The Small Business Administration (SBA) offers financial assistance to a wide range of businesses through its 7a and 504 loan programs. However, it’s essential to understand the eligibility requirements before applying for an SBA loan. Here are the key factors that determine eligibility:
Operating for Profit
To qualify for an SBA loan, businesses must operate for profit. This requirement ensures that the loan funds are used for legitimate business purposes rather than personal endeavors. Non-profits and charities are not eligible.
U.S Based Business
Eligible businesses should be engaged in, or propose to do business in, the United States or its territories (e.g., Guam and Puerto Rico). This criterion ensures that SBA loans support businesses that contribute to the local economy.
Owner Equity
Having reasonable owner equity to invest is another requirement. The SBA expects business owners to have a stake in their ventures, demonstrating their commitment to the business’s success. The owner equity requirements will loosen beginning in August 2023 with new SOPs from the SBA which allow for more liberal use of seller financing and partial buyouts.
Financial Resources
Before seeking financial assistance from the SBA, businesses are expected to exhaust alternative financial resources, including personal assets. This step ensures that SBA loans are utilized as a last resort when other avenues have been explored, so high net worth individuals who could obtain a traditional commercial and industry (C&I) loan would not be eligible for 7a SBA loans.
Ineligible Businesses
While the SBA aims to support a wide range of enterprises, certain businesses are deemed ineligible for loan assistance. Understanding the categories of ineligible businesses can help potential borrowers assess their eligibility accurately. Here are some examples:
Illegal Activities
Businesses engaged in illegal activities, such as drug trafficking or operating establishments facilitating illegal activities, are not eligible for SBA loans. This includes businesses involved in the production, servicing, or distribution of products used for illegal purposes.
Speculative Activities
Speculative activities that generate profits primarily from fluctuations in price, rather than regular trade, are ineligible. Examples include wildcatting for oil and dealing in commodities futures, unless such activities are integral to the regular operations of the business.
Rare Coins and Stamps
Dealers of rare coins and stamps are not eligible for SBA loans. This category of businesses typically involves specialized trading and collecting, which falls outside the scope of SBA loan programs.
Lending Institutions
Firms primarily engaged in lending activities, such as banks, finance companies, factors, leasing companies, and insurance companies (excluding agents), are ineligible. Since their core business revolves around financial services, these institutions do not qualify for SBA loan assistance.
Pyramid Sales Plans
Businesses operating pyramid sales plans, where participants’ incentives rely on sales made by an ever-increasing number of participants, are ineligible. Such schemes often revolve around products like cosmetics, household goods, and other soft goods.
Gambling Activities
Businesses whose principal activity is gambling, including racetracks and casinos, are ineligible for SBA loans. However, if an otherwise eligible business generates less than one-third of its annual gross income from state lottery sales or legal gambling activities supervised by state authorities, they may still be considered for loans.
Non-profits and Charitable and Religious Organizations
Charitable, religious, non-profit, government-owned corporations, consumer and marketing cooperatives, churches, and organizations promoting religious objectives are not eligible for SBA loans. These entities typically operate with a different set of funding and support mechanisms.
Top Ineligible Business Inquiries at SBALenders.com
While the SBA provides clear guidelines on ineligible businesses, certain inquiries frequently arise on platforms like SBALenders.com. Understanding these common inquiries can shed light on additional restrictions borrowers may face. Here are the most common ineligible SBA loan inquires we see:
- Passive Income Businesses: Businesses focused on generating passive income, such as those involved in purchasing apartments or rental real estate, often inquire about SBA loan eligibility. However, these types of businesses do not meet the SBA’s criteria, as the loan programs are intended to support active businesses.
- Leasing or Finance Companies: Another common inquiry pertains to leasing or finance companies seeking SBA loans. Unfortunately, businesses predominantly engaged in these activities are ineligible due to the nature of their operations.
- Venture Capital or Private Investor Consortiums: Businesses created for the sole purpose of making investments in other businesses are not eligible. We are frequently approached by general partners of special purpose vehicles looking to leverage equity by their limited partners to make investments in other business.
Additional Restrictions Imposed by SBA Lenders
In addition to the SBA’s set criteria for ineligible businesses, it’s important to recognize that SBA banks may impose further restrictions based on the industries they choose to lend to. For example, many SBA lenders refrain from providing loans for speculative home building projects. Also, some lenders avoid select industries from time to time. For example, Live Oak Bank, the nation’s #1 SBA lender, is not currently lending for hotels. Borrowers should be aware of these additional restrictions when seeking SBA loan assistance. Our Find a Lender tool helps match borrowers with SBA lenders actively investing in their industries.