Deals are falling apart as the SBA is set to tighten loan rules in the name of safer lending–and restricting foreign ownership.
The Trump Administration’s Small Business Administration is hitting rewind, bringing back old (pre-Biden) standards in an effort, it says, to make SBA-backed loans safer for the government.
But some of the new rules, which kick in on June 1, are stricter than they were during Trump’s first term. One, for example, requires any business getting an SBA-backed loan to be 100% (up from 51%) owned by U.S. citizens and those who have been permanent residents for at least six months. Another makes it nearly impossible for a business seller to stay on as a partial owner. The result is that deals are falling apart just as some aging Baby Boomer owners are looking to sell.
The new rules affect the SBA’s popular 7(a) and 504 loan programs, which offer government-backed financing for small businesses. The 7(a) program is the most widely used, allowing loans of up to $5 million for general needs like working capital, equipment, or buying a company. The 504 program also goes up to $5 million, but is typically used for fixed assets such as real estate or large machinery. Business owners turn to SBA loans because the federal guarantee makes banks more willing to lend and often results in better terms than conventional financing. In fiscal 2024, ended last September 30, the SBA guaranteed 76,235 loans with a total value of $37.8 billion through these two programs.
Most of the new rules are a reset, bringing standards back in line with what was in place at the end of President Trump’s first term in office. The latest update reverses many recent changes and reinstates stricter guidelines for approving such loans. Borrowers can expect tighter credit checks, tougher requirements on down payments, and less wiggle room when it comes to debt service coverage ratios. According to an SBA announcement titled “SBA Eliminates Disastrous Biden-Era Underwriting Standards,” the changes aim to close an “era of irresponsible lending.” As proof for that claim, the SBA says that the 7(a) program suffered “negative cash flow of about $397 million” in 2024, its first loss in 13 years.
For the most part, the changes aren’t draconian. For example, one new provision raises the minimum credit score for borrowers from 155 to 165, as measured by the Small Business Scoring Service score, which goes up to 300. Another restores the requirement that business buyers put up at least 10% equity themselves. (Under Biden, half of that 10% often came from a loan from the seller.)
But other changes have left many in the industry questioning whether the SBA move is really just about safer lending or is more of a political reset aimed at scrubbing away Biden-era decisions and putting a MAGA stamp on the SBA. Some of the new hurdles, they say, could actually add more risk for the SBA.
“It’s one-part signaling a return to tighter underwriting, but also reads as a somewhat political reset rather than a coherent policy shift,’’ says Eric Pacifici, the founder of SMB Law Group, which has advised on more than $1 billion in small business deals since opening up shop in 2022.
That tension, between tighter lending standards and rules that could unnecessarily squelch good deals, shows up clearly in the new treatment of equity rollovers.
Equity rollovers are when sellers keep some stake in a business after selling it. Previously, if sellers kept less than a 20% stake, they didn’t have to personally guarantee the SBA loan used by the buyer. But under the new guidelines, known as SOP (Standard Operating Procedures) 50 10 8, any seller who retains equity, no matter how small, is treated as an ongoing owner and must personally guarantee the entire loan for at least two years. Additionally, these transactions must now be structured as stock purchases. Asset purchase structures, previously a common option, are no longer allowed. That means buyers can no longer carve out for purchase just the clean assets. They now take on the full legal and financial history of the business, including any hidden liabilities. And that, presumably, means more risk for the lender.
Pacifici says the changes don’t just complicate equity rollovers. They effectively end them. Under the new rules, anyone who keeps even a sliver of ownership must personally guarantee the full loan. That’s a dealbreaker for most sellers, especially those who want to stay involved without risking all their personal assets.
In one case, Pacifici says a transaction fell apart because a seller wanted to remain in the industry but refused to sign a personal guarantee to stick with his business or a non-compete keeping him from starting or joining a competitor. That deal, he says, is now dead.
From Pacifici’s vantage point, the rule changes don’t take account of how deals have been getting done in the real world.
Another issue, a knock-on effect of the new equity rollover rules, involves licensure. Matthias Smith, founder of Pioneer Capital Advisory, says it’s not a deal killer, but it is a “big speed bump.” Since the pandemic, a wave of buyers from Wall Street and big consulting firms have left the corporate world in search of small business ownership. One of the most popular targets has been HVAC (heating, ventilation and air conditioning) companies. But while bank analyst programs, or an MBA, might teach you the plumbing of the financial system, they don’t prepare people to recharge a refrigerant line. Moreover, many banks won’t lend to businesses without an owner who is licensed in that specialty.
