Factoring 101

SBA 7(a) Eligibility

SBA 7(a) Eligibility

The vast majority of businesses are eligible for financial assistance from the SBA.  Some, however, are not.

Basic eligibility requires that a business must simply:

  • Operate for profit
  • Be engaged in, or propose to do business in, the U.S. or its territories
  • Have reasonable owner equity to invest
  • Use alternative financial resources, including personal assets, before seeking financial assistance

Additional eligibility requirements / limitations are listed below.

SBA 7(a) Eligibility

Most business types meet the basic eligibility requirement for SBA enhanced financing programs so long as they:

  • operate for a profit
  • do business in the United States or its possessions
  • have reasonable owner equity invested or to invest
  • use alternative sources of financing first (including personal assets).

Certain types of businesses have additional requirements  which must be met.  These include medical facilities, franchises, farms, and certain recreational facilities.  Applicants who are currently incarcerated, are on parole or probation, or are a defendant in a criminal proceeding are restricted from receiving financing through the SBA.

Ineligible Businesses

Businesses engaged in illegal activities, loan packaging, multi-sales distribution, gambling, investment or lending, are not eligible for SBA financing.  Such businesses include:

  • Real Estate Investment Companies…where real estate is held for investment purposes
  • Lending Companies…including banks, finance companies, factors, leasing companies, insurance          companies and any other company whose stock in trade is money
  • Pyramid Selling Companies...characterized by endless chains of distributors, sub-distributors, and    down lines.
  • Charitable, Religious, and Non Profit…religious organizations, consumer and marketing cooperative and government owned corporations
  • Casinos and Gambling Activities…and also including race tracks, internet gaming, and similar operations

Special Considerations

Special considerations apply to some types of businesses and individuals.

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 U.S. Commerce Department.

Medical Facilities such as hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided they 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 that 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.

Loans for 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.

Legal 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 or SCORE 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) is currently incarcerated, on parole, or on probation; is a defendant in a criminal proceeding; or 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.

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