Changes to the Small Business Administration’s (SBA) lending requirements take effect October 1, bringing additional scrutiny to certain loan applications, particularly those involving the purchase of an existing business. What do the changes mean for entrepreneurs seeking capital, and how can borrowers prepare? Two lending executives explain what business owners should know before approaching a lender.
The Small Business Administration’s updated lending procedures, known as SOP 50 10 8.1, take effect October 1, 2026. The changes affect SBA-backed financing, with particularly significant revisions to the underwriting requirements for business acquisitions.
For entrepreneurs planning to buy a business, expand an existing operation, or seek additional capital, understanding the requirements before applying could help avoid unnecessary delays.
I asked Mark Valentino, Head of Business Banking at Citizens, and Ben Johnston, COO at Kapitus, how the changes could affect small business borrowers and what owners should do to improve their chances of securing financing.
Buying a Business? Expect More Scrutiny
Both Valentino and Johnston identify business acquisitions as a major area of change.
Valentino says the greatest impact will likely be on acquisition financing, particularly transactions involving purchase prices exceeding $3 million, where additional documentation may be required.
Lenders will place greater emphasis on historical cash flow and documented business performance, he explains. Deals that rely heavily on future projections may face additional scrutiny.
Johnston identifies several specific changes under the revised requirements:
- Smaller 7(a) acquisition loans under $350,000 will no longer receive lighter underwriting treatment.
- The debt-service coverage requirement for initial acquisitions increases from 1.15 times to 1.25 times.
- An independent quality of earnings report is required for qualifying business acquisitions with purchase prices of $3 million or more, excluding owner-occupied real estate from that threshold.
- Restrictions on how the required equity contribution can be funded may affect how some acquisition transactions are structured.
Business owners considering an acquisition can find the detailed requirements in Appendix 15 of the SBA’s updated lending procedures.
For prospective buyers, the message is straightforward: Understand the business you’re acquiring, and make sure its financial history supports the proposed financing.
Valentino says thorough due diligence is increasingly important. Buyers should examine the target company’s earnings, repayment capacity, and long-term sustainability. Strong liquidity and a realistic transition plan can also help strengthen an application.
Will SBA Loans Become Harder to Obtain?
That depends, in part, on the type of financing being requested.
Valentino doesn’t expect significant disruption for well-prepared borrowers seeking traditional SBA financing for working capital, equipment, or owner-occupied real estate.
However, acquisitions requiring additional due diligence could experience longer underwriting timelines.
Johnston expects the revised requirements to make some applications more complicated and time-consuming. He believes additional scrutiny of acquisition values and repayment capacity is understandable, given concerns about loan defaults.
He also raises concerns about the SBA’s restrictions on businesses with legal permanent resident ownership.
That restriction is worth distinguishing from the October 1 changes. Under a separate SBA policy effective March 1, 2026, businesses with any ownership interest held by legal permanent residents, commonly known as green-card holders, became ineligible for SBA-backed 7(a) and 504 financing.
Johnston disagrees with that policy, arguing that legal permanent residents contribute significantly to American entrepreneurship and that excluding their businesses is counterproductive to the SBA’s economic development goals.
How to Make Your Business More Loan-Ready
For owners expecting to seek financing in the next six to 12 months, preparation is essential.
Valentino recommends getting financial and business records organized well before approaching a lender.
That includes current financial statements, tax returns, legal documents, leases, licenses, and ownership records. Borrowers should also understand their revenue, profitability, and cash flow trends and address potential personal credit issues.
Johnston emphasizes the importance of developing a business plan that demonstrates an understanding of the market opportunity, projected costs, capital requirements, and expected returns.
That means knowing not only how much financing you want, but why you need it and how the investment is expected to generate sufficient revenue to repay the debt.
Valentino also recommends contacting lenders early rather than waiting until the financing becomes urgent.
Is Alternative Financing Worth Considering?
An SBA-backed loan isn’t necessarily the right solution for every business or every financing need.
Johnston points out that non-bank lenders often have more flexible requirements, including less time in business, fewer collateral requirements, and less documentation. Funding decisions may also be faster.
The trade-off is that alternative financing is often more expensive.
Valentino cautions owners against choosing financing based solely on the advertised interest rate. He says, “The lowest rate is not always the best option if it restricts growth or strains liquidity.”
Business owners should also consider repayment structure, flexibility, cash flow impact, and the certainty of receiving funds when needed.
Johnston recommends calculating the anticipated revenue and expenses associated with any project, then factoring in the full cost of financing.
If the project cannot generate an acceptable return after those costs, owners may need to reconsider the project or its financing structure.
For acquisition transactions that no longer meet SBA requirements, Valentino suggests exploring additional equity, seller support, or revised transaction terms before abandoning the deal.
Don’t Wait Until You Need the Money
Valentino and Johnston agree on one important point: Too many entrepreneurs wait until they need financing to prepare for it.
Valentino says one of the biggest mistakes is waiting too long to contact a lender. He explains, “Early conversations create more opportunities to address issues before deadlines become critical.”
Johnston believes owners also need a stronger understanding of the economics of the projects they’re financing. Knowing the anticipated costs, returns, and repayment obligations makes it easier to determine which financing option makes business sense.
The Takeaway: If you’re considering an SBA loan, particularly to purchase an existing business, familiarize yourself with the October 1 changes before beginning the application process. Get your financial records organized, understand your cash flow, and talk to lenders early. And when comparing financing options, remember that the lowest borrowing cost isn’t necessarily the best choice if the repayment terms put additional pressure on your business.
Rieva Lesonsky is the founder of Small Business Currents, a content company focusing on small businesses and entrepreneurship. You can find her on Twitter @Rieva, Bluesky @Rieva.bsky.social, and LinkedIn. Or email her at Rieva@SmallBusinessCurrents.com.
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