What Should Small Business Owners Know About SOP 50 10 8?

The Small Business Administration (SBA) has released its updated Standard Operating Procedures (SOP 50 10 8), announcing that all changes will be effective for any loan receiving SBA approval on or after June 1, 2025. These changes are significant as they will impact the availability of capital to business owners.

What follows is a summary of the changes that appear most impactful; it is not intended to be all-inclusive. For a full copy of SOP 50 10 8, visit SOP 50 10 8. Please be aware that, from time to time, the SBA issues technical corrections and SOP changes through Information Notices that can be accessed at SBA.gov. Also, be aware that requirements in the SOP are considered minimum requirements by the SBA and that all lenders are required, per the SOP, to maintain prudent lending practices that may exceed these minimum requirements.

  • Notices

      Prior to the release of the new SOP, the SBA issued several Information Notices that went into effect immediately and are incorporated into SOP 50 10 8. Some of those changes include:

    • All borrowers are now charged an SBA Guarantee Fee on all loans. This fee had been previously waived for all loans under one million dollars.
    • All companies applying for an SBA loan must be 100% owned by a U.S. Citizen or a person with Legal Permanent Residence (Green Card) status. No foreign ownership or ownership by anyone in the U.S., legally or illegally, that has any other status is eligible.
  • SBA 7(a) and 504 Loan Core Requirements

      First, let’s start with what the SBA calls its Core Requirements for both 7(a) and 504 loans:

    • All 7(a) loans over $350,000 are now considered “Standard 7(a) loans” and require full documentation and underwriting. Loans $350,000 and smaller are considered “7(a) small loans”.
    • Applicant's business must be located in and primarily operate within the United States.
    • The Alternative Size Standard has been increased, making larger companies eligible for SBA financing:
      • Tangible net worth may not exceed $20,000,000 (up from $15,000,000)
      • Average net income after taxes for the two full years before application may not exceed $6,500,000 (up from $5,000,000).
    • The list of types of businesses that are not eligible for SBA financing has been expanded and clarified. While the list is too long to detail here, a few broader points are:
      • An ineligible business cannot obtain a loan for any purpose, even if the use of proceeds for the loan is eligible. For example, a loan for an ineligible business to purchase or construct owner-occupied real estate for its own use is not eligible.
      • A business is either fully eligible or it’s not. Thus, a combined model where part of the business is ineligible makes the entire business ineligible.
      • Any applicant, owner or associate, who has previously defaulted on a Federal Loan or Federal Government guaranteed loan is not eligible. This includes PPP loans, EIDL loans, and student loans, to name a few.
    • The SBA is re-instituting its Franchise Directory. If a concept is not listed on the Franchise Directory as eligible, no loan can be made to any of its Franchisees.
    • The SBA is re-instituting its focus on what it calls “Credit Available Elsewhere”. The SBA Lender must certify and indicate that the Applicant does not have the ability to obtain some or all requested loan funds from a conventional source or source other than the SBA.
  • Other Specific Language

      In other sections of SOP 50 10 8, the SBA has added some specific language:

    • The purchase of excess land (land that is not for immediate use as part of the project) is not eligible to be funded by SBA loan proceeds.
    • If the business will operate from a leased location:
      • If $500,000 or 30% of the loan proceeds (whichever is less) will be used for leasehold improvements or if $500,000 or 30% of the proposed collateral (whichever is less) consists of leasehold improvements, fixtures, machinery, or equipment that is attached to the real estate:
        • Term of the lease, including renewal options exercisable only by the Borrower, should be equal to or exceed the term of the loan.
        • If the SBA Lender is unable to obtain the Assignment of Lease or Landlord Waiver, the lease term, including renewal options exercisable only by the Borrower, must equal or exceed the term of the loan.
        • If the loan proceeds will finance improvements made by the Borrower/tenant, any landlord reimbursements:
          • Must be used to pay down the loan to a point that will not trigger prepayment penalties (subsidy recoupment fee), and any remaining funds may be used for working capital or to decrease rent payments
          • Alternately, if the Lender can document that the landlord reimbursement has been factored into the Lender’s working capital adequacy analysis, the landlord reimbursement may be used for business working capital or to reduce the rent payments.
    • The SBA requires hazard insurance on all assets pledged as collateral
      • If hazard insurance is not available, the loan cannot be approved.
    • Flood Insurance
      • If any portion of a building that is collateral for the loan is located in a special flood hazard area, the SBA Lender must require the applicant to obtain flood insurance on the building.
      • If any equipment, fixtures, or inventory that is collateral for the loan (Personal Property Collateral) is in a building of which any portion is located in a special flood hazard area (building owned or leased location), the SBA Lender must require the applicant to obtain flood insurance for the Personal Property Collateral.
    • Life Insurance
      • If the loan is not fully collateralized, life insurance is required for the amount of the collateral shortfall for the principals of sole proprietorships, single-member LLCs, or for businesses otherwise dependent on one owner’s active participation.
  • SBA Environmental Policies & Procedures

