Section 02
Approval no longer guarantees funding: fall-out rose sharply in FY2025.
Headline finding
Framing
Approval volumes rose, but funding reliability deteriorated.
Approval counts did not tighten in FY2025 — the SBA cleared more 7(a) applications than in any non-PPP year on record. What changed was what happened after approval. The window between approval and first disbursement, which borrowers often treat as paperwork, became the most expensive part of the process. The spread across lenders on the same government guarantee is large: Columbia Bank closes roughly 99 of every 100 approvals, while Northeast Bank closes closer to 47. On the 504 side, Bank Five Nine shows a post-approval fall-out rate of 58%. On time-to-close, Colony Bank funds a median 7(a) in three days, while Webster Bank takes about 42. These are public-record figures for the same program and fiscal year, which suggests lender-level execution differences matter at closing.
The sub-sections below walk through close-rate variance by program, lender, state, industry, and size band; which deal structures close cleanly and which die in diligence; the time-to-close leaderboard (which matters when a seller contract has a 60-day fuse); a four-question Borrower Scorecard that produces a short list of named lenders to approach; and a 12-month outlook anchored on prime at 6.75% and SOP 50 10 8, which reset the acquisition-equity regime effective June 1, 2025. FY2026 will be the first full year underwritten under the tightened rules.
§ 2.1
Who Gets Approved, And Who Actually Closes
Two programs, two failure modes. The 7(a) fall-out rate in FY2025 was 15.77%; the 504 rate was 54.53%. Those are not measuring the same thing. Across the entire 16-year public lending record, no 7(a) loan has ever been coded NOT FUNDED; all 7(a) fall-out is CANCLD, which is SBA’s flag for an approved 7(a) that simply did not disburse — regardless of which side blinked. 504 fall-out is 95%+ NOT FUNDED, which is SBA’s separate flag for an approved 504 that failed the third-party diligence stack: appraisal gaps, environmental reports, first-mortgage bank pulling out, or the debenture pool underwrite not clearing. A 7(a) fall-out tells you the deal or the borrower blinked. A 504 fall-out tells you the deal structure broke.
| Program | Approved | CANCLD | NOT FUNDED | Fell out | Pct |
|---|---|---|---|---|---|
| 7(a) | 77,805 | 12,271 | 0 | 12,271 | 15.77% |
| 504 | 6,759 | 167 | 3,519 | 3,686 | 54.53% |
Fall-out by size band — 7(a) FY2024-FY2025
Size turns out to be a weaker predictor than lender choice, but the $150K-$350K band — where Express-style quick-approvals meet real underwriting friction — still runs the highest at 14.88%. Bands above $500K, where structured acquisition deals dominate, close more cleanly. The sub-$150K band runs 13.56% — the Express product (fast in, fast out) absorbs most of the rate-shock cancellations.
| Size band | Approved | Fell out | Pct | Typical use |
|---|---|---|---|---|
| $0-$150K | 76,338 | 10,348 | 13.56% | Express / working capital |
| $150K-$350K | 26,755 | 3,980 | 14.88% | Small equipment / partial acq |
| $350K-$500K | 14,474 | 1,739 | 12.01% | Owner-operator acquisitions |
| $500K-$1M | 13,602 | 1,355 | 9.96% | Small-biz acquisitions |
| $1M-$2M | 9,069 | 1,034 | 11.40% | Mid-market acquisitions |
| $2M-$5M | 7,612 | 811 | 10.65% | Upper-mid acquisitions + CRE |
The 7(a) lender fall-out leaderboard — FY2024-FY2025
At the 200-approval floor, the five cleanest closers each funded more than 96% of their approvals, while the five with the highest fall-out include two of the largest 7(a) lenders in the country. Columbia Bank at 1.48% and Northeast Bank at 52.56% sit a 35.5x gap apart on the same government guarantee. JPMorgan Chase appears on the cleanest list at 3.32% despite running 4,455 approvals, which suggests scale alone does not drive the variance. Newtek Bank’s 33.80% fall-out on 8,622 FY24-FY25 approvals is the volume-weighted number that pulls the national benchmark above 13%.
