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 I have received the updated SOP set to go into effect on June 1st as well as a summary of the changes provided by the SBA. There is a lot to take in, so I am trying to provide the most accurate information possible below, but some of the language is still a bit confusing, so there could ultimately be changes to what I am stating here. There is also a chance that the SBA roles back some of these changes prior to the new SOP going into effect. 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 on the change afterwards. I am only highlighting the changes that most directly impact this community for now. 1) Multi-Step partial changes of ownership are no longer eligible. Need to complete partial change of ownership and then ask SBA for permission. – This means you can no longer do a partial ownership change via an asset purchase. It has to be done as a stock purchase. 2) 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. – 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. 3) 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. 4) Under a complete partner buyout transaction, if the loan will finance 90% of 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. – This rule provides additional clarification for partner buyouts on the required equity contribution, which can be $0 if the balance sheet supports the acquisition. 5) 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. If 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 6) Sources of equity have been further defined: 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. – 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. 7) 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. – This should make it easier to get partial business acquisitions completed. 8) SBA Lenders must now complete the “Credit Elsewhere” request 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. – 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, they likely will no longer qualify for SBA financing. 9) The SBA Franchise Director 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 – SBA lenders can only lend to approved franchisors or distributors that are in the Directory and have completed the appropriate paperwork. 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. 10) 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 is a clarification on some previous confusion that indirect owners could be involved. Based on this you cannot have anyone in your capital stack that is not a U.S. citizen or Green Card holder for the most part. 11) 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. 12) The businesses with any employees that are not legal citizens are ineligible for SBA financing. – This is an additional change to enforce immigration laws. I will get a more detailed post and video out shortly with the changes. If you have a deal impacted by these changes and you cannot get it closed by June 1st, you probably want to renegotiate the deal. If you do not have a deal under LOI already and submitted for approval, it is going to be a challenge to get it done based on the previous rules prior to the end of May. Lenders are going to be slammed trying to get deals already in process approved and authorizations pulled prior to the end of May. If you have questions you can reach me here or directly at redacted