Orientation: What You're Reading and Why It Matters
SOP 50 10 8 is the single rulebook governing how lenders originate, underwrite, close, and service SBA-guaranteed business loans. Get its architecture in your head first; everything else hangs off it.
SOP 50 10 contains the SBA's policies and procedures governing the 7(a) and 504 loan programs. This edition, SOP 50 10 8, is effective June 1, 2025. When the rules in this SOP and the regulations in 13 CFR describe a requirement, that requirement is part of the "Loan Program Requirements" a lender or CDC must follow to keep the SBA guaranty enforceable.
The three-section structure
The SOP is divided into three sections. Read Section A first, every time, then the program-specific section that applies.
| Section | Covers | Applies to |
|---|---|---|
| Section A | Core requirements: eligibility, ineligible businesses, citizenship, franchises, special structures, uses of proceeds, ethics & fees, guaranties, tax verification, insurance, environmental | All 7(a) and 504 loans |
| Section B | Program-specific rules for the 7(a) family | 7(a) loans only |
| Section C | Program-specific rules for the 504 program | 504 loans only |
7(a) versus 504, at a glance
These are two different programs with different mechanics. The 7(a) program is a flexible lender-driven guaranty. The 504 program is a fixed-asset economic development program delivered through a three-party structure.
| 7(a) Program | 504 Program | |
|---|---|---|
| Purpose | Broad: working capital, equipment, real estate, refinancing, change of ownership, export | Fixed assets (real estate, long-life equipment) for economic development |
| How SBA backs it | SBA guarantees a portion of a lender's single loan | SBA guarantees a 100% debenture issued by a CDC, behind a third-party first mortgage |
| Who delivers it | A participating 7(a) Lender | A Certified Development Company (CDC) + a Third Party Lender |
| Revolving lines? | Yes (CAPLines, SBA Express, Export Express, EWCP) | No |
Know the players
Delegated vs. non-delegated processing
How a loan is submitted determines who decides eligibility and credit. This distinction comes up constantly in later modules.
The lender submits the application and supporting documents to SBA. SBA makes the final determination on eligibility, creditworthiness, use of proceeds, collateral, structure, and any required equity contribution.
SBA does not review the lender's credit analysis before issuing a loan number. The lender analyzes the credit, documents the file, and bears the risk: its analysis is reviewed when it later asks SBA to purchase the guaranty or during lender oversight.
Once an application is submitted to SBA for non-delegated processing and is then withdrawn, screened-out, or declined, no lender may approve it under PLP authority for 12 months from that date. E-Tran enforces this.
Knowledge Check
This training is a study aid built entirely from SOP 50 10 8 (effective 6/1/2025). It paraphrases and organizes the source for learning. It is not legal advice and does not replace the SOP, 13 CFR, or official SBA notices, which control in any conflict. Dollar thresholds and percentages noted as "maximum" may be adjusted by SBA through Information Notices or Federal Register notices.
Borrower Eligibility: The Four Core Tests
Eligibility is the first and most consequential determination a lender makes. It must be settled early, documented, and met at application and throughout closing and disbursement.
Eligibility for all SBA business loans flows from 13 CFR § 120.100. The applicant must satisfy every core test. SBA's lending programs qualify as Special-Purpose Credit Programs under the Equal Credit Opportunity Act, which is why a lender may obtain a spouse's signature where needed to perfect a lien or protect SBA and lender interests.
The four 120.100 tests
Organized for profit — the nonprofit subsidiary trap
Nonprofit businesses are not eligible. A for-profit subsidiary of a nonprofit may be eligible if all other requirements are met (120.110(a)), but watch the conditions:
- The nonprofit affiliate's receipts or employees must be included when determining the for-profit's size.
- Loan proceeds must be used exclusively for the benefit of the for-profit business.
- If the nonprofit affiliate owns 20% or more and cannot or will not guarantee the loan, the for-profit business is not eligible.
Size: two ways to qualify as "small"
An applicant may qualify under either the industry standard or the alternative size standard.
| Standard | Test |
|---|---|
| Industry Size Standard | Applicant alone must not exceed the size standard for its primary industry; combined with affiliates, must not exceed the standard for the primary industry of either the applicant alone or the applicant + affiliates, whichever is higher. Receipts are calculated from federal tax returns. 13 CFR § 121.201 |
| Alternative Size Standard | Tangible net worth ≤ $20 million, and average net income after federal income taxes (excluding carry-over losses) for the 2 full fiscal years before application ≤ $6.5 million. 13 CFR § 121.301 |
The applicable size standards are increased by 25% when the applicant agrees to use all of the financial assistance within a labor surplus area (designated by the Department of Labor).
Size is determined as of the date the application is accepted for processing by SBA. For loans under delegated authority (PLP, SBA Express, Export Express, PLP-EWCP, PCLP), size is determined as of the date the lender approves the loan.
Affiliation — the post-2023 ownership test
The April 10, 2023 Final Rule (88 FR 21074) removed the principle of control from affiliation. Affiliation is now driven primarily by ownership:
- Owning more than 50% of another business creates affiliation (in either direction).
- A >50% owner who also owns >50% of another business in the same 3-digit NAICS subsector ties all three together.
- With no >50% owner, a 20%+ owner that operates in the same 3-digit NAICS subsector is affiliated.
- Ownership interests of spouses and minor children are combined. Pro rata ownership through entities counts.
Stock options, convertible securities, and agreements to merge are generally given present effect (treated as exercised). SBA will not honor a divestiture done solely to avoid a finding of affiliation.
If affiliation exists, SBA's loan maximums apply to the applicant plus all affiliates as one business (120.151).
