Changes to SBA Lending Rules Complicate Deals

New SBA lending rules are weighing on the business-for-sale market, rolling back Biden-era policies. Aimed at reducing lender risk, the updated rules impose U.S. citizenship requirements, stricter credit checks, and tighter debt service coverage ratios for small business acquisitions loans.

Furthermore, the SBA has added new rules for down payment requirements, which is critical, particularly for buyers planning to use seller financing as part of their equity injection. Effective June 1st, SBA rules only allow seller notes to cover up to 50% of the buyer’s required equity injection, which is typically 10% of the total project cost.

When used this way, sellers cannot receive any principal or interest payments until the SBA loan is fully repaid, often over a 10-year term. This forces buyers to contribute more capital to the table and effectively turns the seller note into a zero-interest, unsecured loan for the life of the SBA loan.

“SBA lending has become a real challenge with new federal regulations regarding seller notes to be on full standby,” said Mark Kincannon of Resolution Equity Partners.

Further complicating deals, any seller retaining even a small equity stake must personally guarantee the entire SBA loan for at least two years. In addition, all partial ownership transfers must now be structured as stock sales, rather than asset sales, bringing new tax and liability implications for sellers.

These heightened risks add strain to an already significant disconnect between buyer demand for seller financing and seller willingness to offer it. Just 23% of surveyed owners plan to provide seller financing, while 62% of buyers expect it to be part of the deal.

These changes are already being felt. Forty-one percent (41%) of business brokers surveyed reported delays caused by new SBA policies. Supporting that trend, the average time on market for businesses sold in the second quarter increased by 12 days year-over-year.

With more complex requirements, deal structure has never been more critical. Sellers should work closely with their business broker or sales team to navigate these changes. For example, seller repayment restrictions generally don’t apply when the seller note is in addition to the buyer’s down payment, rather than part of it. Lenders are often more favorable toward deals where the buyer meets the equity injection independently and the seller contributes additional financing as a sign of confidence.

For buyers using SBA financing, preparation is essential. While 68% of surveyed buyers say they are considering an SBA loan, more than half (55%) are unaware of the recent changes. Savvy buyers should get pre-qualified with a lender and be ready to move quickly when a viable opportunity arises.