Cleanest closers (fall-out %, lowest-first)
| Lender | Approvals | Fell out |
|---|---|---|
| Columbia Bank | 1,354 | 1.48% |
| Central Pacific Bank | 201 | 2.49% |
| Five Star Bank | 251 | 2.79% |
| SouthState Bank, National Association | 760 | 3.03% |
| JPMorgan Chase Bank, National Association | 4,455 | 3.32% |
Dirtiest closers (fall-out %, highest-first)
| Lender | Approvals | Fell out |
|---|---|---|
| Northeast Bank | 10,338 | 52.56% |
| Newtek Bank, National Association | 8,622 | 33.80% |
| Bank of America, National Association | 2,094 | 18.67% |
| Midwest Regional Bank | 209 | 18.66% |
| Stone Bank | 241 | 17.43% |
The figures above are not a direct underwriting-quality comparison. Columbia (n=1,354) appears to run a narrower pre-qualification funnel, while Northeast (n=10,338) appears to run a broad-funnel preferred-lender model that treats approval more as a screen than a commitment — the pattern suggests lender-level process differences rather than one approach being categorically better. For borrower planning, an approval at a broad-funnel lender behaves more like a pre-screen than a binding commitment. The full 151-lender league table with rate, spread, and vintage charge-off columns is in Section 6.
(7(a), FY24-25 pooled, n=147,850, lender floor n≥200 approvals)The 504 first-lien partner table
Every major first-lien partner on 504 deals shows a post-approval fall-out rate above 25%. Bank Five Nine sits at 58.27%, Celtic Bank at 53.33%, and M&T at 48.48%. The pattern appears to be program-driven rather than lender-driven: the three-party 504 structure (first-mortgage bank + CDC + SBA debenture) produces similar results across institutions, and the majority of fall-out is coded NOT FUNDED (diligence-phase) rather than CANCLD (borrower walk-away). Borrowers planning a 504 around a 90-day close should build in more runway.
| First-lien lender | Approved | CANCLD | NOT FUNDED | Fell out | Pct |
|---|---|---|---|---|---|
| Bank Five Nine | 127 | 0 | 74 | 74 | 58.27% |
| Celtic Bank Corporation | 135 | 5 | 67 | 72 | 53.33% |
| M&T Bank Corporation | 132 | 6 | 58 | 64 | 48.48% |
| JPMorgan Chase Bank, National Association | 390 | 14 | 148 | 162 | 41.54% |
| Bank of America, National Association | 441 | 14 | 165 | 179 | 40.59% |
| Glacier Bank | 137 | 1 | 50 | 51 | 37.23% |
| Meadows Bank | 102 | 0 | 37 | 37 | 36.27% |
| Harvest Commercial Capital, LLC | 287 | 6 | 94 | 100 | 34.84% |
| CalPrivate Bank | 121 | 2 | 39 | 41 | 33.88% |
| First-Citizens Bank & Trust Company | 368 | 6 | 111 | 117 | 31.79% |
| Zions Bank, A Division of | 120 | 2 | 33 | 35 | 29.17% |
| Wells Fargo Bank National Association | 157 | 1 | 39 | 40 | 25.48% |
Geography — fall-out by state
The national benchmark across the 43 states clearing the 500-approval floor is 13.02%. Alabama runs +4.66pp above that, and Idaho runs -5.24pp below, producing a meaningful spread within the same program and fiscal year. The pattern appears to track lender mix: hot states concentrate in the Southeast (AL, LA, GA, FL, NJ — where high-volume national broad-funnel lenders dominate) and cool states concentrate in the Upper Midwest and Mountain West (ID, IA, NE, OH, MN, MI, OR — where regional banks with in-market underwriters dominate). State-level effects largely reduce to which lenders operate there.