Credit not available elsewhere
This is a statutory requirement (15 U.S.C. 636(a)(1)(A), 13 CFR § 120.101). The lender must certify that the applicant cannot obtain some or all of the requested funds on reasonable terms without SBA's help. If the applicant's cash flow and collateral would meet the lender's conventional standards, the project is not eligible.
A lender may not use as the sole reason: the applicant's failure to meet the lender's credit-score policy; that liquidity depends on selling the guaranteed portion; or that SBA lets the lender exceed its legal lending limit. A lender may never cite improving its CRA rating or its collateral lien position.
Needing a longer maturity than policy allows; loan exceeds the lender's one-customer limit; collateral falls short of policy; policy won't lend to new businesses (≤ 2 years) or to the applicant's industry; or other prudent-lending factors (credit history, management experience, leverage, global cash flow, loan size vs. business age) that cannot be overcome but for the guaranty.
Knowledge Check
Ineligible Businesses and Their Exceptions
Section 120.110 lists business types SBA will not finance. The skill is not memorizing the list, it's knowing the narrow exceptions that turn an apparent "no" into a "yes."
The lender must determine whether the applicant is one of the ineligible types in 13 CFR § 120.110. An ineligible business cannot obtain an SBA loan for any purpose, including buying or building its own facility.
The high-frequency categories
| Ineligible type | The exception worth knowing |
|---|---|
| Lending businesses 120.110(b) | Pawn shop eligible if >50% of prior-year revenue is from merchandise sales; a business financing its own sales is eligible if <50% of revenue is from financing; a mortgage company that sells loans within 14 days of closing is eligible; check casher eligible if >50% revenue from check cashing; fee-basis financial advisors eligible. |
| Passive businesses 120.110(c) | Landlords/developers ineligible (except Eligible Passive Companies). Salon suites / ghost kitchens eligible only if revenue is membership dues (not rent), customers have no assigned space, and the business supplies/maintains the equipment. Hotels, motels, RV parks, marinas, campgrounds eligible if >50% of prior-year revenue is from transients staying 30 days or less. |
| Gambling 120.110(g) | Ineligible if more than one-third of prior-year gross revenue (including rent) is from legal gambling. A casino or racetrack is ineligible regardless of percentage. |
| Illegal activity 120.110(h) | Marijuana businesses are ineligible (recreational or medical, even where state-legal). Hemp is eligible only if it meets the federal and applicable state definitions; CBD eligibility turns on source, product type, and FDA compliance. |
| Prurient sexual 120.110(p) | Ineligible if it presents live/recorded prurient performances or derives more than 5% of gross revenue from prurient products/services. |
| Political / lobbying 120.110(r) | Ineligible if over 50% of gross annual revenue is from political or lobbying activities. |
| Loan packagers 120.110(m) | Ineligible if more than one-third of gross annual revenue is from packaging SBA loans. |
Nonprofits; life insurance carriers; foreign-located businesses; pyramid/multilevel sales; businesses restricting patronage (e.g., one-gender clubs) or with discriminatory hiring; government-owned entities (except certain Native American tribe-owned businesses meeting conditions); businesses with an Associate currently incarcerated, serving a sentence, or under indictment for a felony or financial-misconduct crime; businesses in which the SBA Lender or its Associates hold an equity interest; and speculative businesses (wildcatting, dealing in securities/commodity futures, building spec homes — except under the Builders CAPLine).
Two screens that disqualify on debt history
Prior Loss to the Government — 120.110(q)
An applicant is ineligible if it (or a business it or an Associate owns, operates, or controls) previously defaulted on a federal loan or federally assisted financing causing a loss to the government. "Loss" means a recognized deficiency after write-off/close-out, including amounts compromised, discharged in bankruptcy, or unreimbursed 8(a) advances.
"Loss" does not include unpaid/delinquent taxes or an FDIC loss from selling a loan at a discount. Lenders check CAIVRS. If a prior loss is fully satisfied, the application can proceed (document how).
Delinquent Federal Debt — 31 CFR § 285.13
Ineligible if the applicant or any guarantor (except a Supplemental Guarantor) owes a nontax federal debt in delinquent status, meaning unpaid more than 90 days past the due date. A debt is not "delinquent" if released/compromised, in a satisfactory written repayment plan being paid as agreed, discharged in bankruptcy (and current on any court plan), or in administrative/judicial appeal. Check CAIVRS; if fully satisfied, the application can proceed.
A business is ineligible if it has an existing 7(a) or 504 loan that is not current at the time the new SBA loan number is issued. "Current" means a required payment has not gone unpaid for more than 29 days. A matured loan unpaid within 29 days of maturity is not current and cannot be refinanced.
Knowledge Check
Citizenship and Ownership Verification
SBA financing is limited to businesses whose owners and required guarantors are U.S. citizens, U.S. Nationals, or Lawful Permanent Residents. The verification mechanics are exacting, and a six-month lookback can sink an otherwise clean deal.
SBA financing requires that 100% of direct and/or indirect owners and SBA-required guarantors be U.S. citizens, U.S. Nationals, or Lawful Permanent Residents (LPRs, "green card holders"). The lender must certify in E-Tran that no owner or guarantor is an Ineligible Person. No loan may be made if any direct or indirect owner is an Ineligible Person.
Foreign nationals; those granted asylum; refugees; visa holders; nonimmigrant aliens under 8 U.S.C. § 1101(a)(15); individuals under DACA; and undocumented aliens. The list is not exhaustive.
The six-month lookback
The business is ineligible if any Associate of the business, beginning 6 months prior to issuance of the SBA loan number, is an Ineligible Person — unless that person completely divests their ownership before the loan number issues and severs every relationship with the applicant (including being a paid or unpaid employee) for the life of the loan.
