Stricter acquisition standards, new ownership restrictions, and expanded personal guarantees could make federally backed loans harder to get. A lending executive explains what’s changed and how to prepare.
For many New Jersey entrepreneurs, an SBA-backed loan has long been the go-to route for buying a business, expanding a storefront, or covering a big equipment purchase. As of October 1, that path got a little steeper.
The U.S. Small Business Administration’s revised lending rules are now in effect, and they tighten requirements across several areas, from how acquisitions are underwritten to who is allowed to own a business that receives an SBA-guaranteed loan. To understand what the changes mean on the ground, we spoke with Ben Johnston, chief operating officer at Kapitus, a non-bank lender that finances small businesses.
“The SBA’s new requirements make it more challenging for small businesses to obtain financing through the SBA, with rule changes ranging from stricter requirements for financing acquisitions, to new citizenship requirements, and tighter guarantor requirements,” Johnston said.
Buying a Business Just Got Harder
Some of the biggest changes affect owners looking to purchase an existing company, a common path for New Jersey entrepreneurs taking over family shops, restaurants, and service businesses.
According to Johnston, smaller 7(a) loans, those under $350,000, no longer get lighter underwriting when they’re used to finance an acquisition. The required debt service coverage ratio has also gone up: initial acquisitions previously qualified at 1.15x, and the bar is now 1.25x, which Johnston said lowers “the amount of financing available to small business acquirers.”
Larger deals face added scrutiny, too. Johnston said an independent quality of earnings report is now required for financings of $3 million or more, excluding owner-occupied real estate, and that report must validate the purchase price.
Buyers will also have less flexibility in how they come up with their down payment. The 10% equity requirement still applies, but Johnston explained that no more than half of the minimum equity contribution can now come from the seller or from non-controlling minority investors.
Who Can Own, and Who Has to Guarantee
The new rules also reach beyond acquisitions. According to Johnston, legal permanent residents, meaning green card holders, are no longer eligible to own any portion of a company receiving an SBA-guaranteed loan. And every owner must now personally guarantee the loan. Previously, only owners holding 20% or more were required to do so.
Slower, Tougher, and in Some Ways Justified
Johnston expects the changes to make applying for an SBA loan “somewhat more difficult and time consuming.” Still, he said much of the tightening makes sense in light of rising defaults.
“We believe that many of these changes are justifiable given the higher default rates that the SBA has experienced over the past several years as lending standards were [weakened],” he said. “Reductions in the amounts available to finance acquisitions and increasing the amount of analysis required to validate transaction values seems logical.”
The green card restriction is another story. Johnston sharply disagreed with it, arguing that permanent residents have made a long-term commitment to the country and pay U.S. taxes on their worldwide income.
“They are some of the most entrepreneurial members of our society and create vibrant and important businesses that help drive the U.S. economy,” he said. “Many also happen to be married to U.S. citizens. This ban means that a U.S. citizen who owns a small business and is married to a green card holder is not allowed to receive funds guaranteed by the SBA. We find these restrictions to be counter-productive to the SBA’s goal of backing strong businesses to help grow the U.S. economy.”
In a state with one of the largest immigrant populations in the country, that change could hit a meaningful share of New Jersey’s small business community.
Getting Loan-Ready
For owners planning to borrow in the next six to 12 months, Johnston’s advice starts with a solid business plan, one that shows a lender you understand your market, your costs, and your timing.
That means first sizing up the opportunity: how big the market is, how much revenue you can realistically generate, and whether your price point fits what customers expect. From there, owners should project their labor, inventory, and production costs, and factor in the cost of capital, including interest rates and fees on whichever financing they’re considering.
“A well-prepared business plan is essential for securing financing. It allows you to articulate the opportunity, capital requirements, and expected returns,” Johnston said. “While traditional banks may require a detailed business plan, non-bank lenders might offer quicker funding with less documentation. Regardless, a comprehensive business plan provides clarity and demonstrates your preparedness to potential lenders.”
He also urged owners to keep an eye on how quickly technology and customer tastes are shifting, which can open new markets but also demand flexible products, sales, and marketing.
When the Cheapest Loan Isn’t the Best Fit
Banks and the SBA generally want to see a track record of profitability, strong personal and business credit, and collateral such as real estate or equipment. Non-bank lenders tend to be more flexible, Johnston said, often requiring less time in business, little or no collateral, and less paperwork, with underwriting based largely on the applicant’s credit and the business’s recent cash flow.
“While these loans are often more expensive, credit decisions are generally made much faster, with a higher chance of an offer being made,” he said.
For owners who may have qualified for SBA financing before but don’t under the new rules, Johnston says non-bank lending is worth a look rather than giving up on financing altogether. He also recommends that businesses that borrow regularly maintain relationships with several lenders, noting that banks have been pulling back from small business lending in recent years.
“Having contacts at both bank and non-bank lending institutions can help secure the fastest and lowest-cost capital when borrowing is required,” he said.
Whatever the source, his test for any loan is the same: run the numbers first. Calculate the expected revenue and expenses of the project, then add in the cost of capital. If the project still delivers the return you need, move forward. If it doesn’t, rework the plan or find a different project.
The Biggest Mistake
Asked what trips up small business owners most often, Johnston didn’t point to credit scores or paperwork.
“Too few business owners truly understand the economics of the projects they are trying to finance,” he said. “Forming a strong view of a project’s expectations is the best way to know what type of financing is required to make a project a success.”
Lifelong Jersey resident and Rutgers and FDU alumnus, Tom La Vecchia is publisher of New Jersey Digest, one of the state’s leading lifestyle media brands. When he’s not growing the Digest, he’s raising four kids, wrangling four cats and pretending it’s all under control. His mission: keep Jersey interesting and impossible to ignore.
