A complete guide to SBA borrower eligibility

SBA Borrower Eligibility is the set of requirements a business (and its owners/guarantors) must meet to qualify for an SBA-backed loan. SBA eligibility is governed by federal regulations (notably 13 CFR Part 120 and 13 CFR Part 121) and implemented through SBA’s SOP 50 10 (loan origination policies for 7(a) and 504), plus periodic updates via SBA procedural/policy notices.

This guide summarizes the most important eligibility criteria and the most common disqualifications for small business owners evaluating SBA financing.

Borrower Eligibility (the baseline SBA checklist)

Under SBA’s core eligibility regulation, a small business applicant must:

• Be an operating business (with a key exception for Eligible Passive Companies)
• Be organized for profit
• Be located in the United States
• Be small under SBA size rules (including affiliates)
• Demonstrate a need for the desired credit (including the SBA “credit elsewhere” concept)

SBA’s 7(a) guidance mirrors these fundamentals and adds that the business must be creditworthy and demonstrate ability to repay, and must not be able to obtain credit on reasonable terms elsewhere.

Citizenship, residency, and ownership rules (most recent SBA notice)

Policy Notice 5000-876441 (effective March 1, 2026)

SBA issued Policy Notice 5000-876441 (published February 2, 2026, effective March 1, 2026) to revise SOP 50 10 8 citizenship and residency guidance.

Who must meet citizenship/residency requirements (starting March 1, 2026)?

Per the notice, SBA now requires:

• 100% of all direct and/or indirect owners of a small business applicant must be U.S. Citizens or U.S. Nationals, and
• those owners must have their Principal Residence in the United States, its territories, or possessions.

Major change: LPRs are no longer eligible owners (including OC/EPC)

Beginning March 1, 2026, the notice states Legal Permanent Residents (LPRs) are not eligible to own any percentage interest in an Applicant/Borrower, Operating Company (OC), or Eligible Passive Company (EPC).

The “5% foreign ownership exception” is removed

The notice rescinds Procedural Notice 5000-872050, and explicitly removes the prior narrow exception that allowed up to 5% ownership by certain non-qualifying owners.

Practical impact: If any direct or indirect ownership includes a non-qualifying owner, it can disqualify the borrower as of March 1, 2026—so cap tables and ownership chains matter more than ever.

Assess: Size standards (what counts as “small”)

SBA size standards determine whether a business is “small” and eligible for SBA programs, and they are generally tied to NAICS industries (employees or receipts depending on the industry).

Two key takeaways:

• Size is often measured with affiliates, not just the single operating entity.
• Your NAICS classification matters because it drives the applicable size standard.

Assess: Credit elsewhere (the SBA “need” test)

SBA does not provide loan assistance if the borrower can get the desired credit on reasonable terms from non-government sources. SBA’s regulation states assistance is only for applicants for whom the desired credit is not otherwise available on reasonable terms from non-federal sources.

This is why SBA loans are commonly used when:

• Conventional lenders require more collateral than the borrower has,
• The needed term is longer than the bank will offer conventionally, or
• The deal structure (acquisition/startup/industry risk) doesn’t fit conventional credit boxes.

Assess: Ineligible businesses and common disqualifications (13 CFR 120.110)

Even if you’re small, for-profit, and U.S.-based, you can still be ineligible based on business type or structure. SBA’s ineligible business list includes (high-impact examples):

• Non-profits (for-profit subsidiaries may be eligible)
• Financial businesses primarily engaged in lending
• Passive businesses owned by developers/landlords that do not actively use/occupy the financed assets (except Eligible Passive Companies)
• Businesses located in a foreign country
• Pyramid sale plans
• Businesses deriving > 1/3 of revenue from legal gambling
• Businesses engaged in activity illegal under federal/state/local law
• Certain prurient sexual nature businesses
• Businesses with an associate who is currently incarcerated or under indictment for certain crimes involving financial misconduct/false statements
• Businesses that have previously defaulted on federal/federally assisted financing causing a loss (unless SBA waives for good cause)
• Businesses primarily engaged in political or lobbying activities
• Speculative businesses (e.g., oil wildcatting)

Eligible Passive Company (EPC) exception (real estate holding company structures)

SBA’s core eligibility rule explicitly notes that an applicant must be an operating business except for loans to Eligible Passive Companies.

This is the regulatory foundation behind common SBA real estate structures (e.g., an EPC holding title to owner-occupied property leased to the operating company), when structured within SBA requirements.

Important update: Under the March 1, 2026 policy notice, LPRs cannot own any percentage interest in an EPC (or OC or Applicant/Borrower).

What to watch from SOP 50 10 and procedural/policy notices

SBA’s current loan origination SOP for 7(a) and 504 is SOP 50 10 Version 8, effective June 1, 2025.

SBA also issued notices that amend or clarify SOP 50 10 8, including:

• Procedural Notice 5000-872764 (effective September 30, 2025) with updates for 7(a) and 504, including changes to the definition of New Business and related guidance.
• Policy Notice 5000-876441 (effective March 1, 2026) updating citizenship and residency requirements and rescinding PN 5000-872050.

If you’re preparing an application today, these SOP + notice changes matter because they impact what lenders must document and what can disqualify a borrower at underwriting.

How to self-assess Borrower Eligibility before you apply

Here’s a practical “pre-check” sequence most borrowers can run:

1. Confirm basic eligibility: for-profit, operating, U.S.-based, small under SBA size rules
2. Screen for ineligible business types under 13 CFR 120.110
3. Review ownership/citizenship/residency against the newest SBA notice (effective March 1, 2026) — confirm 100% U.S. Citizen/U.S. National ownership + U.S. principal residence, and ensure no LPR ownership in Applicant/Borrower, OC, or EPC
4. Prepare “credit elsewhere” rationale (why SBA is needed vs conventional)
5. Get lender-aligned early: SBA lenders vary in appetite by industry, structure, and documentation expectations

SBARates.com tip: Use SBARates.com to identify active SBA lenders by program and industry so you’re speaking to lenders who routinely underwrite your type of request (7(a) working capital vs acquisition vs owner-occupied real estate).

Frequently Asked Questions about Borrower Eligibility (SBA Loans)