      SBA Environmental Policies and Procedures

    • Environmental Investigation Reports must be dated within one year of issuance of the SBA loan number.
    • The SBA’s environmental policies and procedures apply to all SBA Lenders on all 7(a) and 504 loan programs. Prudent lending practices may dictate additional Environmental Investigations or Safeguards on any property.
    • The SBA requires an Environmental Investigation of all commercial Property upon which a security interest, such as a mortgage, deed of trust, or leasehold deed of trust, is offered as security for a loan or debenture.
      • If at any time an Environmental Questionnaire reveals that further investigation is warranted, the SBA Lender must obtain, at a minimum, a Records Search with Risk Assessment (RSRA).
      • If the Environmental Professional conducting the Phase I ESA concludes that no further investigation is warranted, the SBA Lender must keep a copy of the Phase I ESA and review it in the loan file.
    • If the Environmental Professional conducting the Phase I ESA concludes that further investigation is warranted (typically a Phase II), and the SBA Lender still wants to proceed with the loan, the SBA Lender must follow the Environmental Professional’s recommendations or submit the results for an exception to policy at EnvironmentalAppeals@sba.gov. The SBA will require compliance with all of an Environmental Professional’s recommendations (including “housekeeping measures,” such as secondary containment, decommissioning monitoring wells, sealing floor drains, etc.).
    • Prudent lending practices dictate that specific additional environmental assessments be performed for Child-Occupied Facilities. Such facilities, constructed prior to 1978, must undergo a lead risk assessment and also testing for lead in drinking water at all taps and fountains potentially used as a drinking water source for children. A new lead risk assessment and new testing for lead in drinking water at all indoor and outdoor taps and fountains accessible to children and, therefore, potentially used as a drinking water source for children are required for each new loan. The assessment and any tests must have been conducted within one year of reliance upon the report by the SBA Lender. The SBA Lender may not disburse the loan unless the risk of lead exposure to infants and small children has been sufficiently minimized.
  • 7(a) Loan Specific Requirements

      7(a) Loan Specific Requirements

    • Refinancing
      • Refinancing of the same institution debt must be sent to General Processing.
      • The SBA does not consider the following to be refinancing of SID:
        • The debt is an interim loan that has been made for purposes other than real estate construction and was approved by the Lender within 90 days prior to the issuance of a PLP loan number; or
        • The debt is a construction loan that has not been disbursed at the time the PLP loan number is issued.
      • Merchant Cash Advances and factoring agreements are not eligible for refinance.
    • Change of Ownership
      • When 100% of the business is being purchased
        • 10% Equity Injection is required based on Total Project Costs
        • Half the equity can be in the form of a seller's note on full standby for the life of the SBA loan. Interest may accrue.
        • When an SBA loan is used to purchase a business owned by an ESOP for a complete change of ownership where the ESOP is being dissolved, the employees (owners of the ESOP), except for illegal aliens, may remain as employees of the business despite other provisions in this SOP to the contrary.
      • Partial Changes of Ownership
        • Both the Operating Company, the Person (defined as an individual or another company) buying the interest, and any current owner gaining any interest in the business (directly or indirectly) must be co-borrowers on the loan.
        • Multi-step partial changes of ownership are not eligible.
        • 7(a) loans may not fund a partial change of ownership in an EPC for a business structured as an EPC/OC due to the regulation at 13 CFR § 120.111. However, 7(a) loans may be used to fund a partial change of ownership in the Operating Company of a business structured as an EPC/OC.
        • Any selling owner (one who receives loan proceeds in exchange for selling part of their ownership) who remains as a direct or indirect owner and 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 (1) a period of at least 2 years after final loan disbursement; or (2) until the loan has been current (making payments in accordance with the terms of the note and not on deferral) for 12 consecutive months.
          • The SBA does not require these guarantors that are providing a 2-year guaranty to provide their assets in case of collateral shortfall.
        • Except for the scenario above, the percentages of ownership for determining who must provide a guaranty will be based on the post-sale percentage of ownership in the business.
        • For ESOP transactions, there is a statutory requirement that if the seller of the employer small business remains as a partial owner, the seller must provide a full, unlimited guaranty, regardless of ownership. This statutory requirement cannot be waived.
    • Credit Analysis
      • The SBA requires loans for start-ups, new businesses, changes of ownership, and other applications based on projections, to include detailed projections, including the supporting assumptions that reflect a debt service coverage equal to or greater than 1.15 within 2 years from loan funding or, for construction projects, within 2 years from the end of construction.
    • Equity Injection
      • Depending on whether the loan is processed on a non-delegated or PLP basis, the Lender or SBA must determine that there is sufficient invested equity. To do this, the Lender (for PLP loans) or SBA (for non-delegated loans) must determine if the equity position, any required equity contribution, and the pro forma debt-to-worth are acceptable based on the factors related to the type of business, experience of management, and the level of competition in the market area.
      • Minimum equity injection for start-up businesses is 10% of Total Project Costs. This applies to all businesses in operation and generating revenues for one year or less.
      • Changes of Ownership
        • Loans to ESOPs for the purpose of purchasing a controlling interest (at least 51%) in the employer's small business are not subject to the SBA requirement for equity injection.
        • Changes of ownership resulting in a new owner (complete change of ownership): At a minimum, the SBA requires an equity injection of at least 10% of the total project costs, (all costs required to complete the change of ownership, regardless of the source of funds, except for lines of credit and 504 loans) for such transactions. Seller debt may not be considered as part of the equity injection unless it is on full standby for the life of the SBA loan, and it does not exceed half of the SBA-required equity injection.
        • An equity investment not subject to an agreement to repay equity or make distributions to recover an investor’s investment prior to release of the guaranty. Note that whether called “search funding” or by some other name, the 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 guaranty (e.g., certain types of redeemable preferred stock) to be debt and not equity.
        • Cash that comes from a personal loan where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify) is eligible.
      • The SBA requires that all equity injections be verified and documented by the source by the SBA lender.
  • Collateral

