Big Story

The Financing Side of a Deal Just Got Harder

Key Takeaways

• The SBA has pulled 7(a) small-loan underwriting back toward standard commercial credit analysis, retiring the FICO Small Business Scoring Service score and asking lenders to judge each deal as they would a similarly sized conventional loan.

• The shift places greater emphasis on documented cash flow, debt service coverage, and clean books, thereby lengthening timelines and raising the bar for thinly capitalized buyers.

• As banks remain cautious and SBA rules tighten, private credit and direct lenders are filling a larger share of the lower-middle-market financing gap, often with faster decision-making and tighter covenants.

• Buyers and sellers who understand which financing path fits a given deal have more leverage than those who assume the SBA route still works as it did a year ago.

For most of the last decade, an acquisition entrepreneur buying a small business could rely on SBA 7(a) financing. The rules were stable, the approvals driven by a software score were fast for clean files, and a seller could reasonably assume that a qualified buyer would close on a predictable timeline. But between the middle of 2025 and March 2026, the SBA issued a number of rule changes, and several of them directly affect how a deal gets underwritten.

The change that matters most for small acquisitions took effect on March 1, 2026, when the SBA discontinued the FICO Small Business Scoring Service score for 7(a) small loans. In its place, lenders are now required to underwrite these loans using generally accepted commercial credit practices consistent with the analysis they apply to similarly sized non-SBA loans. In plain terms, a lender has to write up the operating business, ownership, and loan request, then explain why the borrower cannot obtain credit elsewhere, and document credit history, repayment ability, and the terms of any seller financing.

The SBA now expects 7(a) small loans to show a debt service coverage ratio of at least 1.1 on either a historical or a projected basis, supported by business bank statements and projected earnings. Files that miss the threshold move into standard 7(a) underwriting, which means a longer, more rigorous review. The agency has also reinstated upfront guaranty fees and lender service fees, ending the temporary fee relief that buyers had grown used to, so the all-in cost of an SBA-backed acquisition is higher than it was a year ago.

The new rules favor borrowers with strong fundamentals and clean documentation. The effect on lending is slower decisions and a higher documentation burden, with tax transcript verification and insurance requirements back in force. The effect on deal flow is the one sellers feel most directly. Deals that once qualified for expedited small-loan processing now take longer to close, and a buyer whose cash flow is thin or seasonal may find it harder to secure financing than they expected when they signed.

CHART PLACEHOLDER

This is where the second pillar of the financing landscape becomes important. As bank lending stays constrained and SBA underwriting tightens, private credit has continued to expand into the space banks and government-guaranteed programs are stepping back from. Direct lending now sits at roughly $1.5 to $2 trillion, comparable in size to the broadly syndicated loan market, and capital continues to flow in. For lower-middle-market acquirers, that means a real alternative exists for deals that no longer fit cleanly within an SBA box, with the trade-off that direct lenders expect stronger cash flow, charge more than a government-guaranteed loan, and impose tighter covenants.

Relative to the crowded upper end, lower-middle-market deals carry higher spreads, more conservative leverage, and stronger covenant packages because there is less capital chasing each opportunity. The bulk of private debt capital is directed at sponsor-backed transactions, where the diligence and certainty of execution let lenders deploy quickly, so independent sponsors and search operators with a credible deal and a clean file are well positioned to use this channel.

For practitioners, the takeaway is to stop treating financing as a single default path and start treating it as a choice that shapes the whole deal. A buyer who can show clean books and steady coverage may still find SBA the cheapest route despite the tighter rules. A buyer with a strong but lumpy cash flow, or a deal that the SBA timeline cannot accommodate, may be better served by a bank or a direct lender that can move faster and structure around the specifics. Sellers gain from understanding this too. The question is no longer only what a buyer will pay. It is which financing path the buyer is using, how certain that path is to close, and how much of the purchase price will actually arrive on the closing date.

Governance Feed

1. Deal activity in the US Middle Market continued to slide through May, with the number of transactions down 6% year-to-date, even as total value held up due to larger average deal sizes. The slowdown reflects caution. Buyers are starting processes and then pausing to conduct due diligence, partly due to geopolitical uncertainty, and they are in no rush to close.

