Avoiding Delays: Common SBA Underwriting Red Flags for Buyers

Every SBA 7(a) loan goes through a detailed underwriting review before closing. This is where lenders verify eligibility, cash-flow strength, and documentation quality. Many buyers underestimate how easily an overlooked detail can cause weeks of delay.

At Pioneer Capital Advisory (PCA), we specialize in preparing acquisition financing packages that meet lender expectations from the start. Here are the most common underwriting red flags, and how to prevent them.

1. Incomplete or Inconsistent Financials: The Most Frequent Delay

Lenders rely on clean, reconciled numbers to confirm the business can support new debt. Missing tax returns, mismatched profit and loss statements, or outdated balance sheets often trigger “request for information” loops that stall underwriting.

What lenders look for:

• Three years of business tax returns for the target company
• Year-to-date financials that align with filed returns
• Normalized add-backs clearly explained in writing

PCA reviews every financial statement before submission, ensuring it matches the SBA’s documentation standards in SOP 50 10 8 Section B, Chapter 1 (Credit Standards for 7(a) Loans).

Tip: Keep a single version of financials shared among the seller, buyer, and lender to avoid data conflicts.

2. Weak or Unverified Equity Injection

Underwriters must confirm that the buyer’s required equity injection, typically 10 percent of total project costs, is verifiable and sourced appropriately. Personal cash transfers without documentation, borrowed funds, or pending gifts often halt progress.

What lenders verify:

• Bank statements showing seasoned funds (usually 60 to 90 days)
• Source of funds letters for transfers or partnerships
• Compliance with SBA rules prohibiting borrowed equity unless secured by personal assets

PCA helps clients assemble acceptable verification, organize bank traces, and confirm equity documentation before lender submission.

Typical delay avoided: 2 to 3 weeks of document back and forth.

3. Overly Aggressive Financial Projections

Lenders evaluate the Debt Service Coverage Ratio (DSCR) to determine repayment ability. If projections show sudden jumps in revenue or margin improvements without support, underwriting will pause for clarification.

Best practice: Use realistic assumptions consistent with historical performance and industry benchmarks. PCA models DSCR using conservative cash flow assumptions, ensuring lenders see credible repayment capacity.

Rule of thumb: A DSCR of 1.25x or better is generally expected, though it may vary by lender and deal structure.

4. Buyer Experience That Doesn’t Match the Business

Lenders assess whether the buyer can successfully operate the acquired company. A disconnect between background and industry can raise concerns under SOP 50 10 8 Section A, Chapter 1 (Eligibility) which requires evidence of managerial competence.

Examples that trigger review:

• An IT consultant buying a manufacturing firm
• A first-time operator acquiring a multi-location business
• Passive ownership with limited day-to-day role

PCA mitigates this risk by helping buyers build a management narrative, highlighting transferable skills and post-acquisition support plans.

Tip: Include résumés, letters of intent from key managers, and training agreements with the seller.

5. Ineligible Business Activities or Ownership Structures

Some businesses and ownership scenarios are restricted under SBA regulations. Common issues include:

• Ineligible passive income models such as real estate holding companies without operating activity
• Businesses outside the U.S. or primarily serving foreign markets
• Non-citizen ownership not meeting lawful permanent resident criteria
• Seller retaining control after closing

These issues are covered in SOP 50 10 8 Section A, Chapter 1 and Chapter 2 (Eligibility and Special Transaction Structures).

PCA screens for ineligible activity early, confirming the buyer, entity, and transaction all qualify before lender presentation.

6. Environmental or Real Estate Documentation Gaps

If the acquisition includes real property, environmental and valuation reports must comply with SBA requirements. Missing Phase I Environmental Site Assessments, outdated appraisals, or unaddressed exceptions frequently hold up closing.

Lenders require:

• A current appraisal ordered by the lender
• Environmental reports meeting SBA Appendix 8 standards
• Proof of corrective action when issues are identified

PCA’s pre-closing checklist ensures these items are initiated early so the lender’s final credit memo is not delayed.

7. Seller Notes or Earnouts That Don’t Meet SBA Guidelines

Improperly structured seller financing can create SBA compliance issues. For example, earnouts tied to future performance or seller notes with standby periods shorter than required may disqualify the loan guarantee.

According to SOP 50 10 8 Section B, Chapter 1, seller debt must be on full standby for the life of the SBA loan if counted as part of the equity injection or repayment calculation.

PCA reviews all seller note terms to ensure they meet standby and subordination requirements before submission.

8. Missing Guarantors or Ownership Clarification

Every individual or entity with 20 percent or more ownership must provide a personal guaranty. Lenders must also identify all direct and indirect owners through entity charts. Missing guarantor signatures or unclear ownership structures are frequent red flags.

PCA assists clients in preparing accurate ownership breakdowns and guarantor documentation, aligning with the SBA’s guaranty requirements in SOP 50 10 8 Section A, Chapter 5.

9. Out of Date Corporate or Legal Filings

Expired Certificates of Good Standing, unsigned operating agreements, or outdated business licenses can postpone final approval.

PCA maintains a compliance checklist for each transaction that includes entity formation, tax ID confirmation, and required legal documents. This ensures buyers can respond immediately to lender requests.

10. Slow Communication Between Buyer, Seller, and Lender

Even well-qualified deals can stall when parties do not respond promptly. Underwriting timelines depend on coordination between buyer, seller, accountants, and attorneys.

PCA acts as a central coordinator, managing communication flow and ensuring each stakeholder stays on schedule. Our structured communication model often shortens underwriting by one to two weeks.

Conclusion

Most SBA delays are avoidable with the right preparation and guidance. By anticipating lender questions, confirming eligibility, and verifying documentation upfront, buyers can move from LOI to closing with confidence.

Pioneer Capital Advisory serves as your financing partner throughout this process, packaging your deal for lender review, matching it with the right SBA bank, and managing every step through underwriting.

Ready to make your SBA underwriting smooth and predictable? Connect with PCA to prepare your acquisition for fast, compliant financing.