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SBA 7(a) and 504 Loan Changes - Beneficial Ownership Requirements

Key Takeaways

• As of March 2025, 100% of beneficial owners must be US Citizens, US Nationals, or Green Card holders for SBA 7(a) and 504 loans
• Banks must certify full compliance, and the SBA can deny loan guarantees retroactively if requirements aren't met
• Gray areas exist around pseudo-equity arrangements and trusts, but expect banks to interpret these conservatively

Effective March 7th, 2025, the SBA updated their loan policies for two of their most common loan programs: 7(a) and 504. These changes prohibit most foreign nationals from holding equity in deals financed through these SBA programs. We've seen these changes cause deals to fail at the eleventh hour and cause confusion across the search ecosystem. This article aims to clarify the changes and help searchers build cap tables that won't fail at the financing hurdle. Disclaimer - we are not lawyers and this article isn't legal advice. The original policy notice can be found here and is an implementation of Executive Order 14159.

TL;DR: Non-US persons cannot own equity in SBA-backed deals, but there are gray areas.

How the SBA Enforces Beneficial Ownership Compliance

The Loan Guarantee Structure

The SBA itself does not issue loans; instead, SBA lenders (banks, private lenders, etc.) are tasked with evaluating the merits of each loan, issuing it, and providing ongoing servicing. If a loan conforms to the SBA's requirements, benefits are conveyed to the SBA lender: a government guarantee for a significant portion of the principal. This guarantee reduces the risk the lender assumes and, in turn, lowers the rate paid by the borrower.

The Trust But Verify Process

A key feature of the SBA's process is a "trust but verify" approach. There are different types of SBA lenders, each with different levels of trust. However, regardless of the lender type, the SBA has the authority to deny the loan guarantee, even after the loan has been approved, if it determines that the lender did not follow the required policies. In the SBA's own words:

The conditional guaranty covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender.

Let's walk through a fictional example:

1. SBA procedures require the bank to run a credit check on a borrower.
2. The bank issues an SBA-approved loan without conducting a credit check.
3. The borrower defaults.
4. The bank tries, but fails, to recover losses from both the business and the personal guarantee.
5. To further recover losses, the bank requests the SBA to cover the SBA guaranteed portion of the principal.
6. As part of reviewing the bank's request, the SBA asks for evidence of the credit check.
7. The bank failed to perform this credit check and therefore cannot produce this evidence.
8. Since the bank did not follow required procedure, the SBA does not fulfill the guarantee.
9. The bank is left with the full loss of principal.

While the bank's actions are unrealistically reckless in this example, it highlights why banks are diligent in following the SBA's policies to the letter.

What Changed in March 2025

The SBA's policy update stated that for a business receiving a 7(a) loan, 100% of the beneficial owners must be eligible persons. An eligible person is defined as a U.S. Citizen, U.S. National or Lawful Permanent Resident (Green Card Holder). The SBA Lenders must both:

• Submit to the SBA at least 81% of the beneficial owners
• Certify that 100% of the beneficial owners are eligible persons

Why can't you have 1% owned by an overseas investor? This is due to the "certify 100%" requirement in combination with the "trust but verify" process. Even though the bank does not need to submit 100% ownership accounting to the SBA, they are required to certify that the business is 100% owned by eligible persons. Even though the loan is approved, if it subsequently defaults, the SBA could request evidence of 100% eligible beneficial ownership and deny the loan guarantee. Banks are risk-averse, and our expectation is that they would not take this risk.

What Counts as Beneficial Ownership Under SBA Rules

In general, a beneficial owner is a natural person (not an entity) that ultimately owns or controls an entity. Beneficial ownership can have different definitions depending on the context. For example, the United States definition is differs significantly from the United Kingdom definition.

The SBA actually specifies their definition of a beneficial owner:

A Person who owns a concern directly or indirectly through another entity. For example, if Jane Doe owns 100% of Jane Doe, Inc., and Jane Doe, Inc., owns 50% of the Applicant, Jane Doe is the beneficial owner of 50% of the Applicant.

Gray Areas in the New Requirements

Pseudo-Equity Arrangements

Profit-sharing agreements, sale-leaseback arrangements, creative debt structures, and post-financing transactions may not technically constitute equity, but banks may interpret economic interests that function like ownership as beneficial ownership. Expect conservative interpretations from lenders in these areas.

Trusts and Trustee Status

When a trust holds equity in a business seeking SBA financing, the question becomes whether the trustee or the beneficiary—or both—is considered a beneficial owner. The SBA's definition focuses on who ultimately 'owns or controls' the entity, and banks may take the broadest reasonable interpretation of this.

It's up to the bank as to how they interpret such agreements in light of the SBA's definition. We expect banks to err on the side of caution, therefore we would avoid structuring deals in this way. This may change if the SBA provides further clarification or a precedent is set.

For information on how this analysis was produced, see Jamestown Capital's Research Methodology.