The SBA released significant updates to its loan programs that take effect October 1, 2026.

SBA SOP 50 10 8.1 imposes new underwriting standards, more formalized financial diligence, and restrictions that will affect the ownership and structuring of deals after the effective date. The following is a brief summary of key changes.

Debt service coverage

Initial acquisitions and owner buyouts must demonstrate a debt service coverage ratio (DSCR) of at least 1.25x. Qualifying business expansions will be subject to a minimum DSCR of 1.15x.

The DSCR analysis must be based on historical results, not future projections.

The new SOP formalizes a standard that many lenders already require. Buyers should analyze deal opportunities and capital structures accordingly and engage with potential lenders early in the process.

Quality of Earnings for deals over $3 million

Many business buyers already obtain quality of earnings reports during financial diligence, but the new SOP mandates this as part of the lender’s underwriting process for transactions over $3 million.

What is a quality of earnings?

According to the SBA, a quality of earnings report (QofE or QoE) is a financial diligence report prepared by an independent, experienced financial professional that “examines the reliability, sustainability, and accuracy of a business's historical and projected earnings.”

QoEs involve more extensive forensic accounting than the business valuations traditionally required by SBA lenders. Among other requirements, the QoE must reconcile the financial statements, tax returns, and IRS transcript data to produce a normalized, adjusted earnings figure; include a cash proof analyzing debits and credits in bank statements; and examine customer concentration risk and revenue sustainability. Earnings calculated through the QoE factor into the lender’s DSCR review.

Importantly, the SOP states QoEs must be conducted for the benefit of the lender, rather than prepared for the borrower or seller. There has been some chatter online about whether lenders could piggyback on work done by others, for example, engaging their own advisors to review a buy-side report as a starting point for their independent analysis. It remains unclear whether that is permissible or practical, particularly given potential non-reliance issues for the financial professionals preparing the reports.

Down payments and sources

For initial acquisitions, lenders must require at least 10% down from their borrowers. Business expansion and certain buyout loans are permitted more flexibility on a case by case basis.

For sources of the down payment, the SBA looks at two categories. At least half must come from the borrower’s cash or certain personal loans or grants.

No more than half may come from other “limited” sources such as seller notes and certain investor equity. When used for this purpose, seller notes must remain on full standby for the term of the SBA loan, and minority investors may not receive distributions (other than tax distributions) during the full term.

The SBA also adopted policies earlier this year limiting eligibility to U.S. citizens and U.S. nationals with a primary residence in the United States and restricting certain owners associated with prior SBA losses from participating in new SBA-backed transactions. Also, the rules continue to require a personal guaranty from anyone owning 20% or more of the business.

Other changes effective October 1

• Sellers can consult in the business for up to 24 months after closing (vs. 12 months under the current rules). This is a helpful structuring option for buyers.

• Combined business and real estate financings no longer qualify for 25-year amortization when real estate accounts for 51% or more of the project. Loans instead will be separated for business (10 years) and real estate (up to 25 years) or blended with a weighted-average term.

• The expedited process for 7(a) “small” loans (under $500,000) is gone. All loans will be subject to the same process.

Buyers hoping to close under the current framework should work with their lenders and push for an SBA loan number as soon as possible before October 1. Anyone pursuing SBA financing after that date should be prepared to evaluate and structure deals under the new SOP rules.