SBA SOP 50 10 8, B.Ch1.C.1 — Processing Methods
Verbatim text of SBA SOP 50 10 8 section B.Ch1.C.1 (Processing Methods), effective 2025-06-01. 8 provision(s) quoted from the SOP PDF. SBA's own document page serves superseded editions, and the SOP is further amended by policy notices — read this with the notices that touch it.
Verbatim regulatory text
Verbatim provisions from SBA SOP 50 10 8, B.Ch1.C.1 — Processing Methods — each quote is a verified substring of the regulator-published source snapshot, not retyped. Quoted for reference; this is not legal advice. The operational layer (P&P updates, prompts) lives in the regulation update kits.
SOP 50 10 8 B.Ch1.C.1
1. Processing Methods Once submitted to SBA for non-delegated processing, an application withdrawn by a Lender, screened-out, or declined by SBA may not be approved by any Lender under its PLP Authority. E-Tran will not permit the submission of such an application under any Lender’s PLP authority for a period of 12 months from the date of the withdrawal, screen-out, or decline of the application. Non-delegated – When a Lender submits a Standard 7(a) loan guaranty request under the non-delegated processing method, the Lender submits the application and supporting documents to SBA. SBA will make the final determination as to the eligibility and creditworthiness of the Applicant, including approving the uses of proceeds, the adequacy of the collateral being pledged, the structure of the loan, and any equity contribution to be required from the Applicant. PLP – When a Lender submits a Standard 7(a) loan guaranty request under the Lender’s PLP authority, the Agency does not review the Lender’s analysis of the credit or structure of the loan or line of credit prior to issuing a loan number. The Lender must analyze credit worthiness in accordance with SBA Loan Program Requirements and properly document its file. The PLP Lender’s analysis is subject to SBA’s review and determination of adequacy when the Lender requests SBA to purchase its guaranty or when SBA is conducting lender oversight activities. 2. Underwriting Standard 7(a) Loans: Lender’s Credit Analysis: The Lender’s credit memorandum and analysis must address the Applicant’s ability and likelihood to repay the loan from the cash flow of the business and past performance by documenting the following: i. A description and history of the business, including: a) Nature of the business; b) Length of time in business under current management; c) Depth of management experience in the industry or a related industry; d) Brief description of the business’s management team including principal’s involvement in the daily onsite management of the business or how the daily operations will be managed if the principals are not there on a daily basis. e) If the daily operations will be handled under a management agreement, Lenders must obtain a copy of the management agreement (unless the management agreement is part of the franchise disclosure documents for a brand listed on the Franchise Directory), review it to determine if it results in an ineligible passive business, and retain in their loan file. ii. Financial analysis of repayment ability: a) For existing businesses based on the three most recent years of historical financial information (tax returns or balance sheet with debt schedule and income statement) plus an interim financial statement. (13 CFR § 120.191) b) For start-ups, new businesses, changes of ownership, and other applications based on projections, 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. c) The financial analysis for all Applicants must address the following as applicable:
SOP 50 10 8 B.Ch1.C.1.i
i) Historical cash flow for existing businesses, that demonstrates total debt service coverage after the SBA loan; if the historical cash flow from the most recent full year and the interim financial statements do not show sufficient debt service coverage, Lender must obtain from the Applicant and analyze 2 years of detailed projections including the supporting assumptions justifying relying on projections instead of historical performance; ii) Calculation of operating cash flow (OCF) defined as earnings before interest, taxes, depreciation, and amortization (EBITDA); iii) Justification for additions and subtractions to cash flow such as the following: (a) Unfunded capital expenditures; (b) Non-recurring income; (c) Expenses and distributions; (d) Distributions for S-Corp taxes; (e) Rent payments; (f) Owner’s Draw; and/or (g) Global cash flow analysis that includes assessment of impact on cash flow to/from any affiliate business. Anticipated cash flow from rental income from the Project Property may be included in the global cash flow analysis; iv) The effect any affiliates may have on the ultimate repayment ability of the Applicant.
SOP 50 10 8 B.Ch1.C.1.i.iii
iii. Debt Service (DS) is defined as the future required principal and interest payments on all business debt inclusive of new SBA loan proceeds. The Applicant’s debt service coverage ratio (OCF/DS) must be equal to or greater than 1.15 on a historical and/or projected cash flow basis and 1:1 on a global basis. To perform a complete analysis of debt service, it is important for a Lender to obtain a current debt schedule prepared by the Applicant, including any shareholder debt. iv. For cash flow projections, the Lender must calculate the debt service coverage (which may not include anticipated cash flow from rental income from the Project Property) and provide the assumptions supporting the projected cash flow coverage, including as applicable: a) Justification for revenue growth, i.e., new product lines, sales channels, and new production facilities; b) Justification for any reduction in expenses; and c) A comparison to current industry trends.
