This is the first in a new series from Patrick Flood, Founder & CEO of Owners In Honor, and Jared Johnson, an Owners In Honor board member and First Internet Bank’s #1 SBA lender with 17+ years of experience. The series examines the SBA’s updated Standard Operating Procedure (SOP 50 10 8) and what its equity-injection changes mean for veterans pursuing business acquisition.
The Gap SBA Financing Has Always Bridged
A retiring service member often arrives at the acquisition table with two decades of leadership experience and sound operating judgment — but not necessarily hundreds of thousands of dollars in liquid capital. SBA 7(a) financing has long closed that gap. Under current rules, a full change of ownership generally requires a 10% equity injection, and a properly structured seller note can satisfy up to half of that. The buyer still needs to bring the remaining 5% from eligible sources.
How the Rules Got Here
Jared Johnson traces the evolution from the lender’s side. Equity requirements used to hinge on goodwill — deals with significant intangible assets often required 25% down. That changed with SOP 50 10 5(J), which set a flat 10% requirement and allowed seller financing to cover up to half. The 2023 “do what you do” revision (SOP 50 10 7) went further, letting seller notes cover up to 75% of the required injection — before a 2025 update scaled that flexibility back to the original 50% cap.
SOP 50 10 8: The Source Now Matters as Much as the Amount
The newest change isn’t about how much equity a buyer needs — it’s about where that equity comes from. SOP 50 10 8 splits sources into two categories:
- Unlimited sources (can cover any share of the injection): unborrowed cash, personally borrowed funds repayable from outside the business, and grants with no conditional repayment
- Limited sources (capped at half the injection, combined): standby debt, seller notes on full standby, and non-controlling minority equity investments
This is a real shift in underwriting philosophy — from “how much did the buyer put in” to “where did that money actually come from.”
Why the Rules Tightened
The timing lines up with real portfolio stress. SBA’s 2025 Annual Report showed $609 million in negative FY2024 cash flow for the 7(a) program — the first time in over a decade it failed to cover its own costs — with roughly $2.2 billion in projected losses tied to recent lending cohorts. Highly leveraged acquisitions can leave a new owner with just enough cash flow to service debt and little cushion for a rough first year. The tighter source rules are designed to put more real capital risk on the buyer’s side of the table.
What This Means for Veteran Buyers Specifically
Veterans often bring exactly the operating discipline lenders want to see — but not always the liquid capital. Historically, many closed that gap using a mix of personal funds, seller financing, and outside investors. That combination is still available, but the new source rules mean buyers need to think carefully about the composition of their capital stack, not just its total size — especially if they’re leaning heavily on standby debt or investor capital.
The Practical Numbers
On a $2 million acquisition, the 10% injection comes to $200,000 — a qualifying seller note can cover up to $100,000 of that, leaving the buyer responsible for at least $100,000 from eligible sources. At $3 million, that buyer-side number climbs to $150,000. The percentage stays fixed; the dollar figures grow fast with deal size.
Flood and Johnson also flag a second planning question worth asking early: how much of that available capital should actually go into the transaction, versus staying in reserve for the company’s first 12–18 months — new hires, equipment, working capital — since that’s often what determines whether the acquisition creates lasting value rather than just closing the deal.
Read the full article, “The New Cost of Admission: What SBA Changes Mean for Veteran Buyers,” on LinkedIn →
https://www.linkedin.com/pulse/new-cost-admission-what-sba-changes-mean-veteran-buyers-patrick-flood-iwklc/
