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New SBA Loan Rules Add Pressure to Business Buyers, Sellers, and Lenders
The Small Business Administration is implementing new loan rules on June 1 that will reset many of the eligibility and underwriting standards for SBA-backed lending. Although the changes are presented as a return to earlier policies, they introduce new restrictions that are already causing deals to fall through across the country.
The rules apply to SBA’s two main loan programs—7(a) and 504—which together accounted for nearly 77,000 loans worth $37.8 billion in fiscal year 2024. These programs have long served as a key source of capital for small business acquisitions and growth, supported by federal guarantees that reduce risk for lenders.
Under the updated guidance, the SBA has raised the minimum ownership requirement for borrowers from 51% to 100% U.S. citizen or qualified permanent resident ownership. It has also reinstated tighter credit standards, including higher minimum scores and larger down payments.
Some of the changes, while framed as returning to earlier norms, are stricter than what existed during the previous Trump administration. These adjustments affect not just who can borrow, but how deals are structured, particularly in acquisitions where sellers stay on as minority owners.
New Ownership Standards Affect Foreign Nationals and Mixed Households
One of the most sweeping changes eliminates eligibility for any business not 100% owned by U.S. citizens or green card holders with at least six months of permanent residency. This reverses prior rules that allowed partial foreign ownership as long as control remained with qualified individuals.
The SBA says the shift is meant to limit risk and prevent misuse of federal funds, but critics argue it restricts job creation by excluding otherwise qualified entrepreneurs. Industry experts note that around 40% of small business owners in the U.S. are foreign-born, a group that includes many with legal status who may now find themselves ineligible under the new rules.
Equity Rollovers Now Require Full Guarantees
Another major change limits the ability of sellers to remain involved in a business after a sale. Previously, a seller could keep a minority stake—up to 19%—without needing to guarantee the buyer’s SBA loan. That option helped facilitate transitions in industries where the seller’s presence added value, either for licensing reasons or operational continuity.
Now, under the SBA’s new rules, any seller who retains equity—no matter how small—must personally guarantee the entire loan for at least two years. This provision is expected to sharply reduce rollover arrangements, especially among older sellers who prefer to reduce exposure rather than tie up personal assets.
The rules also require these transactions to be structured as stock sales rather than asset purchases. This shift removes the option to buy selected parts of a business while leaving behind liabilities. Buyers must now take on the full financial and legal history of the company, potentially increasing risk for both borrower and lender.
Tighter Requirements on Standby Seller Notes
Another rule adjustment extends the standby period on seller-provided financing. Previously, sellers could agree to receive payments on their loan to the buyer after a two-year delay. This option helped buyers meet the equity requirement to qualify for an SBA loan, while giving sellers confidence they would be repaid.
Under the new rules, the standby period extends to the full term of the SBA loan—typically 10 years. This makes seller financing less attractive, likely increasing the cash buyers need up front and removing a key tool that many brokers and lenders relied on to close deals.
Licensing and Operational Risks for Buyers
The updated standards also complicate transactions in licensed industries such as plumbing, and other trades. Many state regulations require a licensed owner to operate the business, and in the past, buyers often solved this by keeping the seller on as a minority stakeholder. With that no longer viable in most cases, buyers must either find a licensed employee willing to take equity or bring in a new partner with the right qualifications.
Industry professionals say this adds uncertainty, particularly in cases where the buyer does not have a prior relationship with the license-holder. It also creates leverage for third parties who may demand better terms to participate, making transactions harder to complete.
Industry Response and Market Impact
Legal and advisory professionals working in small business finance are concerned the rules will limit flexibility in dealmaking and create new risks for lenders. The inability to rely on sellers for continuity, financing, or licensing may increase the chance of business disruption after a sale, a factor that historically has led to defaults.
Outlook
Some industry voices are calling for further revisions or clarifications. In particular, they are urging the SBA to reconsider the personal guarantee requirements for minority sellers and to allow standby notes with shorter timelines. Whether those adjustments materialize remains to be seen.
For now, deal participants are adapting to a more rigid environment—one with less room for the flexibility that many small business transactions have long relied on.