If an Ineligible Person is a direct/indirect owner but not an Associate, the business is ineligible unless that person divests ownership before the loan number issues — but (except for an illegal alien) they may remain a non-Key employee. The 6-month lookback only applies to Ineligible Persons who are Associates.
Illegal aliens may not be employees of the borrower. Limited guaranties to support a pledge of jointly held required collateral may be provided by an Ineligible Person except an illegal alien; if an illegal alien co-owns required collateral, the applicant is ineligible unless that person fully divests their interest in the collateral before closing and disbursement.
Status categories
| Status | Treatment |
|---|---|
| U.S. Citizens | Includes those born in the 50 states, D.C., Guam, Puerto Rico, the Northern Mariana Islands, and the U.S. Virgin Islands. Naturalized citizens are eligible with no special restrictions; no further verification if shown as a U.S. Citizen on the application. |
| U.S. Nationals | People born in American Samoa and Swains Island. Eligible; lender must collect evidence of status (birth certificate or passport) and enter the SSN in E-Tran. |
| LPRs | May be owners and/or guarantors. Evidence is USCIS Form I-551 ("green card"). A 2-year conditional card is not acceptable — the holder must obtain a 10-year card. Re-verification is required if 6 months have elapsed since the last verification. |
Verification mechanics
The lender must enter into E-Tran at least 81% of the applicant's direct and indirect owners (entity and individual), combining spouses' and minor children's percentages. For non-citizen/non-national individuals, the lender obtains USCIS documentation and requests Document Verification from the Sacramento Loan Processing Center using USCIS Form G-845, with the alien's original "wet ink" signed authorization (not on lender or SBA stationery). Verification must be received before submitting the application (or, for delegated, before requesting the loan number).
Knowledge Check
Franchises and the SBA Directory
If a brand meets the FTC definition of a franchise, one rule dominates: it must be on the SBA Franchise Directory before the loan can move.
These procedures apply to any agreement that meets the Federal Trade Commission's definition of "franchise" in 16 CFR § 436 — even relationships called licenses, dealer, or jobber agreements if they meet that definition. Agreements covered by the Petroleum Marketing Practices Act (gas station distributor/supply/dealer/jobber agreements) and qualifying new-car dealer agreements are included.
If the applicant's brand meets the FTC definition of a franchise, it must be on the SBA Franchise Directory to obtain SBA financing. Lenders must check the Directory before submitting (non-delegated) or approving under delegated authority.
What the Directory does for you
The Directory lists brands SBA has reviewed and found eligible. For listed brands, lenders may rely on the Directory and no longer need to review franchise documentation for eligibility — with one exception below. The Directory shows whether the brand meets the FTC franchise definition, its SBA Franchise Identifier Code (if applicable), and any additional issues the lender must address.
The application cannot proceed — non-delegated loans can't be submitted and delegated loans can't be approved. When an applicant operates under multiple agreements, all agreements meeting the FTC definition must be on the Directory, or the application cannot proceed. If any brand has been determined ineligible, the loan cannot be processed.
The only franchise document the lender must still review is a management agreement that is not part of the franchise disclosure documents (FDD). The lender (not SBA) reviews it to confirm the applicant is not an ineligible passive business. If the management company is, or is affiliated with, the franchisor, the applicant is not eligible.
Franchise policy questions, Directory placement appeals, and reconsideration requests go to franchise@sba.gov. Franchise appeals are reviewed by the SBA Franchise Committee.
Knowledge Check
Special Transaction Structures
Four structures bend the normal rules: the EPC/OC real-estate vehicle, ESOPs, cooperatives, and 401(k)/ROBS. Each is an exception, so each condition is read strictly.
Eligible Passive Company / Operating Company (EPC/OC)
The EPC rule (13 CFR § 120.111) is an exception to the prohibition on financing assets held for passive income. Because it is an exception, every condition is interpreted strictly — miss one and SBA may deny liability on the guaranty.
The OC must be an eligible small business and a guarantor or Co-Borrower. The EPC must lease the property directly to the OC under a written lease subordinated to SBA's lien, with a term (including OC-only renewal options) at least equal to the loan term. Rent cannot exceed the loan payment plus the EPC's direct holding costs (maintenance, utilities, insurance, taxes). The OC must lease 100% of the property. Each holder of 20% or more of either the EPC or the OC must guarantee the loan.
An EPC may use proceeds to finance a change of ownership between existing owners of the EPC only when the real or personal property has been held by the selling owner(s) for at least 36 months. Multiple OCs may participate, but multiple EPCs in one transaction are not permitted.
ESOPs (7(a) only)
SBA may guarantee a 7(a) loan to an ESOP to (a) purchase a controlling interest (at least 51%) in the employer small business, or (b) purchase qualified employer securities. The small business must be a Co-Borrower.
- Transaction costs to purchase the controlling interest may be financed; costs to set up the ESOP may not.
- If the seller stays on as a partial owner, the seller must give a full, unlimited guaranty regardless of ownership percentage — a statutory requirement that cannot be waived.
- The IRS prohibits ESOPs from guaranteeing, so SBA does not require the ESOP or its members to guarantee.
- Cannot be structured as an EPC/OC. Loans to buy a 51%+ controlling interest are not subject to the equity injection requirement.
Cooperatives & 401(k)/ROBS
Cooperatives
Cooperatives must meet SBA's eligibility requirements and may be processed under delegated authority. Each loan must be guaranteed by at least one individual or entity. For 7(a) only, SBA may guarantee a loan to a cooperative to purchase a controlling interest (51%+) in the employer small business; purchase costs may be financed, set-up costs may not.