Hot states (above national, sorted highest-first)
| State | Approved | Pct | Adj (pp) |
|---|---|---|---|
| AL ⚠ | 1,131 | 17.68% | +4.66pp |
| LA ⚠ | 1,197 | 16.21% | +3.18pp |
| GA | 4,405 | 15.96% | +2.93pp |
| FL | 12,184 | 15.89% | +2.87pp |
| NJ | 5,316 | 15.69% | +2.66pp |
| CT | 1,896 | 15.40% | +2.38pp |
| NY | 10,089 | 14.88% | +1.85pp |
| MD | 2,705 | 14.86% | +1.84pp |
| NV | 1,618 | 14.77% | +1.75pp |
| MS | 699 | 14.74% | +1.71pp |
Cool states (below national, sorted lowest-first)
| State | Approved | Pct | Adj (pp) |
|---|---|---|---|
| ID ⚠ | 1,452 | 7.78% | -5.24pp |
| PR ⚠ | 1,188 | 8.59% | -4.44pp |
| IA ⚠ | 848 | 8.61% | -4.42pp |
| NE ⚠ | 697 | 8.90% | -4.13pp |
| OH ⚠ | 7,141 | 9.06% | -3.96pp |
| MN ⚠ | 3,184 | 9.11% | -3.92pp |
| MI ⚠ | 5,169 | 9.34% | -3.68pp |
| OR ⚠ | 2,289 | 9.65% | -3.37pp |
| NM ⚠ | 570 | 10.00% | -3.02pp |
| IN | 2,551 | 10.07% | -2.95pp |
Industry — 2-digit NAICS spread
Information (sector 51) tops the industry table at 16.12% fall-out, and Finance & Insurance (sector 52) sits at the bottom at 11.16%, a ~4.96pp spread. Industry alone is a weak predictor relative to lender choice. Sectors that hinge on third-party diligence (Information, customer-concentration and IP-license review; Real Estate, appraisal and environmental; Wholesale, inventory audit; Pro Services, book-of-business verification) cluster at the top. Hard-asset and working-operator sectors (Construction, Accommodation/Food, Health Care) cluster near the bottom. The lender-level spread is roughly an order of magnitude larger than this industry effect.
| NAICS | Sector | Approved | Pct |
|---|---|---|---|
| 51 | Information | 1,501 | 16.12% |
| 53 | Real Estate & Rental/Leasing | 3,030 | 15.02% |
| 42 | Wholesale Trade | 6,402 | 14.90% |
| 54 | Professional, Scientific & Technical Services | 15,519 | 14.59% |
| 48-49 | Transportation & Warehousing | 7,457 | 13.64% |
| 31-33 | Manufacturing | 8,576 | 13.34% |
| 61 | Educational Services | 2,431 | 13.25% |
| 44-45 | Retail Trade | 16,727 | 12.91% |
| 81 | Other Services | 14,978 | 12.84% |
| 56 | Admin & Support, Waste Mgmt | 8,801 | 12.70% |
| 11 | Agriculture, Forestry, Fishing | 1,280 | 12.66% |
| 72 | Accommodation & Food Services | 17,759 | 12.50% |
| 62 | Health Care & Social Assistance | 14,437 | 12.41% |
| 23 | Construction | 20,403 | 12.14% |
| 71 | Arts, Entertainment & Recreation | 5,603 | 11.44% |
| 52 | Finance & Insurance | 2,384 | 11.16% |
§ 2.2
What Structures Close
Term length — the 7-to-10-year danger zone
The 7-to-10-year band is where 74% of 7(a) volume sits, and it runs 14.38% fall-out — the highest of any term band by a meaningful margin. Every other bucket sits at roughly 9% fall-out. The mechanism is goodwill-heavy acquisition financing (SBA caps goodwill; appraisals must justify the purchase price; QoE adjustments cut the seller’s EBITDA number by 10-40% on diligence review). Short-term loans (1-7 years, working capital and lines) carry the highest charge-off rate in the seasoned cohort at 0.35%, because borrowers reaching for short terms to shave interest cost end up with payment schedules that break in Year 3 when a quarter goes sideways.
| Term | Approved | Fell out | Pct | Chg-off | Chg-off % |
|---|---|---|---|---|---|
| 1-7yr | 16,565 | 1,530 | 9.24% | 58 | 0.35% |
| 7-10yr | 109,323 | 15,723 | 14.38% | 233 | 0.21% |
| 10-15yr | 6,268 | 579 | 9.24% | 0 | 0.00% |
| 15-25yr | 13,528 | 1,222 | 9.03% | 0 | 0.00% |
| 25yr+ | 2,166 | 213 | 9.83% | 0 | 0.00% |
Business age — the acquisition-closes-cleanest finding
The counterintuitive finding: change-of-ownership deals (acquisitions) close cleanest at 7.70%, while established-business expansion loans fall out most at 15.53% — roughly 2x the acquisition rate. Borrowers and brokers assume acquisitions are the risky thing and existing-business expansions are the safe thing; the data says the opposite at the close line. The mechanism is structural: an acquisition comes with a signed purchase agreement, a seller-imposed deadline, a QoE report, and capital-stack terms that are already on paper. An expansion loan has none of that — the borrower can walk at any time, and often does when the full underwriting cuts the pre-approval’s amount or rate.