SOP 50 10 8 B.Ch1.C.1.v
v. Spread of pro-forma Business Balance Sheet (current business balance sheet adjusted for all changes in assets and liabilities as a result of the SBA loan, other debt, any required equity injection and use of loan proceeds);
SOP 50 10 8 B.Ch1.C.1.v.vi
vi. Ratio calculations (based on the pro-forma Balance Sheet and historical and projected Income Statements) for the following financial ratio benchmarks: Current Ratio, Debt/Tangible Net Worth, Debt Service Coverage, and any other ratios the Lender considers significant for the business/ industry (e.g., inventory turnover, receivables turnover, and payables turnover, etc.) including discussion of Lender’s comparison to industry trends; vii. Analysis of working capital adequacy, at a minimum over the next 12 months;
SOP 50 10 8 B.Ch1.C.1.v.viii
viii. Assessment of collateral adequacy adjusted in accordance with Paragraph C.3.c., Collateral Requirements for Standard 7(a) Loans in this Chapter below to offset risk of default; ix. Insurance Requirements, including: a) Life Insurance – on whom and how much. If life insurance will not be required, provide justification. b) Business hazard & liability insurances. x. Explanation of and justification for the refinancing of any debts as part of the loan request, along with supporting documentation, in accordance with the debt refinancing requirements in Paragraph A. 1. above, including a written explanation for any late payments over the past 12 months. xi. Lender’s rationale for recommending approval, including a discussion and analysis of the following: a) The factors demonstrating the Applicant does not have credit available elsewhere on reasonable commercial terms from non-Federal, non-State, non-local government sources in accordance with Section A, Ch. 2. Para. A. b) When 50 percent or more of the loan proceeds will be used for working capital, Lender must explain in its credit memorandum why this level of working capital is necessary and appropriate for the subject business; c) Competition; d) Seller financing; e) Stand-by agreements; f) 90+ day delinquencies; g) Trade disputes and/or; h) Federal, State, or local citations which would preclude the Applicant from normal business operations; i) For a change of ownership, discussion/analysis of the business valuation used to support the purchase price (see Paragraph C.3.d.v, Business Valuation Requirements - Change of Ownership below.); j) Discussion of any liens, judgments, bankruptcy filings or pending litigation including divorce proceedings; k) If the application involves a franchise (as defined by FTC), the Lender must review any credit information provided, such as the number of failed franchisees and cash flow projections provided by the franchisor). l) Discussion of other relevant information. Equity requirements (13 CFR § 120.150): i. 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. The Lender must include in its credit memorandum a detailed discussion of the equity position (net worth) and any required equity injection. See Ch. 5, Para. D.3., Closing Documentation, for requirements concerning documenting and verifying equity injection.
SOP 50 10 8 B.Ch1.C.1.v.ii
ii. Minimum equity injection requirements for Start-Up Businesses: SBA considers a business to be a “start-up” for the purpose of determining equity injection requirements if it has been in operation (i.e., generating revenue from intended operations) for 1 year or less. SBA considers an equity injection (Applicant contribution) of at least 10 percent of the total project costs (all costs required to become operational, regardless of the source of funds, except for lines of credit and 504 loans) to be necessary for a Start-Up Business to operate on a sound financial basis. All 7(a) loans made to a Start- Up Business require a 10% equity injection based on the project cost; however, loans approved more than 90 days apart from each other are considered to be separate projects. iii. Changes of ownership: a) Loans to ESOPs for the purpose of purchasing a controlling interest (at least 51 percent) in the employer small business are not subject to the SBA requirement for equity injection. b) Changes of ownership resulting in a new owner (complete change of ownership): At a minimum, SBA requires an equity injection of at least 10 percent 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; Note: When an existing business starts or acquires a business that is in the same 6 digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are Co-Borrowers, SBA considers this to be a business expansion, and SBA will not require a minimum equity injection. “Same geographic area” means the acquiring entity is located within a reasonable distance of the subject business, allowing management to exercise similar daily control over both locations. c) Change of ownership between existing owners (“complete partner buyout”): If the 7(a) loan will finance more than 90% of the purchase price of a partner buyout, both of the following must be met: i) The remaining owner(s) must certify that they have been actively participating in the business operation and held the same or an increasing ownership interest in the business for at least the past 24 months. Lender must include in the credit memorandum confirmation that the Borrower has made the required certification and retain such certification in the file. ii) The business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership. iii) In the event the Lender is unable to document that both i) and ii) above are satisfied, the remaining owner(s) must contribute cash either sufficient to reflect a debt-to-worth ratio of no greater than 9:1 on the business’s balance sheet for the current quarter prior to the change in ownership or in the amount of at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement, whichever is less. d) Partial changes of ownership (Changes of ownership other than complete changes of ownership or complete partner buyouts): i) The business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership. ii) In the event the Lender is unable to document that i) above is satisfied, the new and/or existing owners must contribute cash either sufficient to reflect a debt-to-worth ratio of no greater than 9:1 on the business’s balance sheet for the current quarter prior to the change in ownership or in the amount of at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement, whichever is less.
SOP 50 10 8 B.Ch1.C.1.v.iv
iv. Source of Equity Injection: The following may be considered equity injection. a) Standby Agreements - only debt that is on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA’s purposes. Lender must use SBA Form 155 or its own equivalent Standby Agreement form, and a copy of the note must be attached to the standby agreement. The standby debt may accrue interest and may be added to the standby debt and amortized after the 7(a) loan is paid in full. Standby Creditor must subordinate any lien rights in collateral securing the loan to Lender’s rights in the collateral and take no action against Borrower or any collateral securing the Standby Debt without Lender’s consent. b) Cash that is not borrowed, whether on the business’s balance sheet or from other sources. c) 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). d) Grants that do not have repayment or clawback provisions during the life of the 7(a) loan. e) Assets other than cash – An appraisal or other valuation by an independent third party is required if the valuation of the fixed assets is greater than the Net Book Value. A valuation of the fixed assets provided as part of a business valuation will not meet these requirements. f) Prepaid expenses that the Lender has verified by obtaining paid invoices, canceled checks, or bank statements. Lender must retain copies of the documentation in the loan file.
Operationalizing SBA SOP 50 10 8, B.Ch1.C.1 — Processing Methods
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