In the past, buyers often solved this by keeping the seller on as a minority owner. That way, the seller could stay involved and keep the license active. (It was also a nice sweetener to close the deal, allowing the seller to keep their office and parking spot, while banking money and reducing their work load as they move toward retirement.) Now, that option is mostly gone. Buyers will have to find an employee who already holds a license and is willing to become a part-owner from the start, taking on a personal guarantee in the process, or someone willing to take an equity stake later, which banks tend to like because it helps ensure they stay.
Another option is to bring in someone entirely new, but that adds complexity. The buyer probably doesn’t know the license-holder, at least not the way they know the seller they’ve been negotiating with. They have to find someone, hope they’re qualified, and trust they won’t use their leverage to squeeze the deal. It adds moving parts to an already complicated and nerve-wracking process.
Lenders used to like having the seller stick around. It kept someone with skin in the game, someone who had faith in the business and a reason not to walk away. That’s no longer really an option.
“Where I think they [the SBA] screwed up is that they’re asking a seller who wants to keep some equity to guarantee the full loan amount,” Smith says. He’s hoping the SBA reconsiders and allows prior owners to be responsible only for a pro-rata share of the loan, based on their ownership stake. “That’d be commercially reasonable.”
Another problematic change is the adjustment to the “standby requirement,” which determines how long sellers must wait before receiving payments on loans they provide to buyers. It was a common way for buyers to cover the equity needed to qualify for an SBA loan. Previously, sellers often waited just two years, but under the new rules, that period extends to the entire term of the SBA loan, which is typically 10 years. The consequence, of course, is that sellers will be less likely to offer financing, leaving lenders with less assurance that someone who knows the business (and has a financial stake in seeing it succeed) will still be involved.
Ironically, it’s changes like these that dealmakers argue actually increase risk. They point out that keeping sellers financially involved, either through shorter standby periods or equity stakes, helps ensure the business stays healthy during the transition.
“It’s going to force searchers [business buyers] to bring more equity in most cases because fewer sellers are going to agree to wait ten years for 5% of the proceeds,” says Pacifici. He sees nothing wrong with that and expects the market to adjust, but he acknowledges it will make deals harder to close in the near term. It might also be a tough moment to tighten the screws. Baby Boomers own an estimated 2.3 million small businesses, and the peak birth years of that generation are now reaching 65. Add it all up, and you have a wave of owners looking to sell just as the path to the exit is narrowing.
One change with no real workaround is the new restriction on foreign ownership. Until now, businesses could qualify for SBA loans as long as at least 51% was owned and controlled by U.S. citizens or lawful permanent residents, also known as “green card” holders. That allowed for a range of legal statuses. Green card holders, refugees, and individuals granted asylum all had a path to financing. But under the new rules, a business must now be 100% owned by U.S. citizens, U.S. nationals, or those who have had green cards for at least six months. Even a small foreign ownership stake makes a business ineligible.
The rationale, according to the SBA, is part of a broader push to put American citizens first. The agency points to examples of past loans involving undocumented immigrants and says it has closed satellite offices in so-called sanctuary cities which protect the undocumented. That’s in line with the Trump administration’s wider efforts to secure the border, tighten immigration rules and ramp up deportations. It’s a big shift, especially given that four out of every ten small business owners in the U.S. are foreign born. That number includes many with legal status who can still qualify, but it gives a sense of how many entrepreneurs this could affect.
The broad prohibition also seems to work against Trump’s stated goal of bringing more jobs to America. Big corporations, including foreign ones like Taiwan’s Foxconn during the first Trump administration, have received subsidies to build U.S. factories. That project, subsidized by the state of Wisconsin, fell apart. The 13,000 jobs it was supposed to produce never came. The question now is whether the SBA’s stricter rules might block the very people who are ready to create jobs on day one.
Emmet Apolinario, co-founder and president of Ohio Business Advisors, says the rule changes are already causing deals to fall apart. One recent example involved a $2.5 million sale that had been in the works for nearly a year. The buyer and seller had agreed on terms, the loan had cleared underwriting, and all that was left was final due diligence. Then the deal collapsed. The buyer, a U.K. citizen married to a U.S. citizen, was set to receive a green card but hadn’t had it long enough to meet the SBA’s new six-month lookback requirement for lawful permanent residents.
“These blistering SOP changes are wreaking havoc in our brokerage practice,” Apolinario says. “This is not your Grandpa’s SBA anymore.”
For all the immediate disruption, though, much of this is a return to how things used to be, notes Pacifici, the lawyer. Deals may get more complex, he says, but the market will adjust.
“There are interesting wrinkles in this whole thing,” Pacifici says. “But, listen, these deals have been getting done forever.”
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