The U.S. Small Business Administration’s (SBA) new Standard
Operating Procedure (SOP) 50 10 8, which took effect for all loans assigned an
SBA number on or after June 1, 2025, ushers in a period of significant
recalibration for the 7(a) loan program. Among the many adjustments, lenders
participating in the 7(a) Small Loan program must pay close attention to new
requirements concerning the use of loan proceeds for working capital. These
changes signal the SBA’s renewed emphasis on robust underwriting and mitigating
risk within the program.
The New Justification Mandate for Significant Working Capital
A pivotal change for 7(a) Small Loans involves heightened
scrutiny when a substantial portion of the loan is designated for working
capital. Specifically, for 7(a) Small Loans greater than $50,000, if 50
percent or more of the loan proceeds will be used for working capital, the
lender is now required to explain in its credit memorandum why this level of
working capital is necessary and appropriate for the subject business. This
requirement reflects the SBA’s broader objectives outlined in SOP 50 10 8:
restoring the financial sustainability of the 7(a) program, enhancing
operational efficiency, and strengthening program integrity. It marks a
deliberate move away from previous, more flexible underwriting policies that
contributed to program deficits.
Key Implications for Lenders: Justification and Collateral
This new rule for 7(a) Small Loans carries two significant
implications for lenders:
- Enhanced
Due Diligence and Documentation: Lenders must be prepared to
thoroughly document the “why” behind substantial working capital
requests. This means borrowers will need to provide detailed and
defensible explanations for their working capital needs, which lenders
must then critically assess and include in their credit memorandum. The
lender’s credit memorandum for 7(a) Small loans must already demonstrate
reasonable assurance of repayment and address several factors including
business history, management, owner/guarantor analysis, and why credit is
not available elsewhere. The working capital justification adds another
layer to this.
- Stringent
Collateral Requirements Tied to Working Capital Usage: Perhaps one of
the most impactful changes is the new collateral rule linked to high
working capital usage in these loans. For 7(a) Small loans over $50,000,
when 50% or more of loan proceeds will be used for working capital,
the Lender must take a lien on all of the Applicant business’s fixed
assets, including real estate, up to the point that the loan is fully
secured. “Fully secured” is determined by SBA’s valuation
criteria for different asset types (e.g., real estate valued at no more
than 85% of market value, new machinery & equipment at no more than
75% of price, used machinery & equipment at no more than 50% of Net
Book Value or 80% with an Orderly Liquidation Appraisal). Importantly, the
lender is not required to take a lien against the Applicant business’s
real estate if the equity in that real estate is less than 25% of its fair
market value. This direct link between the proportion of working capital
and mandatory collateralization of all available fixed assets represents a
significant tightening of standards for 7(a) Small Loans structured with a
heavy working capital component.
Navigating the Changes: Lender Action Plan
To effectively navigate these new requirements for 7(a)
Small Loans under SOP 50 10 8:
- Update
Credit Memoranda Checklists: Ensure your internal processes for 7(a)
Small Loans explicitly include the justification for working capital when
it exceeds 50% of loan proceeds (for loans >$50,000).
- Educate
Borrowers: Clearly communicate the need for detailed justification if
a large portion of their loan request is for working capital.
- Master
Collateral Rules: Understand and correctly apply the new collateral
requirements tied to working capital usage, including the “fully
secured” calculations.
- SBSS
Score Screening: Remember that all 7(a) Small Loan applications begin
with screening for an SBSS Score. If the score is not acceptable, the loan
must be processed under Standard 7(a) procedures (or potentially SBA
Express if the lender has that authority and the loan fits that program).
Part of a Broader Shift
This increased focus on working capital justification and
related collateral for 7(a) Small Loans is consistent with the overarching
theme of SOP 50 10 8: a return to more rigorous underwriting and enhanced
lender accountability. Other changes, such as stricter citizenship verification
requirements and mandatory CAIVRS checks for delinquent federal debt, further
underscore this directional shift by the SBA.
Your Partner for Navigating New Underwriting Standards
The new rules in SOP 50 10 8 for 7(a) Small Loans create a
significant new hurdle, linking high working capital requests directly to
mandatory justifications and stringent collateral requirements. This shift
demands a higher level of diligence in both credit analysis and documentation,
but you don’t have to navigate this change alone.
This is where Windsor Advantage becomes a critical partner.
With more than 150 years of cumulative SBA lending experience, our team has the
deep expertise required to help you confidently meet these heightened
underwriting and collateralization standards. We provide banks, credit unions,
and CDFIs with a comprehensive outsourced SBA 7(a) and USDA lending platform,
built on cutting-edge technology and rigid, consistent processes.
For lenders needing to craft robust justifications or ensure
full compliance with the new fixed-asset collateral rules, Windsor Advantage
acts as an extension of your team. We ensure every loan is underwritten with
the highest level of diligence, mitigating the risks associated with these
tightened standards and allowing you to continue providing essential working
capital to small businesses thoughtfully and profitably.
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