes as it will be much harder to over-leverage businesses going forward.
For business acquirers it is going to be more important than ever that you properly analyze opportunities and be sure the cash flow will work on a historical basis and the value will be there for the business you are looking to acquire. We will continue to provide our complimentary analysis of potential acquisitions to help verify the cash flow and potential value and appropriate structure for business acquisitions going forward.
At this time we have to assume the new changes will go into effect on October 1st, 2026. Because of that, if you have a loan in process that requires the existing SBA SOP to work, you need to get your loan approved and authorization pulled by September 30th, 2026. The loan does not need to close by September 30th, you just need your authorization pulled. It can close past October 1st.
Most lenders will probably stop working on new requests under the existing SOP within the next few weeks as they will not want to be over-loaded in underwriting or closing trying to get deals processed before the end of September. So if you have a request you have not submitted for underwriting yet under these rules, you will want to get it submitted ASAP.
As always, if there is anything we can do to assist you with any of your loan needs, please do not hesitate to reach out to us at any time at 630-988-4852 or via email at brad@commerciallendingx.com. We are prepared to do the heavy lifting the next few weeks to help all of our clients get through these changes.
If we learn any more about the updated changes we will share that information quickly. Thank you for reading and have a great day!
Brad Hettich
President, Commercial Lending X
~30 years in commercial banking. Originated close to $1.4 billion, underwritten $2.5 billion+. Brad writes about SBA lending, deal structuring, and commercial credit markets from the perspective of someone who has been on both sides of the desk.
View full bio →Related Transactions
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