| Business age | Approved | Fell out | Pct |
|---|---|---|---|
| Existing or more than 2 years old | 88,263 | 13,709 | 15.53% |
| New Business or 2 years or less | 23,508 | 2,640 | 11.23% |
| Startup, Loan Funds will Open Business | 22,261 | 1,841 | 8.27% |
| Change of Ownership | 13,559 | 1,044 | 7.70% |
Interest rate — a timing artifact, mostly
The 10-11% rate band runs the highest fall-out at 16.59%, and the sub-9% bands run the lowest. This appears to be largely a timing artifact: FY2024-FY2025 prime ran 7.5-8.5%, so most variable-rate 7(a) loans landed in the 10-11% band (Prime + 1.5 to 3). The elevated fall-out there is consistent with peak-rate cohort sticker shock at closing rather than a direct rate effect. Section 3 shows that on matched $2M HVAC-acquisition deals, the cheap-tier lender priced at P+1.43% while the expensive-tier priced at P+3.00%, and p10-to-p90 lender dispersion on comparable variable 7(a) deals runs about 220 bps. A borrower who picks the wrong lender on spread can carry roughly 220 bps of excess cost for the full loan term, which dwarfs the effect of getting the prime-rate path wrong.
| Initial rate | Approved | Fell out | Pct |
|---|---|---|---|
| <8.00% | 9,229 | 745 | 8.07% |
| 8.00-8.99% | 11,223 | 872 | 7.77% |
| 9.00-9.99% | 20,981 | 1,723 | 8.21% |
| 10.00-10.99% | 46,943 | 7,787 | 16.59% |
| 11.00-11.99% | 29,706 | 4,417 | 14.87% |
| 12.00-12.99% | 10,039 | 1,062 | 10.58% |
| 13.00-13.99% | 9,459 | 1,221 | 12.91% |
| 14.00%+ | 10,264 | 1,440 | 14.03% |
Collateral — a non-finding worth calling out
Collateralized loans fall out at 12.87% versus 13.79% for uncollateralized — a gap of less than 1pp. The data does not support the common framing that collateral is a close-rate lever. It looks more like a credit-quality and post-close default lever: the SBA guarantee already covers the lender’s downside at approval, so collateral shows up at charge-off recovery rather than at funding.
| Collateral | Approved | Fell out | Pct |
|---|---|---|---|
| Collateralized | 121,700 | 15,662 | 12.87% |
| Uncollateralized | 26,150 | 3,605 | 13.79% |
§ 2.3
The Time-Is-Money Table
Median 7(a) close time in FY2025 was 21 days. Median 504 close was 119 days. At the lender level the 7(a) spread runs from 3 days (Colony Bank, SouthState, Eastern) to 62 days (Bank Five Nine), which is the difference between a seller’s 45-day contract surviving and not surviving. Webster Bank (42-day median on n=381) and M&T (41-day median on n=3,387) represent the large regional pattern where internal credit-committee review adds 4-6 weeks relative to the in-house underwriting of SouthState or Colony.