      Collateral

    • On refinance, except for trading assets, the loan must be secured by at least the same collateral and lien priority as the loan being refinanced. Excess collateral can be released, and substitution of collateral is allowed.
    • The SBA does not require the lender to place a lien on vehicles unless the value is over $20,000. This value must be documented.
    • The SBA Lender can leave trading assets (AR, inventory) off the collateral schedule if they are being used to secure a line of credit.
    • If collateral shortfall:
      • Lender must take available equity in personal real estate owned by both direct and indirect owners of 20% or more.
        • Includes residential, investment, and commercial properties
        • If equity in real estate is less than 25% of the property’s fair market value, the SBA Lender is not required to take it as collateral, except in an abundance of caution
        • If assets are owned by an individual together with spouse and minor children, they must be combined for collateral purposes, even if the spouse has no ownership
        • There is a six-month lookback on transfers
  • Closing Conditions

      Closing Conditions

    • SBA requires all SBA Lenders to fully verify and document sources of all equity injections.
    • Lender must obtain certain certifications and agreements from the Borrower(s) (OC and EPC) prior to disbursement of loan proceeds. Borrower and OC must certify that:
      • They received a copy of the E-Tran Terms and Conditions;
      • There has been no adverse change in Borrower’s (and OC’s) financial condition, organization, operations, or fixed assets since the date the Loan Application was signed;
      • No principal who holds at least 50% of the ownership or voting interest of the Borrower or OC is delinquent more than 60 days under the terms of any administrative order; court order; or repayment agreement requiring payment of child support;
      • Borrower and OC are current on all federal, state, and local taxes, including but not limited to income taxes, payroll taxes, real estate taxes, and sales taxes; and
      • If applicable, the Borrower(s) and the 401(k) plan are in compliance with all applicable IRS, Treasury, and Department of Labor requirements and will comply with all relevant operating and reporting requirements.
      • For any real estate pledged as collateral for the loan or where the Borrower or OC is conducting business operations, the Borrower or OC are in compliance with all local, state, and Federal environmental laws and regulations and will continue to comply with these laws and regulations. Furthermore, they are unaware of any other actual or potential environmental hazards related to the collateral or business premises. They agree to fully indemnify Lender and SBA against all liabilities or losses arising from the contamination of the property before or during the term of the loan.
      • Borrower and OC must certify that they will not, without the Lender’s prior written consent:
        • Make any distribution of company assets that will adversely affect the financial condition of the Borrower and/or OC;
        • Change the ownership structure or interests in the business during the term of the loan; or
    • Sell, lease, pledge, encumber (except by purchase money liens on property acquired after the date of the Note), or otherwise dispose of any of the Borrower’s property or assets, except in the ordinary course of business.
    • Borrower and OC must certify that all owners are eligible borrowers (US Citizens or LPR) and have no employees who are in the US illegally.

As stated earlier, while this list is long, it is not intended to be a comprehensive outline of all changes to SBA Lending Programs included in SOP 50 10 8. All interested persons are encouraged to click here (SOP 50 10 8) to access a complete copy of the new SOP that was issued with technical corrections to review in detail.

If you have any questions about the SOP 50 10 8, please reach out to our experienced SBA lending team.