The SBA 7(A) Loan Guaranty Program - Eligibility

Eligibility is generally determined by four factors:

1. Type of Business:

   The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and, use alternative financial resources first including personal assets. It should be noted that some businesses are ineligible for financial assistance.

2. Size of Business:

   The Small Business Act defines an eligible small business as one that is independently owned and operated and not dominant in its field of operation. The Act also states that in determining what is a small business, the definition shall vary from industry to industry to adequately reflect industry differences. The SBA has therefore developed size standards that define the maximum size of an eligible small business.

   If a potential borrower is close to these standards, size eligibility should be discussed with the local SBA office. Also note that the standards for a particular business may change from time to time and some exceptions do apply.

   When affiliations exist with other companies (for example, through common ownership, directorships, or by contractual arrangements), the primary business activity must be determined both for the applicant business as well as for the entire affiliated group. In order to be eligible for financial consideration, the applicant must meet the size standard for its primary business activity and the affiliated group must meet the standard for its primary business activity.

3. Use of Loan Funds

   The proceeds of SBA loans can be used for most business purposes. These may include the purchase of real estate to house the business operations; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery, and equipment; purchase of inventory; and, working capital.

   Proceeds of an SBA Loan cannot be used for:

   • to finance floor plan needs;
   • to purchase real estate where the participant has issued a forward commitment to the builder/developer, or where the real estate will be held primarily for investment purposes;
   • to make payments to owners or pay delinquent withholding taxes;
   • to pay existing debt unless it can be shown that the refinancing will benefit the small business and that the need to refinance is not indicative of imprudent management. (Proceeds can never be used to reduce the exposure of the participant in the loans being refinanced.)

4. Special Circumstances

   Certain other considerations apply to the types of businesses and applicants eligible for SBA loan programs.

   • Franchises are eligible except in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.
   • Recreational Facilities and Clubs are eligible provided: (a) the facilities are open to the general public, or (b) in membership only situations, membership is not selectively denied to any particular group of individuals and the number of memberships is not restricted either as a whole or by establishing maximum limits for particular groups.
   • Farms and Agricultural Businesses are eligible; however, these applicants should first explore the Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA.
   • Fishing Vessels are eligible; however, those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service (NMFS), a part of the Department of Commerce.
   • Medical Facilities. Hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided hey are licensed by the appropriate government agency and services rendered go beyond those of room and board.
   • An Eligible Passive Company (EPC) is a small entity which does not engage in regular and continuous business activity. An EPC must use loan proceeds to acquire or lease, and/or improve or renovate real or personal property that it leases to one or more Operating Companies for conducting the Operating Company's business. The EPC must comply with the conditions set forth in 13 CFR Sec 120.111.
   • Change of Ownership. Loans for this purpose are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the sound development of the business or, perhaps, in preserving its existence. Loans cannot be made when proceeds would enable a borrower to purchase: (a) part of a business in which it has no present interest or (b) part of an interest of a present and continuing owner. Loans to effect a change of ownership among members of the same family are discouraged.
   • Aliens are eligible; however, consideration is given to the type of status possessed, e.g., resident, lawful temporary resident, etc. in determining the degree of risk relating to the continuity of the applicant's business. Excessive risk may be offset by full collateralization. The various types of visas may be discussed in more detail with the local SBA office.
   • Probation or Parole. Applications will not be accepted from firms where a principal (any one of those required to submit a personal history statement, SBA Form 912): 1) is currently incarcerated, on parole, or on probation; 2) is a defendant in a criminal proceeding; or 3) whose probation or parole is lifted expressly because it prohibits an SBA loan. This restriction would not necessarily preclude a loan to a business, where a principal had responded in the affirmative to any one of the questions on the Statement of Personal History. These judgments are made on a case by case evaluation of the nature, frequency, and timing of the offenses. Fingerprint cards (available from the local SBA office) are required any time a question on the form is answered in the affirmative.

Information courtesy of the Small Business Administration.