New SBA lending rules bring stricter requirements for New Jersey business loans

The U.S. Small Business Administration, the federal agency that backs small business loans, just put a sweeping set of revised lending rules into effect on October 1.

The changes tighten requirements across acquisitions, ownership eligibility, and personal guarantees. According to Ben Johnston, chief operating officer at Kapitus, a non-bank lender that finances small businesses, the path to getting federally backed capital just got a lot steeper. Smaller 7(a) loans under $350,000 no longer get lighter underwriting when used for acquisitions, and the required debt service coverage ratio climbed from 1.15x to 1.25x.

Larger deals face added scrutiny as well, requiring an independent quality of earnings report for financings of $3 million or more. Buyers also face stricter equity terms, with no more than half of the 10% minimum down payment allowed to come from the seller or minority investors.

The rules reach further into ownership and guarantees, barring legal permanent residents holding green cards from owning any portion of an SBA-backed company. Furthermore, every single business owner must now personally guarantee the loan, replacing the old threshold where only owners holding 20% or more had to sign.

Johnston pointed out that while tighter underwriting makes sense given rising default rates, the green card restriction stands out as counterproductive in a state with a massive immigrant entrepreneurial base. For your shop, this means longer approval times and tighter documentation when you go to borrow.

Put together a rock-solid business plan mapping your costs and cash flow before you walk into a lender's office.