Approval → first disbursement, by program and FY
| Program | FY | N funded | Mean days | Median days | P90 days |
|---|---|---|---|---|---|
| 7(a) | 2024 | 59,564 | 35.4 | 17 | 74 |
| 7(a) | 2025 | 57,878 | 32 | 21 | 71 |
| 504 | 2024 | 4,115 | 212.3 | 147 | 455 |
| 504 | 2025 | 3,073 | 139.1 | 119 | 238 |
Fastest closers (median days, lowest-first)
| Lender | Approvals | Median |
|---|---|---|
| Colony Bank | 676 | 3 d |
| City National Bank of Florida | 201 | 3 d |
| SouthState Bank, National Association | 727 | 3 d |
| Eastern Bank | 657 | 3 d |
| BayFirst National Bank | 4,492 | 5 d |
| Cadence Bank | 1,527 | 6 d |
| Celtic Bank Corporation | 2,236 | 8 d |
Slowest closers (median days, highest-first)
| Lender | Approvals | Median |
|---|---|---|
| Bank Five Nine | 251 | 62 d |
| Webster Bank National Association | 381 | 42 d |
| Manufacturers and Traders Trust Company | 3,387 | 41 d |
| Regions Bank | 223 | 35 d |
| Wells Fargo Bank National Association | 2,923 | 35 d |
| Wilmington Savings Fund Society FSB | 201 | 34 d |
For acquisitions, factoring the lender’s median close-time into the seller’s-contract window with a P90 buffer helps calibrate expectations. A 45-day seller window paired with a lender whose median runs around 42 days has little margin for diligence surprises. The Section 6 Lender League Table carries close-time alongside rate, spread, and charge-off columns, which is the composite view for cross-lender comparison.
(combined, FY24-25, n=117,442, funded loans with disbursement within 730 days)§ 2.4
The Borrower Scorecard
Four questions, each a filter rather than a score. Q1 sets the deal type (which base fall-out rate applies). Q2 produces a size-matched lender pool. Q3 filters that pool by timeline (close-time cutoff removes lenders whose P90 would miss the seller deadline). Q4 ranks within that filter by state fit (adjust by the state-adjustment points from § 2.1; bias toward in-state underwriting where the state runs hot). The sequence matters; a single composite score collapses too quickly to act on.
Q1 — What kind of deal?
- Acquiring a business — base fall-out 7.70%, optimistic cohort. Go to Q2.
- Refinancing or expanding existing — base fall-out 15.53%, budget 2x time. Go to Q2.
- Starting from scratch — base fall-out 8.27%, expect heavy underwriting. Go to Q2.
- Real-estate + building (504 candidate) — stop. 504 base fall-out 54.53%, median close 119 days. Read the 504 first-lien table in § 2.1 before going to Q2.
Q2 — Deal size?
- <$500K — 7(a) SBA Express territory. Speed tends to matter more than brand. Pick by the close-time leaderboard in § 2.3.
- $500K-$1M — 7(a) standard. Mid-band fall-out at 9.96%, many lender options. Pick by the close-rate leaderboard in § 2.1.
- $1M-$2M — 11.40% fall-out, acquisition-favored band. Pick from the specialist leaderboard below.
- $2M-$5M — 10.65% fall-out, upper-mid acquisition + CRE. Pick 2-3 specialist backups, not one.
- $5M+ — call a human. Public sample thins here.
Q3 — Timeline?
- Seller deadline <60 days — need median close <14 days + fall-out <8%. Shortlist: Colony Bank, SouthState, Eastern, BayFirst, Celtic.
- 60-90 days — most 7(a) lenders work. Filter on fall-out, not speed.
- 90+ days or flexible — 504 is on the table; slower large regionals viable if the deposit relationship matters.
Q4 — State? (adjustment = state pct minus 13.02% national benchmark)
- Adj ≥ +3pp (AL, LA flagged ⚠) — first-order risk factor. Bias strongly toward in-state underwriting; require a state-specific lender volume quote.
- Adj +1 to +3pp (GA, FL, NJ, CT, NY, MD, NV, TN, VA, CA) — bias toward in-state underwriting. Add state adj to your cohort rate.
- Adj -1 to +1pp — geography is not load-bearing. Pick on close-rate and lender fit.
- Adj ≤ -3pp (ID, IA, NE, OH, MN, MI, OR flagged ⚠) — regional banks and community banks often outperform the national leaderboard at your size.
Q5 — Does this lender sell more than 90% of its variable-rate 7(a) book over the last three fiscal years?
- If yes, the rate quoted to you is priced against the secondary market's yield demand, not the lender's cost of funds. That is not a reason to walk — the SBA guarantee is identical — but it changes what the lender can legitimately cite as cost-of-funds justification for a premium. Shop a hold-to-maturity peer for comparison. Section 5 — Who Flips Your Loan — names the top holders and flippers.
