URGENT: Update on SBA Rule Changes (SMBootcamp / SMB Loan Support)

As you have probably heard, the SBA released significant updates to its Standard Operating Procedure (SOP). As part of SMBootcamp & SMB Loan Support, we’ve closely reviewed the SOP (yes, that 450+ page monster of a document) and the key changes going into effect to understand the practical implications for self-funded searchers. Below are some of the most important updates, with detailed explanations of how they might affect you. *Reminder that all changes described below are effective on June 1, 2025* 1. Minimum 10% Equity Requirement + Changes to Standby Seller Notes Summary: A minimum 10% equity injection (of total project cost) is explicitly required for complete changes of ownership. Seller Notes now only count toward equity if they are on full standby (no principal or interest payments) for the life of the SBA loan (10 years). Interest can accrue on that standby note, but no payments can be made until after loan maturity. In-Depth: This is a *massive* change that significantly impacts deal structures. Historically, searchers could use a 2-year full standby or partial standby seller note as a form of equity that to bridge valuation gaps by (1) excluding the Note payments from the lender’s DSCR calculation, and (2) allowing searchers to inject less than 10% equity in the deal. This change effectively removes that flexibility. This is especially important to keep in mind as you are modeling DSCR using the SMBootcamp financial model – you can no longer expect a Note to be excluded from DSCR! In the real world, there are virtually no sellers who are going to agree to a 10-year full standby note, so you should expect to inject the full 10% in cash (though you can still raise investor equity to do this). 2. Equity Rollovers are Basically Dead – Requiring Seller PG and Co-Borrower Status Summary: Remember how excited people were that equity rollover (through a partial buyout) was possible with an SBA loan? Unfortunately, that didn’t last long. For stock transactions where the seller retains *any equity* (yes, even 1%), the seller must now personally guarantee the SBA loan for two years post-closing and be listed as a Co-Borrower . To make things worse, the SOP requires *any new owner* (which would include equity investors) to become a Co-Borrower on the loan, assuming joint liability for repayment. The SOP also makes it clear that multi-step partial buyouts (asset deal with equity rollover) are no longer allowed. In-Depth: In practice, this means that most searchers will need to structure their deals as 100% buyouts. Even if you could convince a Seller to sign a 2-year PG, they’d still be required to sign as a Co-Borrower. And if you need to raise equity, you’d need investors to agree to be a Co-Borrower on the loan too – which is a non-starter. If you are looking at businesses that require licensing (HVAC, Plumbing, Electrical, etc.) it is critical you understand this new SOP limitation. Previously, sellers retaining a minority stake enabled continuity in licensing, which is what many lenders *required* for you to buy the business (assuming you don’t already have the required license). It's still technically possible to get someone to license / qualify the business without owning equity - but in general it's very difficult to make that work in an SBA deal because (1) most states require a license holder to be a W-2 employee or an equity owner of the entity, (2) if the Seller was the license holder in your deal, that Seller is expressly prohibited from being a W-2 employee post-closing unless it is a stock deal with retained equity… in which case the Seller must PG the loan for 2 years under the new rules. Yikes. Practically speaking, searchers would likely need an existing employee to hold the required license or provide a plan to the lender that demonstrates you can quickly obtain the license personally – but even that is going to be challenging and must be acceptable to a bank’s credit department. 3. Equity Investors Under 20% Do NOT Automatically Provide Personal Guarantees (PG) Summary: Contrary to some interpretations circulating online, equity investors owning less than 20% in a 100% buyout scenario are not required to provide a personal guarantee. The rule that “all new owners must be Co-Borrowers” applies strictly to partial changes of ownership, not complete buyouts. In-Depth: Investors can confidently hold minority positions without personal guarantee implications, provided the transaction is a complete (100%) buyout. 4. Seller Financial Verification Flexibility for Carve-Outs Summary: When acquiring divisions or business segments (“carve-outs”), lenders can now verify seller financials using alternative methods (CPA-reviewed financial statements, sales tax records, etc.) instead of exclusively relying on tax returns. In-Depth: This expanded flexibility benefits searchers targeting carve-out transactions, which previously faced lender hesitancy. We’ve had this come up for a few SMBootcamp alumni – whether it be a segment of a business that’s being sold separately or an e-commerce business that is selling only certain products. In reality, this isn’t a huge change. We had some lenders who were taking that interpretation of the prior SOP anyways, but this opens it up to a lot more lenders now that the guidance is explicit. Keep in mind for the vast majority of deals, this does not apply – so don’t make a bad assumption that tax returns aren’t as important anymore! 5. Franchise Deals Simplified, But Active Oversight Required Summary: SBA no longer reviews franchise documents if the franchise brand appears on its approved Franchise Directory. However, SBA now expressly prohibits deals where a management company or franchisor holds complete operational control. In-Depth: If the franchise brand is listed in the SBA Directory, lenders do not need to review the Franchise Disclosure Document (FDD) or franchise agreement, unless there’s a separate management agreement involved. That means less legal complexity and in theory easier lender processing. However, searchers must demonstrate meaningful operational oversight, including approving budgets, controlling bank accounts, and actively managing employees. SBA explicitly disqualifies passive ownership. So if you’re planning to be hands-off or outsource daily operations to a management firm (which can be common in food/franchise deals), you must still retain control or risk the SBA seeing the business as “passive.” 6. CBD and Hemp-Related Businesses Clarified as Potentially Eligible Summary: This one might be interesting for those of you who attended SMBash and heard Paul Henderson talk about the cannabis industry. CBD and hemp-related businesses (under 0.3% THC and compliant with federal and state laws and testing standards) are explicitly stated as potentially eligible for SBA financing. In-Depth: This technically was more of a clarification than a true change, but it makes explicit that hemp-based businesses might be eligible - but only with strict documentation. CBD products are riskier: if they’re consumed, make health claims, or aren’t FDA compliant, it may not qualify. To be clear, SBA continues to prohibit loans to any marijuana-related business, even if that business is 100% legal at the state level. If you have a deal that touches anything “vice-adjacent” (smoking products, marijuana paraphernalia, supplements, gambling, CBD, etc.), you should probably assume that it’s still difficult to get SBA financing, but there is at least some possibility with CBD / Hemp deals. 7. Stricter Ownership Rules for Non-U.S. Citizens Summary: Loans must go to businesses fully owned and controlled by U.S. Citizens, lawful permanent residents (“green card holders”), or qualified U.S. Nationals. Additionally, if an ineligible person held ownership within the last six months, the SBA could deny the loan. In-Depth: For transactions involving international parties, detailed and early diligence on ownership history and status is essential. Lenders will require thorough documentation to avoid unexpected deal rejections late in the process. Recommended Next Steps: Reevaluate Capital Structures: Plan for 10% cash equity injections. Don’t expect seller notes with 2-year standby periods to be used as a source of equity. Address Licensing Early: If your target business holds a license, identify potential license holders upfront and manage seller expectations regarding their post-closing roles. Engage SMB Loan Support Early: Before finalizing LOIs, consult with us to validate structures against the new SOP and match with appropriate lenders. If you have questions or specific scenarios you want to discuss, reach out directly with your questions! Thanks for your time. Sam Rosati & redacted‌