Under SOP 50 10 8.1, an SBA 7(a) lender must obtain an independent quality of earnings (QoE) report with a cash proof before closing an Initial Acquisition or Business Expansion loan when the business purchase price is $3,000,000 or more. The requirement applies to loans that receive an SBA loan number on or after October 1, 2026. The lender, not the borrower or the seller, engages the QoE provider, and the lender must use the earnings from that report in its debt service coverage calculation.
The requirement lives in Appendix 15 of SOP 50 10 8.1, the SBA's standard operating procedure for 7(a) and 504 lending. It is triggered by two conditions that must both be true:
Owner buyouts (one existing owner buying out another) and ESOP or cooperative transactions are exempt. Loans under the $3,000,000 purchase price threshold are not covered, although a lender can still choose to require a QoE or a cash proof as a matter of its own credit policy.
The threshold is measured on the purchase price of the business, not the loan amount. A $3.2 million acquisition financed with a $2.5 million 7(a) loan, a seller note, and the buyer's equity injection is covered.
Appendix 15 sets out the minimum content. In plain terms, the report must include:
The SOP also requires the analysis to reconcile four sources to one earnings figure: the accountant prepared financial statements, the filed tax returns, the internal financial statements, and the IRS transcript data the lender obtains (Form 4506-C). And it names the adjustment categories the normalized earnings must address: non recurring revenue or expenses, above or below market owner compensation, related party transactions restated to arm's length, deferred maintenance and capital expenditures, and differences between cash basis and accrual basis accounting. In practice that last item means converting cash basis books to an accrual basis for receivables, payables, prepaid expenses, accrued payroll, inventory, and deferred revenue.
The report is written for the lender. The lender must use the earnings figure from the QoE, not the seller's or the broker's adjusted EBITDA, when it calculates debt service coverage. Under the SOP, Initial Acquisition loans require debt service coverage of at least 1.25x and Business Expansion loans at least 1.15x.
The SOP requires an independent, experienced financial professional engaged by the lender and working for the benefit of the lender. Three consequences follow:
Under Preferred Lenders Program (PLP) authority, the lender must have retained the QoE provider and have an engagement letter in place when the SBA loan number is issued. The report itself is completed before closing. In practice that means the lender should engage the provider as soon as the letter of intent is signed and the purchase price is known, so that the report does not become the last item holding up a closing.
The lender engages the provider, but Appendix 15 allows the cost of financial due diligence to be passed to the borrower, financed with loan proceeds, and counted toward the borrower's equity injection. Most lenders pass the fee through to the borrower at closing.
The QoE does not replace the independent business valuation the SOP already requires on change of ownership loans. Both are required. The valuation supports the purchase price; the QoE tests whether the earnings behind that price are real, recurring, and supported by cash.
A well built lender QoE answers these five items on its first page so that a credit officer or an SBA reviewer does not have to reconstruct them from the body of the report.
Change of ownership loans are the fastest growing segment of the 7(a) program and the one where losses concentrate when a business turns out to earn less than the seller represented. A cash proof is the single procedure most likely to catch unreported deposits, personal spending in the ledger, and earnings that exist only on paper. Requiring it on larger acquisitions, and requiring that the lender rather than the borrower control the engagement, is intended to protect both the lender and the SBA guaranty.
The threshold is the business purchase price. Where real estate is acquired in the same transaction, lenders should apply the SBA's allocation rules and their own credit policy; when in doubt, obtain the report.
The engagement must be in place at loan number under PLP authority. The report is delivered before closing.
The clock in a well drafted engagement letter starts when the seller's documents are complete. Lenders should ask their provider to request documents directly from the seller and the seller's accountant and to copy the lender on status.
Most providers quote three to four weeks from complete information. Credex Advisors delivers in ten business days from complete seller documents, five on an expedited basis.
Credex Advisors publishes fixed fees by purchase price tier, starting at $12,500 for purchase prices from $3.0 million to $4.0 million. See the pricing page.