- If no (flip rate ≤ 5%), the lender funds itself through deposits and prices to its own cost of capital. The premium dynamic does not apply to your quote.
The acquisition-specialist leaderboard
7(a), Change of Ownership only, floor n=100 approvals. U.S. Bank tops the table at 1.61% fall-out on 124 acquisition approvals. Huntington National Bank sits at 3.25% on 1,383 acquisitions, which suggests an acquisition practice running at scale. Live Oak Banking Company, the other large acquisition specialist in the cohort, runs 8.59% on 1,374 acquisitions — still below the 12.99% program-wide average but roughly 2.6x Huntington’s rate. The gap appears to reflect different deal mixes and process choices rather than a clean quality ranking.
| Lender | Acq approvals | Fell out | Pct |
|---|---|---|---|
| U.S. Bank, National Association | 124 | 2 | 1.61% |
| Old National Bank | 207 | 6 | 2.90% |
| The Huntington National Bank | 1,383 | 45 | 3.25% |
| Brookline Bank, a Division of Beacon Bank and Trust | 162 | 7 | 4.32% |
| First Financial Bank | 108 | 5 | 4.63% |
| First Internet Bank of Indiana | 360 | 17 | 4.72% |
| T Bank, National Association | 104 | 6 | 5.77% |
| GBank | 244 | 15 | 6.15% |
| Readycap Lending, LLC | 135 | 9 | 6.67% |
| Zions Bank, A Division of | 116 | 8 | 6.90% |
| Celtic Bank Corporation | 183 | 13 | 7.10% |
| Hanmi Bank | 233 | 18 | 7.73% |
| Truliant FCU | 142 | 11 | 7.75% |
| Byline Bank | 261 | 22 | 8.43% |
| Live Oak Banking Company | 1,374 | 118 | 8.59% |
Six deal-killer patterns
Drawn from FY2024-FY2025 fall-out patterns and the regulatory regime change at SOP 50 10 8 (effective June 1, 2025). Each row links a specific structural pattern to its close-rate cost and a fix the borrower can apply before filing.
Equity injection below 10%
- What it is:
- Buyer shows up with 5-8% cash down, expecting to structure the rest as seller financing or gift funds.
- Regulatory anchor:
- SOP 50 10 8 §A(3)(c) — minimum 10% equity required on change-of-ownership, owner-operator real estate, or business acquisition deals.
- What changed:
- Prior SOP permitted a broader interpretation of equity; current SOP hard-codes 10% with limited exceptions.
- Borrower consequence:
- Lender approves conditionally assuming equity at closing; borrower can't bridge the gap; loan moves to CANCLD.
- Fix:
- Verify cash-on-hand (including post-closing reserves) equals 12-15% of project cost before submitting. Budget for closing costs plus SBA guarantee fee.
Seller note structured as equity
- What it is:
- Seller holds a second-position note that pays sooner than 24 months or bears interest during the SBA loan term.
- Regulatory anchor:
- SOP 50 10 8 §A(3)(c) — seller notes counted toward equity must be on full standby (no principal or interest payments) for the first 24 months.
- What changed:
- Full-standby period is 24 months firm; prior SOP allowed shorter standby in some deal structures.
- Borrower consequence:
- Credit committee flags the note terms; the deal is approved then unwinds when seller refuses to amend.
- Fix:
- Draft seller notes as 24-month full-standby from day one. Negotiate seller's price expectation knowing the standby is non-negotiable.
Appraisal below purchase price
- What it is:
- Real estate or business appraisal comes in 5-15% below the signed purchase price.
- Regulatory anchor:
- SOP 50 10 8 §E — SBA will not guarantee above appraised value; shortfall must be covered by additional equity or seller price reduction.
- What changed:
- No change — but 2024-25 valuation softness surfaced this friction more often.
- Borrower consequence:
- Gap is $40-80K on a $1M deal; if seller won't reprice and buyer won't add equity, deal moves to NOT FUNDED.
- Fix:
- Include an appraisal contingency in the purchase agreement. Hold 5% of purchase price in reserve as 'valuation cushion' separate from your 10% equity.
