Small business owners seeking SBA loans have faced a dramatically different landscape since early 2025. After years of relaxed lending standards that led to rising defaults and a $397 million program deficit, the Small Business Administration implemented sweeping policy changes earlier this year that restored stricter underwriting requirements and eliminated several borrower-friendly provisions.
These changes, which took effect between March and June 2025, affect every aspect of SBA lending – from who qualifies for loans to how banks process applications. For financial institutions partnering with small businesses, understanding these new requirements isn’t optional; it’s essential for maintaining loan approval rates and avoiding costly compliance issues.
The policy overhaul represents the most significant changes to SBA lending since the pandemic, with new citizenship requirements, enhanced documentation standards, and restored fees that fundamentally reshape how banks evaluate and process small business loans.
Why the SBA made these changes
The 2025 SBA policy changes, implemented throughout the first half of the year, center on one core principle: restoring program integrity after years of relaxed standards that contributed to rising defaults. The Small Business Administration eliminated its controversial “Do What You Do” underwriting framework on June 1, 2025, which had allowed lenders to use their own internal credit standards instead of standardized SBA criteria
(Source: SBA).
The numbers tell the story of why change was needed. SBA guarantee claim purchases increased 51% in fiscal year 2024 to $1.61 billion, while the program operated at a negative $397 million cash flow after guarantee fees were eliminated during the previous administration
(Source: American Banker).
Banks have largely welcomed these changes, despite the operational challenges they create. The American Bankers Association strongly supported the policy reversal, with executives arguing that consistent underwriting standards are essential for program stability and equitable treatment of borrowers.
Eight critical changes reshaping SBA lending
Ownership must be 100% American
Effective March 7, 2025, all business owners must be U.S. citizens, U.S. nationals, or Lawful Permanent Residents. This eliminates any foreign ownership, including minority stakes from temporary visa holders or international investors.
Banks must now verify citizenship status for every owner and document this information in the SBA’s E-Tran system. For many community banks that serve diverse immigrant communities, this represents a significant shift in their potential borrower base.
(Source: SBA)
Credit standards tighten significantly
The minimum Small Business Scoring Service (SBSS) credit score increased from 155 to 165 for loans up to $350,000 – itself a reduction from the previous $500,000 threshold. Borrowers below this score must now go through the full standard loan process with complete documentation.
Additionally, startup businesses and acquisitions require a minimum 10% equity injection of total project costs, with strict limitations on how seller financing can count toward this requirement
(Source: SBG Funding, Bank at First)
Documentation requirements return to pre-2021 levels
Banks must now obtain tax transcript verification directly from the IRS for all loans, eliminating the simplified documentation that had streamlined processing. Hazard insurance becomes mandatory for all loans over $50,000, and enhanced “credit elsewhere” analysis requires lenders to provide detailed explanations for why borrowers don’t qualify for conventional financing.
(Source: Byline Bank)
Guarantee fees are back
After being waived during the pandemic, SBA guarantee fees returned on March 27, 2025, with a tiered structure:
- 2% for loans $150,000 or less
- 3% for loans $150,001 to $700,000
- 3.5% to 3.75% for larger loans up to $5 million
Only veteran-owned businesses remain exempt from these fees on SBA Express loans.
(Source: SBA)
Franchise directory reinstated with deadline pressure
The SBA Franchise Directory returned on June 1, 2025, after being eliminated in August 2023. Franchisors have until December 31, 2025, to complete new certification requirements or their brands will be removed from the directory and become ineligible for SBA financing
(Source: Commercial Lending X).
With approximately 8,000 franchise brands needing certification, this creates significant compliance pressure for both franchisors and the banks that finance their franchisees.
Merchant cash advance refinancing prohibited
SBA loans can no longer refinance merchant cash advances, which the agency classifies as “purchases of future receivables” rather than traditional debt. This closes a popular avenue for businesses trying to escape high-cost MCA cycles through SBA refinancing.
