In response to rising default rates and financial concerns, the U.S. Small Business Administration (SBA) has announced significant changes to its 7(a) loan program. Effective June 1, 2025, the SBA will implement stricter documentation and underwriting requirements to enhance the program’s integrity and ensure responsible lending practices.RobbinsPellegrino+6SBA+6SBA+6SBA+2jsettleslaw.com+2RobbinsPellegrino+2
Background: Addressing Rising Defaults
Recent audits revealed a substantial increase in defaults within the 7(a) loan program, attributed to relaxed underwriting standards introduced in 2023. These standards, known as the “Do What You Do” approach, allowed lenders greater discretion, leading to a surge in underqualified loan approvals. Consequently, the program experienced its first negative cash flow in over a decade, with defaults rising from $570 million in 2021 to $1.6 billion in 2024 .Barron’s+7SBA+7Bankers Online+7Barron’s+1SBA+1
Key Changes in Documentation Requirements
The SBA’s new Standard Operating Procedure (SOP) 50 10 8 outlines several critical changes:Small Business Committee+10jsettleslaw.com+10SMB-Transactions+10
- Elimination of “Do What You Do” Standards: Reverting to pre-2021 underwriting criteria, requiring lenders to adhere strictly to SBA guidelines .Whiteford Law+1jsettleslaw.com+1
- Mandatory 10% Equity Injection: Borrowers must now provide a minimum 10% equity injection for startup ventures and business acquisitions. Seller financing can only account for up to 50% of this requirement and must be on full standby for the loan’s duration .jsettleslaw.com+3Whiteford Law+3RobbinsPellegrino+3RobbinsPellegrino+1Whiteford Law+1
- Restoration of the Franchise Directory: Reinstating the SBA Franchise Directory to assist lenders in determining franchise eligibility .jsettleslaw.com+3SBA+3CommercialLendingX+3
- Enhanced Citizenship Verification: Businesses must be 100% owned by U.S. citizens or lawful permanent residents. All owners’ citizenship statuses must be verified and documented .Inc.com+3Boefly+3jsettleslaw.com+3CDC Small Business+1Inc.com+1
- Increased SBSS Score Threshold: The minimum Small Business Scoring Service (SBSS) score for small loans has been raised from 155 to 165, ensuring better creditworthiness among applicants .jsettleslaw.com
Implications for Borrowers and Lenders
These changes aim to strengthen the 7(a) loan program’s financial stability and reduce taxpayer risk. Borrowers should prepare for more rigorous documentation requirements, including comprehensive business plans, financial statements, and proof of equity contributions. Lenders will need to adjust their underwriting processes to comply with the reinstated standards, potentially leading to longer processing times but more secure loan portfolios.jsettleslaw.com+3SBA+3Small Business Committee+3
The SBA’s tightened documentation requirements reflect a commitment to responsible lending and the long-term sustainability of the 7(a) loan program. By reinstating robust underwriting standards and enhancing verification processes, the SBA aims to support small businesses while safeguarding public funds.SBA
Take the Next Step with BoomerBiz Loans
Ready to elevate your entrepreneurial journey? BoomerBiz Loans specializes in supporting baby boomer business acquisitions, offering a streamlined 3-step loan application process for fast approvals within 24–48 hours.
With competitive low-interest rates, flexible terms, and loans up to $10M, we’re here to assist both first-time buyers and experienced business owners.
Don’t let funding be a hurdle to your success. Start Your Loan Application today and join the ranks of successful entrepreneurs who’ve experienced the BoomerBiz advantage.
0
20
20
20