401(k) Plans including ROBS
A business owned in whole or part by a 401(k) plan (including a Rollovers as Business Start-ups plan) may be eligible if it complies with all IRS, Treasury, and DOL requirements. The lender must obtain the full unconditional guaranty of the plan sponsor(s) regardless of ownership percentage. Loan proceeds may not be used for any 401(k) plan formation costs. Cannot be structured as an EPC/OC (the 401(k) cannot guarantee under IRS rules, and SBA requires every 20%+ owner of an EPC and OC to guarantee).
For ESOP, cooperative, and ROBS structures, SBA will not review applications — even non-delegated ones — for compliance with the requirements of other regulatory bodies (IRS, Treasury, DOL). That compliance is the lender's responsibility to confirm.
Knowledge Check
Uses of Proceeds and Occupancy
What loan money can buy, what it can never buy, and how much of a building the borrower must actually occupy. The occupancy percentages are tested constantly.
Eligible uses (all SBA loans) — 120.120
Proceeds from any SBA loan may acquire land; improve a site (including up to 5% for community improvements like curbs and sidewalks); purchase, convert, expand, renovate, or construct buildings; acquire and install fixed assets (for 504, assets must have a useful life of at least 10 years at a fixed location); and finance a lender's Other Real Estate Owned (OREO).
Inventory, supplies, raw materials (including work-in-progress), and working capital for everyday operations. Revolving lines of credit are available only under CAPLines, SBA Express, Export Express, and EWCP.
Prohibited uses — 120.130
| Cannot use proceeds to… | Detail |
|---|---|
| Pay or loan to an Associate | Except fair compensation for services actually rendered, or to facilitate certain 7(a) change-of-ownership transactions |
| Refinance SBIC / NMVCC debt | Prohibited outright |
| Floor plan financing | Prohibited |
| Revolving lines of credit | Except EWCP, CAPLines, SBA Express, Export Express |
| Investment / held-for-sale property | Except an EPC or a Builders CAPLine contractor |
| Pay delinquent taxes | Never trust-fund taxes (payroll/sales). Delinquent business income taxes allowed only if the applicant has an approved IRS payment plan and is current on it. |
| Pay a creditor in a position to sustain a loss | No shifting of an existing potential loss to SBA |
When the borrower exports (including indirect exports) or has foreign receivables, the lender must check the Ex-Im Bank Country Limitation Schedule and the Treasury OFAC sanctions lists. No loan may be made to a business exporting to a prohibited country or where the transaction would violate an OFAC sanctions program.
Occupancy — 120.131
When proceeds buy or improve real estate (or refinance real-estate-secured debt), the borrower must occupy a minimum share of the Rentable Property.
"Rentable Property" is total square footage used for business operations, excluding stairways, elevators, and mechanical areas, including common areas. For new construction, the borrower must intend to use some of the temporary 20% within 3 years and all of it within 10 years. Proceeds may not improve space being subleased to a third party. Residential space essential to the business may not exceed 49% of the property.
When the borrower operates in leased space and $500,000 or 30% of proceeds (whichever is less) will fund leasehold improvements — or that much of the collateral consists of fixtures/equipment attached to leased real estate — the lender must obtain the written lease (term, including borrower-only renewals, should equal or exceed the loan term) and pursue an assignment of lease and landlord's waiver.
Knowledge Check
Fees and Agents
Two fee worlds: what the lender pays SBA to obtain and keep the guaranty, and what the lender may charge the borrower. The 504 program has its own distinct schedule. Treat every figure as a maximum that SBA may adjust by notice.
7(a) — the Upfront (Guaranty) Fee
The lender pays SBA an Upfront Fee for each guaranteed loan (and may pass it to the borrower). It is calculated on the guaranteed portion, though the percentage tier is set by the total loan size.
| Gross loan size (maturity > 12 mo) | Maximum upfront fee (on guaranteed portion) |
|---|---|
| $150,000 or less | 2% — lender may retain 25% of the fee |
| $150,001 to $700,000 | 3% |
| $700,001 to $5,000,000 | 3.5% up to $1,000,000, PLUS 3.75% of the portion over $1,000,000 |
| Short-term (≤ 12 mo), up to $5M | 0.25% of the guaranteed portion |
For loans over 12 months, the lender must pay the Upfront Fee within 90 days of approval or the guaranty is cancelled (this due date cannot be waived or extended). Short-term fees are due within 10 business days of the loan number. Multiple 7(a) loans to an applicant or its affiliates approved within 90 days are combined for fee and guaranty-percentage purposes.
For SBA Express only, the Upfront Fee is waived for businesses owned and controlled by a veteran (other than dishonorable/bad-conduct discharge), service-disabled veterans, active-duty members in TAP, or qualifying spouses.
The lender also pays SBA a Lender's Annual Service (on-going guaranty) Fee based on the outstanding guaranteed balance, set each fiscal year by Information Notice, paid monthly with SBA Form 1502. This fee cannot be charged to the borrower.
7(a) — what the lender may charge the borrower
- Packaging fee: a flat fee up to $2,500 per loan without documenting the service. Above $2,500, complete SBA Form 159. On a percentage basis the cap is the lesser of the lender's conventional rate or: 5% for loans ≤ $150,000, 3% for loans over $150,000, with a hard maximum of $30,000.
- Extraordinary servicing fee: may not exceed 2% per year on the outstanding balance of the part of the loan requiring special servicing (higher allowed for EWCP / Working Capital CAPLines disbursed on a borrowing-base certificate).
- A lender may not split one loan into two to charge an extra fee.