Quality-of-earnings re-cut downward
- What it is:
- Seller-provided EBITDA is $450K; QoE report adjusts it to $290K after add-back scrub.
- Regulatory anchor:
- SOP 50 10 8 §E(2) — debt service coverage must be documented with third-party financial statements; lender bank discretion on QoE depth.
- What changed:
- More lenders are requiring independent QoE on acquisition deals above $1M (not mandated by SOP, but market practice post-2024 defaults).
- Borrower consequence:
- Revised DSCR falls below 1.25x; lender's credit committee requires either a larger equity check or a price concession.
- Fix:
- Hire your own QoE before LOI signing. Negotiate price based on scrubbed earnings, not seller's adjusted number.
Personal guarantee refusal (20%+ owners)
- What it is:
- One of multiple owners declines to personally guarantee the loan.
- Regulatory anchor:
- SOP 50 10 8 §B(2) — all owners holding 20%+ must personally guarantee; no waivers.
- What changed:
- Guarantee requirement was tightened under the current SOP; prior informal carve-outs eliminated.
- Borrower consequence:
- Deal stalls; one owner must either buy out the holdout or reduce their stake below 20%.
- Fix:
- Confirm all 20%+ owners' willingness to PG before submitting. For family-owned entities, map the cap table before loan application.
Borrower walk-away on rate or terms
- What it is:
- Between approval and closing, borrower finds a conventional product at 50-100bps lower or decides the deal economics no longer work.
- Regulatory anchor:
- None — this is borrower economics.
- What changed:
- Prime falling from 8.50% (Jul 2023) to 6.75% (Dec 2025) created a 6-month window where conventional alternatives became more competitive.
- Borrower consequence:
- CANCLD — clean exit, no regulatory issue, just a better offer elsewhere.
- Fix:
- Model your all-in cost including SBA guarantee fee vs. conventional before accepting approval. Decide pre-approval, not at closing.
§ 2.5
12-Month Outlook
Prime sits at 6.75% as of 2026-04-16. The Fed cut 25bp on Dec 10, 2025 and prime moved effective Dec 11. Total move since the 8.50% peak (Jul 27, 2023) is -175bp over 28 months; FY2025 alone delivered -75bp across three cuts. A 7(a) variable-rate loan approved at peak (Prime + 2.75 = 11.25%) vs. one approved today (9.50%) carries a ~$90/mo payment reduction per $100K borrowed on a 10-year amortization, or roughly $900/mo at $1M borrowed — enough to move a 1.18x DSCR into 1.28x on the same cash flow.
Prime rate inflection dates (last 7)
| Effective date | Prime | Move | Direction |
|---|---|---|---|
| 2025-12-11 | 6.75% | -25bp | cut |
| 2025-10-30 | 7.00% | -25bp | cut |
| 2025-09-17 | 7.25% | -25bp | cut |
| 2024-12-19 | 7.50% | -25bp | cut |
| 2024-11-08 | 7.75% | -25bp | cut |
| 2024-09-19 | 8.00% | -50bp | cut |
| 2023-07-27 | 8.50% | +25bp | hike |
Looking into FY2026, three things appear to matter more than rate path. First, lender spread dispersion is the larger lever: Section 3’s matched $2M HVAC-acquisition example shows the cheap-tier lender at P+1.43% and the expensive-tier at P+3.00% — roughly 157 bps, or about $203K of lifetime interest on that deal — and the broader p10-to-p90 dispersion across comparable variable 7(a) deals runs about 220 bps. The Fed’s December 2025 SEP implies only another ~50bp of cuts through the end of FY2026. Second, FY2026 Q1 is largely unreadable because the 43-day federal shutdown (Oct 1 to Nov 12, 2025) zeroed out approvals for six weeks and produced a backlog clearance on Nov 13 — the FY2025 fall-out reading, however, holds when approvals after July 1, 2025 are excluded, which suggests the spike is not a shutdown artifact. Planning for FY2025-level close-rate risk and selecting a lender whose historical fall-out sits below 8% is the conservative stance. Third, SOP 50 10 8 (effective June 1, 2025; see SBA Information Notice 5000-868665) reinstated a firm 10% equity injection on change-of-ownership and startup transactions, capped seller notes at 50% of required equity, and required seller notes to sit on full standby for the loan term. FY2026 is the first full cohort underwritten under the tighter rules, so the acquisition structures that cleared in 2024 are not necessarily the structures that clear in 2026. For borrowers prioritizing payment certainty, 504 remains the cleanest 25-year fixed-rate product — but only where the timeline can absorb a 120+ day close and the elevated diligence-phase fall-out covered in § 2.1.
