On May 29, 2025 the U.S. Small Business Administration (“SBA”) issued SBA Information Notice 5000-868665 and released the Standard Operating Procedure 50 10 8 with technical updates (“Updated SOP”), which became effective June 1, 2025. The Updated SOP replaced the version which was previously distributed for review on April 22, 2025. The SBA also provided a link in the email announcing the technical updates that shows the tracked changes, but only the clean version of the Updated SOP will be available on the SBA’s website.
SBA Lenders should update their policies and procedures to ensure compliance with the Updated SOP and implement those updated policies immediately on all current and future applications. While not comprehensive, the following list is a summary of revisions and/or clarifications of note from the Updated SOP:
- SBA Lenders must enter 100% of direct and indirect ownership information into E-Tran.
- Entity owners (whether direct or indirect) must be created, organized, or incorporated in the United States, its territories, or possessions. All direct and indirect owners and guarantors must have their primary residence in the United States, its territories, or possessions.
- SBA Lenders must check the Credit Alert Verification Reporting Systems (“CAIVRS”) to determine whether an Applicant is ineligible for a 7(a) or 504 loan because the Applicant or a business owned, operated, or controlled by the Applicant or any of its Associates has a Prior Loss or if the Applicant or any guarantor (except a Supplemental Guarantor) owes an outstanding nontax debt to the Federal Government, or any agency thereof, that is in delinquent status. SBA Lenders must retain documentation of the CAIVRS check in the loan file.
- If an SBA Lender receives a “no records found message” in its attempt to obtain a required tax transcript, the SBA will now permit the SBA Lender to proceed with loan closing if both of the following have been obtained: (i) proof of filing of the required tax return, either through evidence of an IRS E-file submission or a paper return that has been stamped as received by the IRS; and (ii) proof of payment or refund of tax liability that reconciles with the stated liability on the tax return. If the business’ tax liability is passed through to individual guarantors, the SBA Lender may use IRS tax transcripts for the individuals to verify their payment of taxes.
- All 7(a) term (non-revolving) loans may be structured with an initial interest-only payment period and may be sold in the secondary market after that interest-only period ends.
- Partial Changes of Ownership for Standard 7(a), 7(a) Small, and SBA Express loans:
- SBA requires any individual or entity who is acquiring any direct and/or indirect ownership interest in the Operating Company (i.e., a new owner) to be a Co-Borrower on the loan, regardless of the percentage of ownership being acquired.
- All remaining owners are subject to the requirements for guaranties based on the post-sale percentage of ownership in the business, except that any “selling owner” (one who receives payment in exchange for selling part of their ownership) who: (i) remains as a direct or indirect owner; and (ii) owns less than 20% of the business post-sale must provide a guaranty for the full loan amount. The term of the guaranty must be for the later of: (i) a period of at least two (2) years after final loan disbursement; or (ii) until the loan has been current (making payments in accordance with the terms of the Note and not on deferral) for 12 consecutive months. SBA does not require these guarantors to provide their assets in case of collateral shortfall.
- SBA Lenders are not required to place a lien on a vehicle if: (i) the vehicle already has a first lien on it; or (ii) the value of the vehicle (as reported by any of the following: an independent third party (e.g., orderly liquidation value from an appraisal, independent vehicle valuation company or website) or the purchase price allocable to the vehicle (if the 7(a) loan is being used to purchase the vehicle) is less than $20,000 at the time SBA assigns the SBA loan number.
- A recent emerging practice in “search funding” is not eligible for the 7(a) Loan Program.
- A “search fund” is an investment vehicle through which an entrepreneur raises funds from investors to acquire a company in which the entrepreneur wishes to take an active, day-to-day leadership role.
- A recently emerging practice identified by the SBA is that the investors purchase less than 20% of the business to avoid having to provide a guaranty, and the entrepreneur and investors set up a side agreement that gives control of the business to the investors and requires the return of their investments before the SBA guaranty is released.
- Businesses that have entered into an agreement for control (including a side agreement), that gives a non-guarantor owner/investor control of the business, are ineligible.
- Whether called “search funding” or by some other name, SBA will consider any investment subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the SBA guaranty (e.g., certain types of redeemable preferred stock) to be debt and not equity.
While all SBA Lenders should review the Updated SOP in its entirety to clearly understand the changes and identify considerations to keep in mind under the new guidelines, we will continue to analyze the changes in the Updated SOP and provide further guidance as these changes are implemented moving forward. For more information regarding the Updated SOP and SBA compliance generally, please contact the attorneys at Starfield & Smith at (215) 542-7070 or email us at info@starfieldsmith.com.
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