504 — the fee schedule
| Fee | Amount | Paid by |
|---|---|---|
| CDC Processing (packaging) | Up to 1.5% of Net Debenture | Borrower → CDC |
| Closing fee | Max $10,000, financed from debenture | Borrower |
| CDC Servicing fee (monthly) | Min 0.625%/yr; max 2%/yr (1.5% rural, 1% elsewhere without prior SBA approval) | Borrower → CDC |
| Late fee | 5% of the late payment or $100, whichever is greater (after the 15th) | Collected by CSA |
| Assumption fee | Not to exceed 1% of outstanding principal assumed | Borrower → CDC |
| Underwriter's fee | 0.4% (20/25-yr debenture); 0.375% (10-yr) | Borrower |
| SBA Participation Fee | 0.50% of the senior (Third Party) mortgage | TPL, CDC, or Borrower |
| CDC Fee to SBA (annual) | 0.125% of outstanding debenture balance | From CDC's servicing fees |
| Funding fee | 0.25% of net debenture proceeds | Covers trustee/agents |
At application, the CDC may require a deposit of $2,500 or 1% of Net Debenture Proceeds, whichever is less. If the application is declined, it is refunded in full within 10 business days.
Knowledge Check
Guaranties, Tax Verification, Insurance & Environmental
The remaining core requirements that apply to every loan: who must guarantee, how income is verified against the IRS, when life insurance is required, and the historic and environmental screens.
Guaranties — 120.160(a)
Each loan must be guaranteed by at least one individual or entity. Any individual with direct and/or indirect ownership of 20% or more must provide an unlimited full guaranty. Entities owning 20%+ also provide an unlimited full guaranty. If no one owns 20%+, at least one owner must give a full unconditional guaranty.
- Spouses: each spouse owning less than 20% must personally guarantee in full when the combined ownership of both spouses and minor children is 20% or more.
- Six-month lookback: a person subject to the guaranty requirement 6 months before application stays subject even if they drop below 20% — unless they completely divested before application.
- SBA (or a delegated lender) may require additional full or limited guaranties from anyone critical to operations regardless of ownership (e.g., Supplemental Guarantors).
IRS tax transcript verification
The purpose is to confirm the applicant filed business returns and that the financials provided match what was filed with the IRS.
If an applicant has not filed required federal tax returns, it is not eligible. Lenders obtain transcripts and reconcile before first 7(a) disbursement (or before requesting the 504 debenture funding).
| Size basis used | Years of transcripts required |
|---|---|
| NAICS (industry) Size Standard | Last 3 years (or all years if operating < 3 years) |
| Alternative Size Standard | Last 2 years (or all years if operating < 2 years) |
Lenders obtain transcripts via the IRS IVES program or IRS Form 8821 (lender listed as designee on line 2). The borrower or its own tax preparer may not file the 8821 for an SBA loan.
Insurance
For Standard 7(a), EWCP, CAPLines, and International Trade loans, if the loan is not fully secured, life insurance is required (in the amount of the collateral shortfall) for the principals of sole proprietorships, single-member LLCs, or businesses otherwise dependent on one owner. For 7(a) Small, SBA Express, and Export Express, lenders follow their own conventional policy. Credit life and whole life should not be required.
When required: 10 years for a 10-year debenture; 20 years for a 20- or 25-year debenture. For this calculation, the loan is "fully collateralized" when discounted collateral ≥ the net debenture; the required insurance equals the difference.
Historic properties & environment
For any SBA loan involving purchase or renovation of real property, lenders perform due diligence on whether the site is listed or eligible for the National Register of Historic Places (Section 106 review). If the borrower intends no modifications, a self-certification on SBA Form 2481 plus local SBA counsel clearance is used; if any alteration/renovation/demolition is intended, a full Section 106 review by local SBA counsel is required. Environmental review follows SBA's environmental policies and procedures (environmental questionnaires, site assessments, the NAICS list of environmentally sensitive industries, and indemnification).
Knowledge Check
The 7(a) Core: Standard, Small & SBA Express
The workhorses of the 7(a) family. Same $5M / $3.75M guaranty ceiling, but different size tiers, guaranty percentages, and underwriting shortcuts.
The shared ceilings
Standard 7(a): loans greater than $350,000. 7(a) Small: term (non-revolving) loans of $350,000 or less. SBA Express: loans of $500,000 or less, made only by lenders with SBA Express authority and only under delegated authority.
Guaranty percentages compared
| Product | Max loan | Max guaranty % |
|---|---|---|
| Standard 7(a) | $5,000,000 | 85% (≤$150K) / 75% (>$150K) |
| 7(a) Small | $350,000 | 85% (≤$150K) / 75% (>$150K) |
| SBA Express | $500,000 (aggregate) | 50% |
For multiple 7(a) loans approved within 90 days, gross amounts are combined. If the combined gross exceeds $150,000, the guaranty on the combined loans cannot exceed 75% (subject to the $3,750,000 cap). No part of a 7(a) loan may be guaranteed at zero percent.
Maturities & interest rates (apply across 7(a))
| Use of proceeds | Maximum maturity |
|---|---|
| Working capital, inventory, intangibles (incl. goodwill) | 10 years |
| Equipment, fixtures, furniture | 10 years (up to 15 if IRS asset-class useful life supports it) |
| Real estate | 25 years (plus a construction/renovation period if applicable) |
| Leasehold improvements (non-land) | 10 years |
| Loan size | Maximum variable rate |
|---|---|
| $50,000 or less | Prime or SBA Optional Peg Rate + 6.5% |
| $50,001 – $250,000 | + 6.0% |
| $250,001 – $350,000 | + 4.5% |
| $350,001 and greater | + 3.0% |
The two acceptable base rates are the Prime Rate and the SBA Optional Peg Rate. Default interest rates are not permitted, and the spread over the base may not change during the life of the loan without the borrower's written agreement.
Equity injection (Standard 7(a))
- Start-up (in operation 1 year or less): at least 10% equity injection of total project costs.
