SBA starts new fiscal year with even tighter credit box

• Key insight: The U.S. Small Business Administration saw lending activity decline across its major programs after implementing stricter credit rules. Experts are hoping for a more positive result in the fiscal year that started Oct. 1. 
• Supporting data: Lending activity declined in fiscal 2026 after three years of growth.  
• Expert quote: “I do think the SBA needed to course-correct to bring the agency back to its historic levels of profitability.” — Capitus CEO Ben Johnston

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The U.S. Small Business Administration keeps tightening its credit box, even as lending activity in its flagship 7(a) loan guarantee program has been dipping substantially. 

The SBA reported approving 56,130 7(a) loans for $32.4 billion in the 2026 fiscal year, which wrapped up Sept. 30. Those numbers represented double-digit percentage declines for both metrics from the previous 12 months. Lending under the agency’s smaller 504 program also trended downward, with the dollar volume of loans dropping 9% to $7.1 billion.

The declines have played out against a backdrop of two recent revisions to the rules lenders must follow in order to participate in 7(a) and 504. The first revision was implemented in June 2025. The second took effect last week, meaning that the SBA began the 2027 fiscal year with even tighter underwriting standards. In the view of many observers, the 2025 policy changes had an unmistakable dampening effect. 

“I think there’s a direct correlation between some of these rule changes [and] the impact that they’ve had on getting deals through the pipeline,” Eric Rabinovich, founder and CEO of the SBA Loan Lab, an advisory and brokerage firm based in Washington, D.C., told American Banker. “I think objectively it became harder to get deals done. The credit box shrunk.” 

The SBA reported increased 7(a) lending between fiscal 2023 and 2025. Trump administration officials have argued much of the increased activity was spurred by relaxed underwriting standards implemented during the Biden administration.

According to the Trump team, the Biden-era changes, formalized in November 2023, led to a spike in loan losses that threatened to upend the 7(a) program’s financial stability. In March 2025, the agency implemented a fee increase to help shore up its balance sheet. 

The June 2025 charges were designed to push SBA’s rules in the opposite direction of the Biden era. The agency reinstated a requirement for a 10% equity injection from borrowers seeking to finance a startup or a change in ownership for an existing firm. The SBA also tightened rules governing personal guarantees and eligibility for small-dollar loans. 

From all appearances, the combination of stricter credit regulations and increased fees succeeded in stabilizing SBA’s finances. But the newest revisions, released earlier this month, continued the tightening process, especially for business-acquisition loans.

Now, borrowers seeking more than $3 million to acquire a company must obtain a report prepared by a certified public accountant to evaluate the caliber of the firm’s earnings. In a similar vein, the agency introduced stricter debt-service requirements, limited the amount of non-cash sources that count toward the 10% equity injection to 50% of the required total and required underwriting decisions to be based on trailing earnings, not forward-looking projections.

An SBA spokesperson did not respond to a request for comment by deadline. 

“I do think the SBA needed to course-correct to bring the agency back to its historic levels of profitability,” Ben Johnston, chief operating officer of Kapitus, an Arlington, Virginia-based online small business lender, told American Banker. “You can quibble about some of the decisions it made along the way, but I do think that its core mandate was to make sure it was healthy for the long run.”

According to Rabinovich, the run-up in interest rates that began in 2022 and continued into 2023 was a major contributor to the credit-quality problems SBA encountered and would have wreaked havoc regardless of the underwriting climate. Still, Rabinovich acknowledged that a case could be made that the Biden-era rules were “perhaps a little too loose, a little fast and loose” and “allowed a lot of objectively weaker deals into the program.”

Rabinovich founded SBA Loan Lab in 2025 after a decade as a small-business banker at  $16 billion-asset Live Oak Bancshares in Wilmington, North Carolina. He said the increased level of challenges he encountered in closing loans he felt were bankable convinced him he could have a bigger impact advising businesses on ways to navigate the heightened underwriting hurdles. 

“I realized, ‘Look, I could actually help more folks if I was a broker, not beholden to one bank and one bank’s credit box and credit policies,'” Rabinovich said. “That’s largely why I went off on my own.” 

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The influence of the SBA’s revised credit policies can be seen in the records of individual lenders, not just overall program numbers. Live Oak, the nation’s number-one 7(a) lender, saw its loan volume decline 9% during fiscal 2026 to approximately $2.6 billion. Most of the other top-10 lenders also recorded declines.
Despite the more stringent regulations, many observers are stopping short of predicting a second consecutive year of decline. According to Rabinovich, demand for SBA-backed financing remains high. 

It may be that the underwriting changes are not the only reason loan volumes declined during fiscal 2026.

During the Trump administration, the agency also implemented a rule barring noncitizen lawful permanent residents from obtaining SBA loans. Congressional Democrats along with many program experts have criticized the policy, noting that so-called Green Card holders have been a key SBA constituency in the past. 

“They tend to be very entrepreneurial, and we have many, many Green Card holders with the intent of starting a business,” Johnston said. 

The rule “seems punitive to me and maybe counterproductive to the goal of growing the U.S. economy,” Johnston added. 

A recent study by Lumos Group suggested another potential reason for the lending slowdown. It found that the government shutdown in October and November 2025 skewed the SBA’s fiscal 2026 numbers by spurring a number of borrowers to accelerate their loan requests to beat the program’s stoppage. Loans that would have been closed in fiscal 2026 got done at the tail end of fiscal 2025, Lumos found.

“Overall, it remains a really important program, and I’m sure it will continue to grow with the size of the U.S. economy,” Johnston said.