Best Practices: SBA Loan Program Eligibility – Key Points for SBA Lenders

The U.S. Small Business Administration (“SBA”) has strict eligibility standards for its 7(a) and 504 loan programs.  In the current SOP 50 10 (8), the SBA removed the concepts found in SOP 50 10 7.1 that (i) basic SBA eligibility would be determined by SBA through submission of certain information into E-Tran, and (ii) lenders could rely on an Applicant certification of its own eligibility.  Instead, SBA reverted to its prior standards, placing responsibility for determining Applicant eligibility on the SBA Lender.  SBA reiterated that determining SBA eligibility is a critical first step in the SBA financing process. SBA lender licenses play a key role in how institutions participate in government-backed loan programs and support small business financing.

For both 7(a) and 504 loans, the Applicant and Project must meet all Loan Program Requirements, defined in 13 CFR § 120.10, including:

• Statutes and SBA regulations;
• Government-wide regulations;
• SBA Lender or CDC agreements with SBA;
• SBA Standard Operating Procedures (SOPs);
• Federal Register notices and official SBA notices;
• Applicable SBA forms;
• E-Tran Terms and Conditions (as revised); and
• For CDCs: Requirements tied to Debentures under 13 CFR §120.802.

The Applicant must meet all Core Eligibility Criteria outlined in 13 CFR § 120.100 (i) at the time of application and (ii) throughout loan closing and disbursement.  The Core Eligibility Criteria is defined as the following:

• Operating Business – Must actively conduct business (except certain Eligible Passive Companies).
• For-Profit Status – Must be organized for profit. For-profit subsidiaries of non-profits may qualify, but loan proceeds must benefit the for-profit entity.
• U.S. Location – Must be based, organized, and operating primarily in the United States or its territories. International operations are allowed only if loan proceeds benefit the U.S. entity.
• Small Under SBA Standards – Must meet size standards by industry or alternative limits as summarize below:
  • Tangible net worth ≤ $20,000,000
  • Average net income (past 2 years) ≤ $6,500,000
  • 25% higher limits in labor surplus areas.
• Affiliation Rules – SBA may consider related entities or ownership interests when determining size.

In SOP 50 10 (8), SBA also outlines certain types of business that are not eligible for SBA financing as follows:

• Non-Profits (except certain subsidiaries).
• Financial Businesses primarily engaged in lending, investing, or money services (with limited exceptions).
• Passive Businesses like landlords or developers not actively operating.
• Businesses Outside the U.S.
• Gambling Enterprises deriving more than one-third of revenue from gambling.
• Illegal Activities under federal, state, or local law (including marijuana-related businesses).
• Discriminatory Practices restricting customers or hiring unlawfully.
• Government-Owned Entities (with certain tribal business exceptions).
• Loan Packagers, including Lender Service Providers.
• Businesses with an Associate who is currently incarcerated or is under indictment for a felony or any crime involving or relating to financial misconduct or a false statement.
• Businesses with prior Federal loan losses or delinquent Federal debt.
• Political or Lobbying Organizations generating over 50% of revenue from such activities.
• Speculative ventures, including market price speculation or R&D projects.
• Businesses located within the Coastal Barrier Resource System.

Key Compliance Notes

While the Core Eligibility Criteria outlined above are critical to determining eligibility, analysis of SBA eligibility does not end there. When there are questions about eligibility or collateral, lenders can protect their interests by following legal advice on SBA creditor rights protection. There are multiple other keys factors to consider when determining whether a small business is eligible for SBA financing, such as:

• Applicants may not be owned by Non-U.S. Citizens.
• SBA Lenders must check the Credit Alert Verification Reporting System (CAIVRS) for prior federal loan losses or delinquent debts.
• Certain business models (e.g., hotels, assisted living, personal services) may be eligible if they meet operational and revenue requirements.
• Management agreements giving full operational control to a third party can make a business ineligible unless specific oversight conditions are met.
• Franchise businesses must be listed on the SBA Franchise Directory.
• Applicants must demonstrate that they do not have the ability to request some or all of the loan funds on reasonable terms from a non-Federal, non-State or non-local government source.

In determining eligibility, SBA Lenders may request and gather information about an Applicant, such as: (i) marital status, (ii) sources of personal income, (iii) alimony and child support, and (iv) spouse’s financial resources.  SBA Lenders may also obtain an obligor’s spouse’s signature when (x) required by federal or state law, (y) needed to obtain a valid lien on collateral and (z) necessary to protect SBA and SBA Lender interests. Further, SBA Lenders must comply with Department of the Treasury regulations for Customer Identification Programs (CIP) and must determine that the Applicant and its owners are not listed on the OFAC sanctions lists at the time of application.

Even with careful vetting, SBA eligibility issues may arise for Applicants throughout the closing and funding process.  SBA Lenders must keep SBA eligibility in front of mind as failure to meet SBA eligibility may result in denial of the SBA Guaranty.  For any questions regarding determining SBA eligibility, please reach out to Kim Rayer at krayer@starfieldsmith.com.