(Source: Lendio)
Delegated authority becomes mandatory
Preferred Lender Program (PLP) banks must now process all eligible loans under delegated authority, eliminating the option to send routine applications to SBA for processing. This speeds up approvals but increases compliance responsibility for lenders.
Enhanced fraud prevention measures
All loan applications now require date-of-birth verification for owners, with automatic fraud alerts for ages outside normal business ownership ranges. This reflects heightened focus on program integrity after pandemic-era fraud concerns.
How banks are adapting to the requirements
Financial institutions report processing costs have increased 15-25% due to enhanced documentation requirements, with technology upgrade expenses ranging from $50,000 to $500,000 depending on institution size. Staff retraining has become essential as loan officers learn the restored standardized criteria.
(Source: American Bankers Association)
Despite these challenges, banks are finding strategic opportunities. Mark Gibson from First Internet Bank noted that “small business optimism is increasing” and expressed confidence about program growth potential. Community banks especially benefit from the relationship-focused approach required by enhanced underwriting standards.
Some institutions are restructuring their SBA programs entirely. BayFirst Financial eliminated its small-dollar SBA lending program after experiencing $11.7 million in provisions and $11.1 million in charge-offs in the first half of 2025. However, well-capitalized banks with strong risk management practices are gaining market share as weaker competitors exit.
(Source: American Banker)
Credit unions have emerged as unexpected winners, with SBA lending growing four times faster than other loan types in 2024 as they leverage their member-focused approach to navigate the enhanced requirements.
(Source: Credit Union Times)
Supporting small businesses beyond SBA lending
The stricter 2025 SBA requirements mean some previously eligible businesses will no longer qualify for guaranteed lending. Banks serving these clients face a choice: decline the relationship entirely or find alternative ways to support their growth.
Financial institutions are discovering that comprehensive small business partnerships extend beyond lending. While a business builds the stronger credit profile and documentation now required for SBA loans, banks can maintain and develop these relationships through essential cash management services.
Finli enable banks to offer payment processing and cash management solutions with streamlined underwriting that complements the enhanced SBA requirements. This approach allows institutions to serve businesses immediately while they strengthen their financial position for future SBA loan eligibility – creating a pathway rather than a dead end.
The ripple effect on small business financing
These policy changes create a more selective but potentially more stable SBA lending environment. Loan approval rates are expected to decline for marginal borrowers, while businesses with strong credit profiles and established operations should find the process largely unchanged.
The restored fees add approximately $3,000 to $7,500 in costs per loan, which many banks are financing into loan amounts to maintain competitiveness. However, this creates affordability pressure for smaller loans where fees represent a larger percentage of the total financing.
For small businesses, the enhanced requirements mean longer processing times and more comprehensive documentation, but potentially more predictable program availability as defaults decrease and program funding stabilizes.
Takeaways
The 2025 SBA policy changes, now fully implemented, represent a fundamental shift toward stricter lending standards that prioritize program integrity over accessibility. Banks partnering with small businesses must invest in updated processes, technology, and staff training to maintain their SBA lending capabilities.
Key action items for financial institutions:
- Update internal procedures and train staff on SOP 50 10 8 requirements
- Implement citizenship verification processes and enhanced documentation standards
- Prepare technology systems for mandatory delegated authority processing
- Review franchise lending portfolios for directory compliance by December 31, 2025
- Assess fee structures and loan pricing to accommodate restored guarantee fees
While these changes, implemented earlier this year, create operational complexity, they offer strategic advantages for banks with strong risk management practices. The industry consensus suggests that stricter standards will ultimately strengthen the SBA program’s long-term viability while creating market share opportunities for well-prepared institutions.
For small business owners, success in this new environment requires stronger financial preparation and documentation – areas where partnerships with experienced community banks and comprehensive financial service providers become increasingly valuable. The enhanced requirements may slow initial processing, but they should contribute to a more sustainable and reliable source of small business capital for years to come.