- Complete change of ownership (new owner): at least 10% of total project costs. Seller debt counts toward injection only if on full standby for the life of the loan and no more than half of the required injection.
- Complete partner buyout financed >90% of purchase price: remaining owner(s) must certify 24 months of active participation/ownership and a pre-change debt-to-worth no greater than 9:1, or contribute cash to reach 9:1 or 10% (whichever is less).
Collateral — "fully secured" valuation
| Asset | Counted at (for "fully secured") |
|---|---|
| New machinery & equipment | ≤ 75% of price, minus prior liens |
| Used / existing M&E | ≤ 50% of net book value (or 80% with an Orderly Liquidation Appraisal) |
| Improved real estate | ≤ 85% of market value (unimproved: 50%) |
| Furniture & fixtures | ≤ 10% of NBV or appraised value |
| Trading assets (A/R, inventory) | ≤ 10% of current book value |
A lien on a vehicle is required only if its value exceeds $10,000. On a collateral shortfall, the lender must take available equity in personal real estate of 20%+ owners/guarantors — but is not required to when equity is less than 25% of fair market value; liens on personal real estate may be limited to 150% of the equity.
Credit standards
Cash flow is the primary repayment source, not collateral. The debt-service-coverage ratio (Operating Cash Flow / Debt Service, where OCF = EBITDA) must be ≥ 1.15 on a historical and/or projected basis and ≥ 1:1 on a global basis. For start-ups and projection-based loans, projections must reflect DSC ≥ 1.15 within 2 years of funding (or 2 years from the end of construction). Existing businesses are analyzed on the 3 most recent years plus an interim statement.
7(a) Small applications begin with a FICO SBSS credit-score screen; the minimum acceptable score (as of this SOP) is 165, adjustable by SBA. An acceptable score satisfies several credit-analysis requirements; if not acceptable, the loan must be processed as a Standard 7(a) (or via SBA Express authority). For 7(a) Small loans of $50,000 or less, no collateral is required.
SBA Express lines may not exceed 10 years including a term-out. Revolving loans over 12 months need a term-out period at least as long as the draw period, with no advances after the initial 60-month period.
Knowledge Check
CAPLines and Export Trade Finance
The specialized 7(a) delivery methods: four revolving/working-capital lines under CAPLines, and three export products with higher guaranty ceilings.
CAPLines — 120.390
CAPLines finance short-term operating capital needs (revolving and non-revolving). Max loan is $5,000,000; guaranty is 85% (≤$150K) / 75% (>$150K). CAPLines cannot finance a change of ownership.
| Subprogram | Purpose & key rule | Max maturity |
|---|---|---|
| Working Capital | Short-term working-capital needs; applicant must generate accounts receivable and/or have inventory | 10 years |
| Contract | Finance costs of specific contract(s); no permanent working capital, no fixed assets, no markup/profit, no refinancing | 10 years |
| Seasonal | Finance seasonal increases in A/R and inventory; applicant must have operated ≥ 12 months with a definite seasonal pattern | 10 years |
| Builders | Finance construction/rehab of residential or commercial property for resale by small general contractors | 60 months + construction time |
Rehabilitation must be "substantial" — expenses equal to or exceeding one-third of the purchase price (or FMV at application). Land cost is eligible only if it does not exceed 33% of project cost. Up to 5% of project cost may fund subdivision improvements (streets, curbs, sidewalks). The final sale must be an arm's-length transfer to an unaffiliated third party. The maximum maturity for Working Capital, Contract, and Seasonal CAPLines is effectively a 120-month total revolving period.
Export Trade Finance — the three products
| Product | Max loan | Max guaranty |
|---|---|---|
| Export Express | $500,000 | 90% (≤$350K) / 75% (>$350K up to $500K) |
| Export Working Capital Program (EWCP) | $5,000,000 | 90% — max guaranty $4,500,000 |
| International Trade (IT) | $5,000,000 | 90% — max guaranty $4,500,000 |
EWCP and International Trade loans permit a maximum SBA guaranty dollar amount of $4,500,000 — higher than the $3,750,000 cap that applies to other 7(a) loans. For IT, the guaranteed portion attributable to working capital (combined with any other 7(a) working-capital guaranty) cannot exceed $4,000,000.
Maximum maturity is 36 months. Typical advance rates: up to 90% on purchase orders/contracts, 90% on eligible foreign receivables, and 75% on eligible export-related inventory. Each time an EWCP loan is re-issued after 12 months it is treated as a new loan and another Upfront Fee is due.
Knowledge Check
The 504 Program in Depth
A three-party, fixed-asset, economic-development program. Master the financing split, the contribution tiers, the debenture limits, and the job-creation math.
Purpose and the economic development test
The 504 program is an economic development program to create and preserve jobs and stimulate growth, expansion, and modernization. Every 504 project must achieve at least one Economic Development Objective.
At least 1 Job Opportunity per $90,000 of debenture — or per $140,000 for Small Manufacturers (primary NAICS in sectors 31–33 with all production in the U.S.) and projects meeting an energy public policy goal. 75% of the jobs must be in the community where the project is located. A Job Opportunity is a full-time (or equivalent) permanent job created within two years of receiving 504 funds, or retained.
A project that instead meets a Community Development or Public Policy Goal (including energy goals like reducing existing energy consumption by 10%, generating >15% renewable energy at the facility, or sustainable design) is eligible if the CDC's portfolio meets its required job-opportunity average.
The financing structure
A 504 project has three partners. No more than 50% of eligible project costs may come from federal sources.
| Structure | Third Party Lender | CDC / SBA | Borrower |
|---|---|---|---|
| Standard financing | 50% | 40% | 10% |
| New Business or Limited/Special-Purpose Property | 50% | 35% | 15% |
| Both New Business and Limited/Special-Purpose | 50% | 30% | 20% |
A New Business has operated 2 years or less (a change of ownership creating new, unproven ownership/management plus increased debt can also qualify). A Start-Up (for 7(a) equity purposes) is 1 year or less. The contribution steps up to 15% for a new business OR a special-purpose property, and to 20% when both apply.
