Important SBA 7(a) Loan Updates: What Banks, Lenders, and Financial Institutions Need to Know

At iBusiness Funding, we’re dedicated to staying ahead of the curve as SBA regulations evolve. With the SBA’s new SOP 50 10 8 taking effect on June 1, 2025, there are some important changes coming to the 7(a) loan program. SOP 50 10 8 replaces the prior version, SOP 50 10 7.1, and introduces several significant updates to strengthen lending practices. These updates are crucial for maintaining successful lending practices. Let’s break down some of the key changes.

New Definition of “Small Loans”

The SBA has redefined “small loans” as those $350,000 or less, down from the previous threshold of $500,000. Loans above the new threshold will require a more traditional credit analysis and documentation. This change is intended to enhance the SBA’s risk management practices and ensure that smaller loans receive streamlined processing while larger loans undergo a more thorough review.

Higher Minimum SBSS Credit Score

The SBA has raised the minimum Small Business Scoring Service (SBSS) credit score for small loans from 155 to 165. This change is designed to improve the overall credit quality of smaller 7(a) loans without restricting access for qualified borrowers. Applicants who meet or exceed this score may qualify through a simplified process. However, borrowers with a score below 165 will undergo full underwriting, ensuring a balanced approach to credit risk and loan accessibility.

Updated Collateral Requirements

For loans above $350,000, lenders are now required to secure collateral to the maximum extent possible according to SBA guidelines. If adequate collateral is unavailable, the borrower will not be automatically disqualified, but the lender must document their efforts to obtain collateral. For loans under $350,000, collateral is generally not required unless it is easily obtainable.

Enhanced Citizenship and Ownership Requirements

Effective March 7, 2025, the SBA introduced stricter citizenship and ownership guidelines for the 7(a) and 504 loan programs. The new rules require that businesses be 100% owned by U.S. citizens, U.S. nationals, or lawful permanent residents (LPRs) to qualify for SBA-backed financing. This eliminates prior allowances for partial foreign ownership.

To ensure compliance, lenders must:

• Document and input information on at least 81% of the business’s beneficial owners into the SBA’s E-Tran system.

• Certify that no beneficial owners are ineligible individuals.

• Collect and verify alien registration numbers for any LPR owners.

• Obtain borrower certifications confirming that all owners meet the eligibility criteria.

Reinstated Guarantee Fees  

Effective March 24, 2025, the SBA has restored the 7(a) Lender’s Annual Service Fee and the SBA Guarantee Fee. These fees are based on a number of factors, including but not limited to loan maturity, program, and amount.  

Ineligibility of Merchant Cash Advances (MCA) and Factoring Arrangements for Debt Refinancing

In another significant update, the SBA has made merchant cash advances (MCAs) and factoring arrangements ineligible for debt refinancing under the 7(a) loan program. This change aims to protect businesses from relying on high-risk financing that could jeopardize their long-term stability.

• Merchant Cash Advances: MCAs, often structured as advances against future sales, come with high fees and aggressive repayment schedules. As these arrangements can place significant strain on a business’s cash flow, the SBA has decided that they should not be refinanced through SBA loans. This change ensures that businesses are not burdened with high-cost, short-term debt that can lead to cash flow issues and defaults.

• Factoring Arrangements: Similar to MCAs, factoring involves selling accounts receivable to a third party at a discount. While factoring can provide quick access to cash, it can also place businesses in a vulnerable position due to high costs and potential negative impacts on long-term financial stability. By excluding factoring from SBA refinancing eligibility, the SBA aims to reduce the likelihood of businesses relying on short-term fixes that could ultimately harm their financial well-being.

Injections, Sellers, and Guarantees

The updated SBA SOP 50 10 8 also introduces key changes to injections, seller financing, and guarantees.

• Equity Injection: Buyers must contribute at least 10% of the project costs. Seller financing can count toward this requirement but only if it is on full standby for the life of the SBA loan and covers no more than 50% of the injection.

• Seller Note Standby: Seller notes tied to the injection must now remain on standby (no payments) for the entire loan term, rather than just 2 years.

• Partial Buyouts: Any selling owner who retains less than 20% ownership post-sale must personally guarantee the full loan amount for 2 years after loan disbursement.

These changes help ensure the borrower has invested equity into the purchase.

Working Capital Requirements  

Any loan request for working capital that exceeds $50,000 must include a detailed explanation outlining what the funds will be used for. This helps ensure that the funds are allocated effectively and appropriately, typically for business operations or expansion, rather than personal or non-business expenses. The explanation should include specific use cases like purchasing inventory, paying off debts, or covering operational costs.

Credit Elsewhere Doctrine

One key change pertaining to the “Credit Elsewhere Doctrine” is that lenders are now required to evaluate the personal resources of owners when determining whether credit is available from non-federal sources. Lenders must certify that the applicant cannot obtain the loan funds from non-federal sources on reasonable terms before approving a loan.  

Additional Updates

The SBA has made some additional changes to the SOP, including:  

• Franchise Directory: The SBA has reinstated the Franchise Directory, which helps lenders determine the eligibility of franchised businesses for SBA loans. This will bring consistency and clarity to the franchise eligibility process.

• Lender Responsibilities: The updated SOP emphasizes the responsibility of lenders to assess borrower eligibility, underwriting standards, and ensure compliance with SBA requirements. Lenders will now have an explicit duty to verify that applicants meet all necessary criteria.

• Elimination of the “Do What You Do” Underwriting Standard: The “Do What You Do” approach, which previously allowed lenders to apply their own credit standards to SBA loans, has been eliminated. Lenders must now adhere strictly to SBA-specific underwriting criteria, ensuring more consistency in loan approvals.  

• Enhanced Risk Mitigation: Several new measures have been introduced to reduce risk and safeguard the integrity of SBA loans:

• Mandatory Tax Transcript Verification for all loans, which will help ensure the accuracy of borrower financial documentation and reduce the potential for fraud.

• Hazard Insurance for loans greater than $50,000, providing additional protection to the loan's value in the event of property damage.

• A mandatory 10% cash injection for all startup loans, requiring borrowers to invest a minimum amount into their business, ensuring their financial commitment to its success.  

Final Thoughts  

The SBA’s latest updates to the 7(a) program reflect its ongoing effort to maintain access to affordable capital for small businesses while reinforcing responsible lending practices. Since SOP 50 10 8 includes significant updates to the prior SOP, it’s vital for lenders and financial institutions to adjust internal policies and workflows to comply with these new requirements and ensure continued success in the SBA lending landscape. Adopting the right technology can make navigating these regulatory shifts faster and easier. If you're looking for a way to ensure SOP compliance, streamline administration, and maintain full alignment with evolving SBA and government standards, reach out to us at go-ibf.com/Contact.  Our LenderAI and Lendsey solutions are purpose-built to help lenders implement changes quickly and stay compliant at every step.

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