June 7, 2017

Best Practices: Evaluating the Eligibility of Religious Small Business Applicants

by Laura P. Amato

While the vast majority of small businesses are eligible for loans through the U.S. Small Business Administration (“SBA”) 7a guaranteed loan program, a business may be ineligible because its activities or purpose is illegal, unconstitutional, or violates public policy. Under the SBA’s regulations and Standard Operating Procedures (“SOP”), a lender must determine if the business of an SBA loan applicant (“Applicant”) falls within one of the SOP’s ineligible business categories.

A type of ineligible business is one that is “…principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs, whether in a religious or secular setting” (13 C.F.R. 120.110 (k)). This eligibility rule is consistent with the First Amendment of the United States Constitution, which prohibits the government from establishing, promoting, or favoring one religion over another, or non-religion over religion.

The SOP states that a business is not ineligible “merely because it offers religious books, music, ceremonial items and other religious articles for sale.” Thus, a bookstore that sells copies of the Quran among a variety of other titles, or a jewelry business that offers rosaries along with engagement rings, is not necessarily ineligible because a religious product represents a small portion of its overall business.

The SBA has established a process for lenders evaluating the eligibility of an Applicant that may be connected, associated, or affiliated with a religious organization or may have a religious component to its business. Pursuant to the SOP:

• A lender acting with delegated authority must complete a “Religious Eligibility Worksheet” on SBA Form 1971, which can be found at Appendix 9 of SOP 50 10 5(I). Any such lender must retain in the loan file the worksheet and all information obtained during the lender’s religious eligibility evaluation. The lender must be prepared to submit both Form 1971 and all supporting information to the SBA with any request for a guaranty purchase.

• A lender acting with non-delegated authority must submit the same information, along with the loan application, to the SBA Loan Guaranty Processing Center (“LGPC”) for review by SBA Center Counsel. If SBA Center Counsel recommends that the Applicant is ineligible because of a religious aspect of its business, the matter must be referred to the Associate General Counsel for Litigation for a decision. If Center Counsel finds the Small Business Applicant eligible for financial assistance, the LGPC will notify the lender of such a decisions.

Lenders, whether acting with delegated or non-delegated authority, are advised to use caution in ascertaining the nature, purpose, and activities of any Applicant and its business. In particular, a lender should carefully and precisely document how it evaluated a business with a religious component or affiliation, because the SBA will not guarantee a loan that was made to an ineligible business. For more information regarding eligibility, contact Laura at (215) 390-1061 or at