Debenture limits and terms
| Limit | Amount |
|---|---|
| Minimum debenture | $25,000 |
| Standard maximum | $5,000,000 (per small business + affiliates) |
| Small Manufacturer / Eligible Energy Public Policy project | $5,500,000 per project |
| Energy public policy aggregate cap | $16,500,000 (per business + affiliates) |
504 loans have maturities of 10, 20, or 25 years based on the remaining useful life of the financed property: maximum 25 years for real estate, minimum 10 years for machinery and equipment. The Third Party Loan must have a term of at least 7 years (when the 504 loan is 10 years) or at least 10 years (when the 504 loan is 20 or 25 years).
The Third Party Loan must be at least as much as the net debenture proceeds. It must total at least 50% of project costs if the borrower (or OC) has operated 2 years or less, or the project is for a limited/single-purpose asset.
Knowledge Check
Change of Ownership & 7(a) Debt Refinancing
The two most common 7(a) deal types after a plain expansion loan. Both carry their own structural traps, and both are where guaranty repairs are most often triggered.
Change of ownership — 120.202
Proceeds may fund a change of ownership (COO) through a stock purchase (including a stock redemption) or an asset purchase. An asset purchase is treated as a COO, and must meet all COO rules, when the buyer is acquiring all or substantially all of the seller's assets and continuing the operations. The COO must promote the sound development or preserve the existence of a small business.
A loan cannot be made solely to an individual; the small business must be the Borrower or a Co-Borrower. Total COO proceeds are capped at the business valuation amount. If the valuation is below the sale price, any financed amount covering the shortfall (beyond the 7(a) loan and equity injection) must be subordinate to the 7(a) loan.
- Seller earnouts are prohibited. Buyer rebates tied to performance are allowed; rebate funds go first to paying down the 7(a) loan to a point that avoids triggering a subsidy recoupment fee.
- The seller must exit. Generally the seller may not remain an officer, director, stockholder, or employee. A short transition is allowed only as a consultant for no more than 12 months including extensions. Exceptions where the seller may stay on: a partial change of ownership, or where an ESOP/cooperative is acquiring a controlling interest (51%+).
- Co-Borrower & joint-and-several note. In a complete change to a new owner, the acquiring person and the acquired small business must be Co-Borrowers and the Note must be signed jointly and severally. If the business later denies liability for failure of consideration, SBA may deny liability on its guaranty.
Partial changes of ownership — the 1% rule and the multi-step ban
For a partial change of ownership, both the Operating Company and any person gaining any direct or indirect ownership must be Co-Borrowers, regardless of the percentage gained. Even a person gaining just 1% must be a Co-Borrower because their ownership is increasing and they benefit from proceeds.
Multi-step partial changes of ownership are not eligible — for example, existing owners bringing on a new owner by forming a new entity that becomes the 100% owner of the OC. Also, 7(a) proceeds may not fund a partial COO in the EPC of an EPC/OC structure (120.111), though they may fund a partial COO in the Operating Company.
An accurate business valuation is required for every COO. When the amount of real estate and/or equipment being financed is $250,000 or less, the lender may perform its own valuation (if its policies allow). When it is greater than $250,000, or there is a close relationship between buyer and seller, an independent business valuation from a Qualified Source is required. The lender may not use a valuation prepared for the applicant or seller, and the valuation must allocate separate values to intangible assets. Financing of intangible assets including goodwill is limited to a 10-year maturity.
A complete change of ownership requires at least a 10% equity injection of total project costs. Seller debt counts toward that injection only if it is on full standby for the life of the loan and is no more than half of the required injection. A complete partner buyout financed at more than 90% of the purchase price requires the remaining owner(s) to certify 24 months of prior active participation and a pre-change debt-to-worth no greater than 9:1 (or to contribute cash to reach it).
Debt refinancing — 120.140(j)(1) & 120.201
The governing principle: proceeds may not be used to pay a creditor in a position to sustain a loss, including the same institution's debt. The debt being refinanced must have been current for at least the last 12 months (or the life of the loan, whichever is less). "Current" again means no payment unpaid more than 29 days.
Demand notes or balloon-payment debt; debt with a rate above the SBA maximum; business credit-card debt (with borrower certification of business use); over-collateralized debt; revolving lines the original lender won't renew or that are being restructured for a lower rate or longer term; debt with an inappropriate maturity (e.g. a 3-year note on 15-year-life equipment); change-of-ownership debt where the seller note has been in place and current (not on standby) for at least 24 months; HELOCs used for business (with certification); and other non-SBA debt that meets the 10% improvement test.
Merchant cash advances and factoring agreements cannot be refinanced. Same Institution Debt (SID) may not be processed under PLP authority; it must be submitted non-delegated with a transcript covering the prior 36 months (or life of loan) and a written explanation of any late payments. A 7(a) loan may not be used to refinance only the Third Party Lender's loan of an existing 504 project.
When refinancing, the new installment payment must be at least 10% less than the existing installment amount(s); other debt refinanced at the same time may be included in the calculation. Exceptions to the 10% test: demand/balloon debt, business credit cards, business-use HELOCs, and revolving lines the lender won't renew or that are being restructured for a better rate or term.
Knowledge Check
The 504 Debt Refinancing Program
504 refinancing comes in two flavors: with expansion and without. The "without expansion" track, including limited cash-out for business expenses, is the one most lenders underuse and most need to understand.