§ 2.6
Borrower FAQ
Three questions borrowers ask most often about this data, answered against what the public record shows.
Q. A lender just issued an approval. How much weight should a borrower give it?
It depends on the lender’s historical FY2024-FY2025 fall-out rate. When that rate sits below 8%, the approval behaves more like a commitment, and planning a seller deadline around it is reasonable. When it sits above 15%, the approval is better treated as a pre-screen. Asking the loan officer directly how many of their last 100 approvals in the same size band actually funded is a useful diagnostic; an inability to answer is itself informative. Columbia Bank funds roughly 99 of every 100 approvals, while Northeast Bank funds closer to 47, and the initial approval letters look similar.
Q. Is a 60-day seller close window realistic on a ~$1.8M 7(a) acquisition?
Realistic with the right lender, tight with the wrong one. Median 7(a) close in FY2025 was 21 days and P90 was 71 days. With Webster Bank (42-day median) or M&T (41-day median), a 60-day seller window leaves little cushion for appraisal and quality-of-earnings review. With Colony Bank, SouthState, or Eastern (3-day medians), a borrower has roughly five weeks of cushion. Picking the lender with the shorter tail and filing early appears to be the safer path.
Q. 504 has a lower headline rate than 7(a) — why not default to 504?
Because 504 carries a 54% post-approval fall-out rate and a median 119-day close in FY2025. Every major 504 first-lien bank — Bank Five Nine, Celtic, M&T, JPMorgan Chase, Bank of America — shows more than 25% NOT FUNDED, which is the diligence-phase-kill flag. The rate savings on 504 can erode if the deal dies in appraisal, environmental, or CDC coordination several months in. 504 appears to fit best where there is real estate, a 150-day+ timeline, and tolerance for holding-cost risk.
Methodology & cross-section references
Data Provenance
Source: SBA 7(a) and 504 loan-level public releases, joined through LenderHawk’s lender canonicalization layer.
Fall-out definition: loans with status CANCLD or NOT FUNDED at time of data pull. Excludes EXEMPT (active, too new to classify), COMMIT (in-flight), PIF (paid in full), and CHGOFF (funded, later defaulted). Program-split verified against 2010-2026 public data: 7(a) fall-out is nearly all CANCLD; 504 fall-out is mostly NOT FUNDED.
Approval cohort: SBA fiscal year (Oct-Sep). Close time: first disbursement date minus approval date, funded loans only, capped at +730 days to exclude data anomalies.
Sample floors applied: 7(a) lender leaderboard n≥200; 504 first-lien n≥100; acquisition specialists n≥100; close-time leaderboard n≥200 funded; state adjustment n≥500; 2-digit NAICS n≥300.
Regulatory references: SBA Information Notice 5000-868665 — Issuance of SOP 50 10 8 with Technical Updates (effective June 1, 2025; Office of Capital Access).
Cross-section references: Section 1 (The Lending Scorecard) for FY2025 market shape and the shutdown anomaly; Section 3 (The Cost of Capital) for the lender-level spread dispersion referenced in § 2.2c and the outlook; Section 4 (Where the Money Flowed) for state and industry dollar-flow context; and Section 6 (The Lender League Table) for the full 151-lender cross-columns (rate, spread, charge-off).
Window note on Northeast Bank and Newtek Bank: The Section 6 league table reports each on an FY2025-only window (Northeast 61% on n=7,785; Newtek 38.9%). This section pools FY2024-FY2025 to smooth year-specific noise in the broader leaderboard (Northeast 52.56% on n=10,338; Newtek 33.80% on n=8,622). Both are correct under their denominators; the pooled window is applied consistently here.
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03Cost of Capital
Similar borrowers on otherwise comparable deals still paid materially different prices. Rate dispersion across the top 100 lenders reached 514 bps in FY2025.