SBA SOP 50 10 8, B.Ch3.C.2 — Underwriting
Verbatim text of SBA SOP 50 10 8 section B.Ch3.C.2 (Underwriting), effective 2025-06-01. 6 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 SBA's own document page serves superseded editions, and the SOP is further amended by policy notices — read this with the notices that touch it.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.Ch3.C.2 — Underwriting — 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.Ch3.C.2
2. Underwriting 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 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). Lender must review any management agreement (unless the management agreement is part of the franchise disclosure documents for a brand listed on the Franchise Directory) to determine if it results in an ineligible passive company; 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 new businesses, based on detailed projections, including the supporting assumptions which reflect positive cash flow within 2 years. c) The financial analysis for all Applicants must address the following as applicable:
SOP 50 10 8 B.Ch3.C.2.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. iv) The effect any affiliates may have on the ultimate repayment ability of the Applicant.
SOP 50 10 8 B.Ch3.C.2.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 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.Ch3.C.2.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.Ch3.C.2.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;
SOP 50 10 8 B.Ch3.C.2.v.vii
vii. Analysis of working capital adequacy, at a minimum over the next 12 months; viii. 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. ix. 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.iii., above in this Chapter. In addition, Lender must include a written explanation for any late payments over the past 12 months. x. 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. 1, Para. H, Credit not available elsewhere; b) Competition; c) Seller financing; d) Stand-by agreements; e) 90+ day delinquencies; f) Trade disputes and/or; g) Federal, State, or local citations which would preclude the Applicant from normal business operations; h) Discussion of any liens, judgments, bankruptcy filings or pending litigation including divorce proceedings; and i) Discussion of other relevant information (for example, if the application involves a franchise (as defined by FTC), Lender must review any credit information provided such as the number of failed franchisees and cash flow projections provided by the franchisor). 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., Loan Closing and Disbursement, of this Section for requirements concerning documenting and verifying equity injection.) ii. Minimum equity injection requirements for certain Applicants or loans: Start-Up Businesses – At a minimum, 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) to be necessary for a Start-Up Business to operate on a sound financial basis. 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; iii. 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.Ch3.C.2 — Underwriting
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