Posted by Jennifer M. Settles, Esq. | May 02, 2025
SBA 7(a) Loan Program Overhaul Effective June 2025: Key Changes for Small Businesses
Effective June 1, 2025, the U.S. Small Business Administration (SBA) will implement significant reforms to its flagship 7(a) loan program under the new Standard Operating Procedure (SOP) 50 10 8. These changes mark a decisive shift from the previous administration’s policies, with the stated aim of restoring financial integrity and ensuring that SBA-backed loans are directed toward eligible American small businesses.
Reinstatement of Traditional Underwriting Standards
The SBA is eliminating the “Do What You Do” underwriting framework introduced in 2023, which allowed lenders to apply their own commercial credit standards. The new SOP reinstates stricter underwriting criteria that were in place before January 2021, including:
• Restoration of the Franchise Directory to streamline procedures for determining business eligibility. • Increase in the minimum acceptable Small Business Scoring Service (SBSS) score for 7(a) small loans from 155 to 165. • Mandatory 10% cash injection for startup business loans. • Reinstated requirements for hazard insurance on loans over $50,000 and life insurance for certain borrowers. • Reinstated tax transcript verification for all loans.
Enhanced Citizenship and Ownership Requirements
Effective March 7, 2025, the SBA has implemented stricter citizenship and ownership requirements for its 7(a) and 504 loan programs. Businesses must now be 100% owned by individuals who are U.S. citizens, U.S. nationals, or lawful permanent residents (LPRs) to qualify for SBA-backed financing. This change eliminates previous allowances for partial foreign ownership, rendering any ownership stake by individuals who do not meet the specified citizenship criteria ineligible for SBA loans.
Reduction in Maximum Loan Size for 7(a) Small Loans
The maximum loan size for 7(a) small loans will decrease from $500,000 to $350,000. This adjustment aims to focus SBA resources on truly small businesses and reduce exposure to higher-risk loans.
New Equity Rollover Restrictions: Stock Purchase Required
A significant change affects transactions involving seller equity rollovers. Starting June 1, 2025, any SBA 7(a) loan transaction where the seller retains an ownership stake—regardless of size—must be structured as a stock purchase. Asset purchase structures will no longer be eligible in these scenarios. This shift aims to ensure that sellers maintaining equity remain legally and financially tied to the business, thereby aligning their interests with the company’s ongoing success.
Additionally, sellers retaining any equity interest will be required to personally guarantee the SBA loan for a period of two years post-closing. This mandate underscores the SBA’s commitment to accountability and risk mitigation in transactions involving seller rollovers.
Implications for Small Business Owners
These changes signify a return to more stringent eligibility and underwriting standards. Small business owners seeking SBA-backed financing should prepare for a more rigorous application process, with increased documentation and verification requirements. It’s crucial to ensure compliance with the new citizenship and ownership criteria and to be prepared for the reinstated financial requirements.
For detailed guidance on navigating these changes and assistance with SBA loan applications, please contact The Law Office of Jennifer M. Settles. We are committed to supporting small businesses through this transition and ensuring access to the capital necessary for growth and success.
Contact The Law Office of Jennifer M. Settles to learn more about how we can support your small or medium-sized business. Send us a message through our webpage, or call Jennifer directly at (602) 617-3938.
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