Refinancing without expansion — 120.882(g)
SBA may approve a Refinancing Project of a Qualified Debt that does not involve expansion. The whole program turns on that definition.
A commercial loan where substantially all (75% or more) of the original proceeds were used to acquire an Eligible Fixed Asset (the remaining 25% or less for the benefit of the business); that was incurred at least 6 months before application; was incurred for the benefit of the business seeking the refinancing; and has been secured by Eligible Fixed Assets for at least 6 months. If the asset was originally financed and later refinanced one or more times, the existing debt must be the most recent refinancing of that original loan.
Limited cash-out: Eligible Business Expenses
Beyond the Qualified Debt, a Refinancing Project may include Eligible Business Expenses (EBE):
- Operating Expenses: business expenses incurred but not yet paid, or that will come due within 18 months after application, such as salaries, rent, utilities, and inventory (not capital expenditures). Business lines of credit and business credit cards qualify only if used exclusively for business (no personal expenses), are in the business's name, and the applicant and CDC certify the business-only use.
- Other Secured Debt: non-capital-expenditure debt incurred before the application that has been secured for at least 6 months by the same Eligible Fixed Assets, with the borrower current for at least the prior 12 months (no payment more than 30 days past due).
For projects refinancing only Qualified Debt, the maximum loan-to-value of the Refinancing Project is 90%. If the Qualified Debt being refinanced exceeds 90% of the asset value, the borrower must add cash or acceptable fixed-asset collateral to get back under 90%. Any project that includes Eligible Business Expenses is also capped at 90% LTV, and the project value may not be increased by adding collateral.
Funding is based on current fair market value of the collateral: the Third Party Lender provides at least as much as the 504 loan (net debenture), the 504 loan provides no more than 40%, and the Borrower contributes 10% or 15% as determined under the regulation. The borrower must meet all current 504 occupancy requirements at application, and a supplemental annual guarantee fee applies to refinancing.
Refinancing with expansion — 120.882(e)
A project "involves expansion" if it includes the acquisition, construction, or improvement of land, building, or equipment for the applicant's use. When there is expansion, existing indebtedness up to 100% of the cost of the expansion may be refinanced. That refinanced debt is added to the expansion cost to set total project costs. The same 75%/25% Qualified Debt test applies, the debt must be collateralized by fixed assets, and the 504-eligible fixed assets must also collateralize the 504 loan (unless SLPC grants a waiver for extraordinary circumstances).
Knowledge Check
Closing, Disbursement & Debenture Funding
Approval is not the finish line. The after-approval mechanics, the disbursement clock, equity-injection proof, and how a 504 debenture actually funds, are where guaranties are kept or lost.
The 7(a) authorization and disbursement clock
The E-Tran Terms and Conditions is the digital loan authorization; once SBA approves, those conditions govern how the loan must close and disburse.
A 7(a) loan must be fully disbursed within 48 months of approval, or SBA cancels any remaining undisbursed balance. A line of credit is considered fully disbursed at the time of first disbursement. Extensions require an approved Exception to Policy request that states the additional months needed.
- Escrow at closing: a lender may use an escrow account for no more than 5 business days to facilitate closing. It must not report the loan as disbursed on Form 1502 or charge the guaranty fee until all funds leave escrow, and may only charge interest on funds actually disbursed to the borrower.
- Secondary market: a loan is "fully disbursed," and may then be sold on the secondary market, once the borrower has access to all proceeds and can use them per the E-Tran Terms and Conditions.
- Notes: must state the rate (and any interest-only period), adjustment dates, maturity, and repayment terms. Loans with a maturity of 15 years or more must include the prepayment/subsidy recoupment fee payable to SBA (120.223).
- Tax/insurance escrow: if used, the amount collected may not exceed 105% of the current-year tax/insurance charge; the account must be FDIC-insured and interest-bearing; remaining funds return to the borrower within 15 business days of termination.
Except for SBA Express and Export Express, lenders must verify the required equity injection before disbursing any proceeds and keep the evidence. Acceptable proof: a copy of the check or wire plus evidence it was processed into the borrower's account or escrow; a statement covering at least 30 days from the source account showing the funds were available; and a deposit record or settlement statement (HUD-1) showing use of the cash. A promissory note, gift letter, or financial statement alone is not sufficient. Failure to verify can warrant a repair or denial.
504 closing and how the debenture funds
The 504 funding sequence is fundamentally different from 7(a). The project is first funded by interim financing, and the SBA-guaranteed debenture is sold afterward to take that interim loan out.
The Net Debenture funds the eligible project costs. Adding the administrative costs (underwriter, funding, and processing fees) produces the Gross Debenture amount that is actually issued and sold.
The interim financing must be fully disbursed and the project completed before the debenture is sold, with one exception: a portion of debenture proceeds may be escrowed to complete a minor part of the project (120.961). At debenture closing the Interim Lender makes the certifications on SBA Form 2288; if it cannot certify as required, the debenture cannot be funded.
The CDC is responsible for the 504 loan closing and compliance with all Loan Program Requirements. The debenture closing is a joint CDC and SBA responsibility: the CDC prepares the closing documents and SBA counsel reviews the closing package for legal sufficiency and opines whether SBA may guarantee the debenture. CDC Counsel submits a formal Opinion of CDC Counsel that SBA relies on in guaranteeing the debenture.
Knowledge Check
Glossary & Acronyms
Your quick-reference desk. Search the key terms, then scan the acronym wall. These are the words that appear on every page of the SOP.
Acronym wall
Built entirely from SOP 50 10 8 (effective June 1, 2025). For learning only; not legal advice. The SOP, 13 CFR, and official SBA notices control. Verify current dollar thresholds and percentages, which SBA may adjust by notice.