The government-backed loan market shrank

Much of this month's capital-raising coverage has been about venture rounds and private credit. Main Street borrowers have had a different year. According to American Banker, the Small Business Administration approved 56,130 loans under its 7(a) program in fiscal 2026, which ended Sept. 30, for a total of $32.4 billion. Both the count and the dollar total fell by double-digit percentages from the prior twelve months. The 504 program, which finances real estate and equipment, fell 9% in dollar volume to $7.1 billion.

That ends a streak. SBA lending had grown for three straight years through fiscal 2025, per the same report. The largest 7(a) lender, Live Oak (LOB), saw volume fall 9% to about $2.6 billion, and most other top-10 lenders also declined.

The comparison is not perfectly clean. A Lumos Group study cited by American Banker found the government shutdown in October and November 2025 pulled some loans into fiscal 2025, which flatters the prior-year base. The Coleman Report shows the effect: its count of October 2025 approvals in SBA's activity report was zero. Even with October removed from both years, it found loan count down 25% through the first nine months of the fiscal year.

Why volume dropped: fewer small loans, not just fewer dollars

Coleman's nine-month tally is useful because it separates count from size. Through the first nine months of fiscal 2026, the SBA approved $21.8 billion in 7(a) loans, down 21%, across 40,824 approvals, down 30%. Average loan size rose 12% to $535,034. In other words, the program lost small loans faster than large ones.

The cause, Coleman argues, is the updated Standard Operating Procedure. It removed the streamlined provision that let lenders apply their own credit practices to small-dollar loans, so full underwriting is now required even on small requests. His example is a $150,000 working-capital loan, which he says no longer makes economic sense for a lender to underwrite that way. Lenders that had built large small-loan operations cut production by roughly half, he reports.

Capacity also left the market. BayFirst National Bank, the number 10 lender by loan count last year, shut its Bolt program in August 2025 and exited SBA lending entirely, removing nearly 2,000 loans of annual capacity, according to Coleman.

The policy trail runs longer. American Banker traces it to the Trump administration's view that the loosened standards of November 2023 led to a spike in loan losses. A fee increase followed in March 2025. A June 2025 revision reinstated a 10% equity injection for startup and change-of-ownership financing, tightened personal-guarantee rules and narrowed small-dollar eligibility. Eric Rabinovich, founder of SBA Loan Lab, told the publication that "the credit box shrunk," while also noting that rising interest rates from 2022 into 2023 contributed to credit problems.

The newest change targets business acquisitions

The latest revision, SOP 50 10 8.1, was published Aug. 27, 2026 and took effect Oct. 1, according to CLA. American Banker lists the main changes:

  • Borrowers seeking more than $3 million to buy a company must provide a CPA report assessing the quality of the target's earnings.
  • Debt-service requirements are stricter.
  • Non-cash sources may cover no more than half of the required 10% equity injection.
  • Underwriting must rest on trailing earnings, not forward-looking projections.

CLA's reading of the quality-of-earnings rule is specific. It applies when the purchase price is $3 million or more, measured before buyer equity, seller debt or other financing, and it excludes the appraised value of owner-occupied commercial real estate. The report must come from an independent professional engaged for the lender's benefit. It "may not be prepared by or for the borrower or seller," so a sell-side report does not satisfy it. The work includes reconciling financial records, tax returns and IRS transcript data into normalized earnings, a cash proof on a trailing 12-month basis and for the last two fiscal years, documented add-backs, and an assessment of revenue quality. Those QoE-derived earnings then feed the debt service coverage calculation. Owner buyouts and ESOP and cooperative transactions are exempt.

What it means for borrowers

This is commentary, not advice, and the data is thin on what happens next. But several implications follow from the numbers above.

Acquirers should budget time and money for diligence. A lender-commissioned QoE is a new cost and a new step in the timeline, and its normalized earnings, not the seller's adjusted figures, drive debt capacity. Sellers who market a business on aggressive add-backs may find the buyer's financing sized on a lower number.

Forecasts count for less. Trailing-earnings underwriting favors businesses with a clean multi-year record. Companies whose case rests on growth projections, which describes many founders, will find less room in this channel.

Small-dollar borrowers face the biggest squeeze. If a $150,000 working-capital request no longer pencils out for SBA lenders, those businesses either wait, borrow smaller amounts elsewhere, or use non-bank products. Alternatives such as revenue-based financing or online term lenders are priced differently from a 7(a) loan, so compare total cost, not just speed.

Lender choice matters more. Coleman's top five lenders by fiscal 2026 dollar volume through nine months were Live Oak ($1.66 billion), Huntington National Bank (HBAN, $1.04 billion), Newtek Bank ($999.5 million), U.S. Bank (USB, $594.5 million) and Northeast Bank ($496.9 million). The market is concentrated, and a lender's appetite for your deal size is worth confirming before you spend on diligence.

What to watch next

Not everyone expects the slump to continue. American Banker reports that many observers do not foresee a second straight annual decline, and Rabinovich says demand for SBA financing remains high. S&P Global Market Intelligence reported in May that U.S. banks approved about $8.49 billion in gross 7(a) loans in Q1 2026, roughly double the prior quarter, a sign that banks were adjusting to the policy changes rather than abandoning the product.

Three indicators will show whether the market stabilizes. First, whether the monthly approval counts in SBA's activity reports recover once the shutdown distortion rolls out of the comparison. Second, how many acquisition deals above $3 million stall or reprice as lender-side QoE reports reach underwriters. Third, whether lenders that cut small-loan production in response to full underwriting return to it, or whether that segment moves to non-bank providers for good.

Critics of the rules, including Kapitus COO Ben Johnston on the separate restriction affecting lawful permanent residents, argue the tightening is counterproductive. The administration's stated concern is loan losses. Both arguments will be tested by loss data over the next several quarters.

For founders and owners planning a raise, the practical takeaway is simple: government-backed debt is still available, but it now rewards clean historical earnings, real equity and patience with underwriting. Anyone counting on it for a quick small loan or a projection-led acquisition should line up a second option early.

Sources