Changes in SBA Loan Guidelines

 Significant changes to SBA loan rules were made in Spring of 2025 in   SOP 50 10 8.  This Post reviews some of the most frequently asked questions regarding those changes.

Seller Financing & Equity Injection

• Q: Can seller financing count toward the buyer’s equity injection?

A: Yes, but with limits. Seller financing can cover up to 5% of the required equity injection. However, that seller note must be on full standby for the life of the SBA loan (10 years for 7(a), up to 25 years for 504). Interest may accrue but cannot be paid until the SBA loan is satisfied.

• Q: What if the seller note is not part of the equity injection?

A: Then it does not need to be on full standby. Confusion exists in the market, but only seller notes used for equity count toward that standby rule.

Buyer Equity Requirements

• Q: Is it still possible to get a loan with only 5% buyer equity?

A: Yes, but lenders are stricter. If the business cash flow is strong and debt service coverage is sufficient, 5% can work. However, many lenders and sellers resist since sellers prefer not to wait years for repayment.

• Q: Can investors or family members provide the equity injection?

A: Yes. Investors can contribute equity (sometimes without a guarantee if they’re minority owners), and gifted funds are also allowed. All sources must be documented with a clear money trail.

• Q: Can buyers use a HELOC (Home Equity Line of Credit)?

A: Yes, but only if they have secondary income (outside the acquired business) to cover those HELOC payments.

Debt Service Coverage Ratio (DSCR)

• Q: How do lenders calculate DSCR for SBA loans?

A: Lenders typically subtract a reasonable owner salary from SDE (Seller’s Discretionary Earnings) to calculate available cash flow. That figure must cover debt payments at a ratio of at least 1.15x (some lenders require 1.20–1.25x).

Ownership & Citizenship Rules

• Q: Can a foreign buyer get an SBA loan?

A: No. 100% of SBA loan ownership must be U.S. citizens or lawful permanent residents (green card holders). Even a minority non-citizen owner can disqualify the deal.

• Q: Are there residency requirements?

A: Yes. Even U.S. citizens and green card holders must reside in the U.S. to qualify.

• Q: Can a seller keep partial ownership under 20%?

A: Yes, but they must give up all voting rights. Their guarantee requirement depends on ownership percentage and lender interpretation.

Licensing Requirements

• Q: What if the buyer doesn’t have the required professional license (HVAC, daycare, contractor, etc.)?

A: Deals generally cannot close without proper licensing in place. Options include:
– Buyer obtaining license before or shortly after closing.
– A licensed key employee staying on with a limited guarantee.
– In rare cases, the seller qualifying temporarily (usually no longer than 6 months).

Most lenders will not finance buyers with no path to licensing.

Contingent Payments & Earnouts

• Q: Are earnouts or contingent seller payments allowed in SBA deals?

A: Generally not in the traditional earnout sense. However, structured forgivable notes tied to clear, measurable benchmarks (e.g., revenue levels) may be allowed. Terms must be black-and-white and not open to interpretation.

Working Capital

• Q: Is working capital included in SBA loans?

A: Yes, most lenders build in 1–6 months of working capital depending on the industry and transition needs.

Insurance Requirements

• Q: Is life insurance required for SBA loans?

A: Usually yes, covering at least the loan shortfall. Exceptions exist if coverage is denied after multiple applications. Buyers should apply early to avoid delays.

Special Programs & Loan Types

• Q: Can a buyer get 100% SBA financing?

A: Only in certain cases, such as expansions in the same NAICS code (e.g., a CPA buying another CPA practice). Most acquisitions still require equity injection.

• Q: What about 504 loans?

A: 504 loans are primarily for real estate or heavy equipment. Rules on seller financing and standby differ slightly and are generally more flexible.

EIDL & PPP Loans

• Q: What happens if the seller has an outstanding EIDL or PPP loan?

A: – PPP must be fully forgiven or paid off. Forgiveness letters are required.
– EIDL loans can sometimes be assumed by the buyer, but the process is slow and complex. The SBA may also require partial paydowns.
– Compliance checks can flag issues, so sellers must disclose all SBA debt upfront.

LOIs vs Purchase Agreements

• Q: Will lenders work off a Letter of Intent (LOI)?

A: Many will, at least to issue a commitment letter, but some require a purchase agreement before underwriting. LOI exclusivity clauses (‘no-shop’) are common but should be reviewed carefully.