Like many U.S. federal agencies, the Small Business Administration (SBA) has experienced changes under the new presidential administration, including a series of revised rules governing SBA 7(a) and 504 loans that went into effect June 1, 2025.
There are several important changes that businesses and owners should be aware of so that they’re not caught off guard.
- Every single owner of an SBA borrower must now be either a U.S. Citizen, lawful permanent resident, or qualified U.S. National.
- Previously, only majority owners were subject to this restriction.
- This is a critical change for companies contemplating an SBA loan and who have or intend to have foreign nationals in their equity stacks.
- Hand in hand with that change, borrowers can expect increased due diligence and background checks on all their owners.
- Most SBA loans will now require collateral
- Originally, borrowers of SBA loans less than $500,000 were not required to provide collateral.
- Now, any loan exceeding $50,000 will have to be supported by collateral, capturing nearly every SBA loan.
- Stricter Equity Injection Rules
- The required minimum equity down payment for new businesses is 10%; previously no injection was required.
- Seller Financing Changes for Acquisitions funded with SBA Loans
- For changes of ownership and acquisitions of new businesses, 10% equity injection is required, but that 10% can no longer be comprised of a seller promissory note, unless that promissory note:
- Makes up no more than 50% of the required equity/5% of the project cost
- Is on standby (i.e., the seller cannot collect payments under it) for the full length of the SBA loan (which could be 10 years).
- Additionally, in the event any sellers retaining equity in the buyer post-transaction must provide a personal guarantee of the loan for at least two years.
- For changes of ownership and acquisitions of new businesses, 10% equity injection is required, but that 10% can no longer be comprised of a seller promissory note, unless that promissory note:
- These rule changes have resulted in many smaller market M&A deals falling through, as it has made seller financing less attractive of an option for sellers.
- Gaps in financing ability are now more common in smaller market M&A deals, where those gaps would previously have been plugged by seller financing arrangements
This post is intended to highlight the impact of a few rule changes that we have dealt with since their introduction. There have been other changes to the SBA loans not addressed here, including higher creditworthiness requirements, life insurance requirements, and additional diligence requirements.
If you are exploring an SBA loan for a new business or acquisition and have questions about the new rules, please feel free to reach out to Ruari O’Sullivan of BFV’s Corporate practice.
Ruari O’Sullivan takes the proactive approach. In working with business owners, he anticipates their issues and puts structures in place to protect their interests.