2. The SBA opened a narrow path for borrowers who would otherwise be blocked by the prior loss rule. Effective June 1, 2026, an owner tied to an earlier government loss no longer disqualifies a 7(a) or 504 applicant when that owner held less than 20% of the failed business, was not a borrower or guarantor on it, and had no control. The check runs automatically through the SBA Fraud Risk Framework, so lenders do not file a separate request. For a buyer assembling an investor group, a minority partner with a past default is no longer an automatic dealbreaker.

3. A recent lower-middle-market LOI shows how much of a headline price can sit outside cash at close. For a digital marketing services business with $20M to $25M in revenue, a private equity buyer structured the deal at a 5.75x to 6x EBITDA multiple with 48% in cash, 17% in rollover equity, and 35% in a performance earnout, and no seller note. The earnout pays only if the company hits set EBITDA targets, so more than a third of the price rides on future results. For a seller, the structure matters as much as the multiple, and a 60-day exclusivity window leaves little room to renegotiate once those terms are set.

Thesis Principle

Most acquisitions under $5 million are financed with an SBA 7(a) loan, and the program rules shape what a seller can actually negotiate. A seller note is usually required to sit on full standby for 24 months, meaning no principal or interest accrues to the seller for the first two years, and the paper remains illiquid for the duration. The seller note also sits fully behind the SBA loan, so in the event of default, the lender is made whole first, and the credit risk on that note is high. Earnouts are generally not permitted in SBA-backed deals, so a seller cannot rely on one to bridge a valuation gap as they might in a conventional sale. The buyer has to inject at least 10% equity, which, on a $4 million deal, means about $400,000 in cash, so no buyer can finance the whole purchase, and every buyer carries real skin in the game. The buyer principals must personally guarantee the loan, which raises their exposure and gives them a strong reason to keep the seller note current. The SBA also typically requires key-person life insurance equal to the loan amount, which can disrupt operations if the buyer is the key person.

Resources & Events

📅 Great Lakes ACG Capital Connection (Indianapolis, IN - September 9-10, 2026)

The Great Lakes Capital Connection brings private equity professionals, lenders, investment bankers, and intermediaries together for two days of one-on-one DealSource meetings and regional dealmaking across the Midwest. The format is built around pre-scheduled meetings that let advisors and capital providers cover a lot of ground in a short window. For intermediaries and sponsors sourcing in the Great Lakes manufacturing and industrial base, it is one of the more efficient ways to meet active buyers and lenders in one place. Details →

📅 ACG Charlotte Annual Deal Crawl (Charlotte, NC - November 18-19, 2026)

The Annual Deal Crawl is ACG Charlotte's flagship gathering for dealmakers across the Southeast, combining structured networking with a relaxed format that draws private equity groups, lenders, advisors, and operators. The Southeast continues to produce strong lower-middle-market deal flow in industrial services, niche manufacturing, and family-owned distribution, and the event is built to connect that supply with capital. Details →

📊 Report Spotlight: US LMM Private Credit (Muzinich & Co.)

Muzinich's outlook makes the case that the US lower middle market remains a structurally attractive corner of private credit. Compared with the more crowded core and upper-middle market, the lower-middle market offers higher relative spreads, more conservative leverage, stronger covenant packages, and earlier protection through covenants. The report notes that an abundance of capital chasing fewer large deals is pressuring spreads and weakening investor protections at the top of the market, while the lower middle market still rewards disciplined underwriting and stronger documentation. It also flags that targeting underserved geographies can translate into better pricing and tighter structures. Read → 

For the Commute

M&A Integration Technology (M&A Science)

Four integration leaders from Intel, Coursera, Ansys, and UKG compare what integration technology actually delivers. The conversation is candid and digs into why the handoff from diligence to integration so often breaks down and what fixes it. The group is direct about where AI helps in integration today and where it is still early, how to right-size the effort when several deals run at once, and why lost institutional knowledge is the biggest place value leak in a deal. For an acquirer who plans to hold and build, the closing case for running pre-mortems and post-mortems is the most practical takeaway.