In a pivotal move to restore financial stability and reduce taxpayer risk, the U.S. Small Business Administration (SBA) has reported a substantial decline in loan defaults in 2025. The reversal in trend follows a major shift in lending policy—reinstating stricter underwriting standards and rolling back looser guidelines that had been blamed for a spike in early loan failures.
This change underscores the importance of robust risk assessment in small business financing. For entrepreneurs, it also signals a more stable and trustworthy lending environment—and an important opportunity to secure capital through SBA programs with greater confidence.
What Sparked the Shift in Policy?
In the aftermath of the pandemic, the SBA had introduced several temporary policies intended to boost economic recovery, including eliminating lender fees and relaxing underwriting guidelines. Notably, a policy called “Do What You Do” was introduced, allowing lenders to rely more heavily on their internal practices rather than standard SBA rules.
While this approach increased accessibility and loan volume, it also had unintended consequences. By 2024, the SBA’s flagship 7(a) program began to show signs of fiscal strain. According to SBA data, the program experienced a $397 million negative cash flow—the first such shortfall in over a decade【SBA.gov】.
The root cause? A surge in early defaults, many occurring within 18 months of loan origination—a red flag for risky underwriting.
Reinstating Rigorous Standards: SOP 50 10 8
In 2025, SBA Administrator Kelly Loeffler led a decisive effort to restore discipline to the agency’s lending programs. That began with a rollback of the “Do What You Do” policy and the reinstatement of formal underwriting requirements as outlined in the newly updated SOP 50 10 8, which took effect on June 1, 2025.
Key updates include:
- Stricter eligibility checks on borrowers
- Mandatory verification of business and personal creditworthiness
- Documentation requirements for startup costs, revenue projections, and use of proceeds
- Reinstatement of lender fees to increase program sustainability
The full procedural notice detailing these changes can be viewed on the SBA’s site here.
These reforms aim to reduce default rates and improve the long-term viability of the 7(a) loan program, which remains one of the most critical tools for funding small businesses in the U.S.
Measurable Impact on Loan Defaults
Just months after the new policies took effect, the impact has been significant:
- Early defaults—loans that fail within 12 to 18 months—have declined sharply compared to 2023.
- Delinquency rates are down across all categories of SBA lending.
- Loan performance metrics have improved, suggesting borrowers are better positioned to succeed and repay.
This has reassured both lenders and lawmakers, many of whom had voiced concern over unsustainable risk exposure. As Senator Joni Ernst noted, “Reinstating clear underwriting standards is a win for small businesses and taxpayers alike”【Senate Small Business Committee】.
What This Means for Borrowers
For entrepreneurs, the return of tighter underwriting presents both a challenge and an opportunity.
✅ The Pros:
- Stronger system credibility: A well-capitalized SBA program is less vulnerable to political changes and economic swings.
- Better loan performance: Fewer defaults mean more lenders remain in the program, increasing access over time.
- Higher borrower preparedness: Applicants are more likely to succeed when loans are based on solid plans and financial discipline.
⚠️ The Challenges:
- More documentation is required than in recent years.
- Higher scrutiny means applications must be thorough and aligned with SBA lending criteria.
- Pre-loan planning—especially for startups—is now essential, including cash flow forecasts and market validation.
To help with this, local Small Business Development Centers (SBDCs) and nonprofit groups are offering loan readiness programs and business plan assistance. You can find help through the America’s SBDC Network.
Navigating SBA Lending in 2025
If you’re preparing to apply for an SBA loan this year, here’s how to ensure your application meets the new standards:
- Know your credit: Both personal and business credit histories matter more than ever.
- Prepare a detailed business plan: Include revenue models, cost projections, and market research.
- Be specific about use of funds: The SBA wants to see clear allocation and ROI expectations.
- Document all ownership: Citizenship status and ownership structure are critical eligibility factors.
- Consult with an SBA lender: Work with a lender who understands the new rules and can help tailor your package.
A complete loan checklist is available at WithHansa’s SBA loan prep guide.
SBA Loan Types That Remain Popular
Despite the changes, several SBA loan types remain in strong demand:
- 7(a) loans: Flexible, general-purpose financing up to $5M
- 504 loans: Fixed-asset funding, often used for real estate and large equipment
- Microloans: Loans under $50,000, often used for startups or small inventory needs
- Community Advantage loans: Ideal for businesses in underserved markets
Learn more about loan types on the SBA Loan Program Overview Page.
Conclusion
After a turbulent few years in small business lending, the SBA’s return to fiscally responsible underwriting has yielded tangible results: stronger loans, fewer defaults, and a more sustainable program. While it now takes more effort to qualify, the benefits are clear—a stable loan environment means better outcomes for borrowers and lenders alike.
Entrepreneurs who are serious about long-term growth should view this as a positive development. With the right preparation and guidance, accessing SBA capital in 2025 remains not only possible but potentially more rewarding than ever.
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