Client Alert: SBA Issues SOP 50 10 8: Key Changes Impacting SBA 7(a) Lending
Date: May 6, 2025
Key Changes
Equity Injection
SBA 7(a) loans for both startup ventures and changes in business ownership require at least 10 percent equity injection from the buyer. Prior to the changes implemented by the SOP, seller promissory notes could be used to meet this 10 percent equity injection requirement. Under the revised SOP, however, a seller note must be on full standby—with no principal or interest payments—for the entire SBA loan term (typically 10 years) to count toward the required equity injection, and it may not account for more than 50 percent of that total injection. This condition is considered commercially impractical for many sellers.
Partial Change in Ownership Transactions
(i) Structure Requirements
The SOP places strict limitations on partial change of ownership transactions, where a buyer acquires less than 100 percent of a business. These transactions must now be structured as stock purchases, as asset purchase structures are explicitly no longer allowed. This change eliminates a commonly used approach for managing tax and liability considerations.
(ii) Investor Requirements
For any partial change of ownership transactions, all equity holders must now provide personal guarantees of the SBA loan for at least two years. This personal guarantee requirement for partial change of ownership transactions applies uniformly to all investors, regardless of the size of their equity stake. Notably, in a complete change of ownership transactions, the SOP does not require personal guarantees from equity investors with less than 20 percent ownership. This distinction preserves the ability of investors to hold minority positions in SBA-financed acquisitions without triggering a personal guarantee, provided the transaction results in a full ownership transfer.
(iii) Rollover Equity
Under the new SOP, any seller who retains equity is treated as retaining ownership and must personally guarantee the loan for two years. These changes effectively eliminate the viability of seller rollover equity in transactions.
Acceptance of CPA-Prepared or Reviewed Financial Statements:
Under the SOP, SBA lenders will be permitted to accept CPA-prepared or reviewed financial statements as an alternative to tax returns in specific circumstances, providing greater flexibility for borrowers. This approach recognizes the practical realities of small business operations and the prevalence of CPA-prepared financials in certain market segments, while still requiring lenders to ensure the reliability and accuracy of the financial information used in underwriting.
Underwriting Requirements for SBA 7(a) Small and Express Loans
For SBA 7(a) Small Loans (loans of $350,000 or less), a FICO Small Business Scoring Service (“SBSS”) score of 165 or more allows the loan to be processed under expedited procedures. If the SBSS score falls below the threshold, the loan must be processed as a Standard 7(a) loan or submitted under SBA Express.
Delegated Lender Limitations:
Lenders with Preferred Lender Program (“PLP”) authority are now required to process most loans under their delegated authority, limiting exceptions such as refinances of same-institution debt. This change seeks to standardize processing but may limit flexibility in certain deal contexts. To determine whether a lender is a PLP lender, borrowers can check directly with the lender, review the SBA’s lender match tools, or reference official SBA directories that identify PLP-authorized institutions.
Stricter Ownership Rules for Non-U.S. Citizens
The SOP imposes tighter restrictions on borrower eligibility based on ownership status. SBA loans must now go to businesses that are 100 percent owned and controlled by U.S. citizens, lawful permanent residents, or qualified U.S. Nationals. For transactions involving international parties, this makes early and thorough diligence on ownership history critical. Lenders will require detailed documentation of citizenship or residency status.
Other Changes - Franchise Oversight, Eligibility Rules, and Documentation Requirements:
The revised SOP includes several other updates. The SBA has reinstated its Franchise Directory, streamlining franchise deal approvals by eliminating the need for SBA review of franchise documents when the brand appears on the approved list. However, the SBA now expressly prohibits transactions where a franchisor or management company exercises complete operational control, reinforcing the requirement for independent business operation. Additional changes include the reimposition of tax transcript verification and reinstated hazard and life insurance requirements. The SOP also reflects a broader return to more rigorous eligibility standards, signaling the SBA’s intent to tighten underwriting across the board.
Possible Impacts and Next Steps
The SOP is expected to limit the use of seller financing and restrict flexible deal structures, particularly those that rely on rollover equity to minimize upfront equity injections and leverage favorable loan-to-value terms. As a result, buyers without sufficient personal capital will need to seek alternative sources of equity. This reality may create new opportunities for investors to fill capital gaps.
The SOP takes effect on June 1, 2025, and applies to all SBA loan applications submitted on or after that date. Borrowers, lenders, and investors should carefully review the updated requirements and consult with counsel and their SBA lending partners to ensure compliance and to evaluate the impact on current and future transactions.
DISCLAIMER
This client alert reflects our current understanding of SOP 50 10 8. Rules are evolving and subject to lender and SBA interpretation. Always consult your SBA lender and legal counsel to confirm your deal structure is compliant.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.