SBA SOP 50 10 8.1, A.Ch1.E — Types of Ineligible Businesses

SOP 50 10 8.1 A.Ch1.E

Effective 2026-10-01 · publisher's stamp for this provision

E. Types of Ineligible Businesses The SBA Lender must determine whether the Applicant is one of the types of businesses listed as ineligible (13 CFR § 120.110). Certain business types appearing on this list may be eligible under limited circumstances, as discussed below. 1. Non-profit businesses are ineligible (for-profit subsidiaries may be eligible). 13 CFR § 120.110(a) 2. Businesses Engaged in Lending 13 CFR § 120.110 (b). a. SBA cannot guarantee a loan that provides funds to businesses primarily engaged in lending, investment, or to an otherwise eligible business engaged in financing, factoring, or investment not related or essential to the business. This prohibits SBA Loans to: i. Banks; ii. Life Insurance Companies (but not independent agents); iii. Finance Companies; iv. Factoring Companies; v. Investment Companies; vi. Bail Bond Companies; and vii. Other businesses whose stock in trade is money. b. Certain businesses engaged in lending may be eligible under limited circumstances: i. A pawn shop is eligible if more than 50 percent of prior year revenue is from merchandise sales rather than interest on loans. ii. A business that provides financing in the regular course of its business (such as a business that finances credit sales) is eligible, if less than 50 percent of its revenue is from financing its sales. iii. A mortgage servicing company that disburses loans and sells them within 14 calendar days of loan closing is eligible. Mortgage companies primarily engaged in the business of servicing loans are eligible. Mortgage companies that make loans and hold them in their portfolio are not eligible. iv. A check cashing business is eligible if it receives more than 50% of its revenue from the service of cashing checks. v. A business engaged in providing the services of a financial advisor on a fee basis is eligible, provided they do not use loan proceeds to invest in their own portfolio of investments. 3. Passive Businesses 13 CFR § 120.110(c): a. Businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds are not eligible, except Eligible Passive Companies under 13 CFR § 120.111. b. Businesses primarily engaged in subdividing real property into lots and developing it for resale on its own account are not eligible. c. Businesses that are primarily engaged in owning or purchasing real estate and leasing it for any purpose are not eligible. i. Shopping centers, office suites (aka salon suites), ghost kitchens, and similar business models that generate income by renting space to accommodate independent businesses that provide services directly to the public are not eligible unless all of the following apply: a) The revenue is earned through membership dues (not rent); and b) The business’s customers do not have an assigned space that they know they can return to each time they visit (i.e., customers do not get an office with a lockable door or a particular kitchen setup and the space cannot be personalized); and c) The business is responsible for upkeep and maintenance and is supplying the equipment necessary for a fully functioning office/kitchen where customers can drop in and begin working. It is acceptable for customers to bring their own tools with them (e.g., kitchen knives). ii. A business is either fully eligible or fully ineligible. If a business has a combined model (part of the revenue is from rent and part from membership dues or they provide for options where there is an assigned space model), it is not eligible. d. Businesses that lease land for the installation of a cell phone tower, solar panels, billboards, or wind turbine also are not eligible. However, the business operating the cell phone tower, solar panel, billboard, or wind turbine is eligible. e. EV-charging stations and businesses structured as a stand-alone asset operated on a passive basis are not eligible. f. Businesses that have entered into a management agreement with a third party that gives the management company sole discretion over the business operations are ineligible passive businesses. However, if the management company does not have sole discretion to manage the operations of the business and the Applicant exercises meaningful oversight of the business, the Applicant is eligible. “Meaningful oversight” by the Applicant means involvement in the decisions made concerning the operation of the business, which include a management agreement that provides for the Applicant to do all of the following: i. Approve the annual operating budget; ii. Approve any capital expenditures or operating expenses over a significant dollar threshold; iii. Have control over the bank accounts; and iv. Have oversight over the employees operating the business (who must be employees of the Applicant). Regardless of whether processing the loan under delegated or non-delegated procedures, unless the management agreement is part of the franchise disclosure documents (FDD) for a brand listed on the Franchise Directory, SBA Lenders must review these agreements to determine whether the agreement makes the Applicant an ineligible passive business. Note: Businesses that have entered into an agreement for control (including a side agreement) that gives a non-guarantor owner/investor control of the business are ineligible. g. Apartment buildings and mobile home parks are not eligible. h. Residential facilities that are not licensed as nursing homes or assisted living facilities and do not provide healthcare and/or medical services are not eligible. i. Businesses that provide a leveled model where the small business owner relies on the services of a middle level operator (e.g., cleaning service models) and do not have ownership of the contracts that support the business operation are not eligible. j. The limited circumstances under which certain businesses engaged in renting or leasing may be eligible are as follows: i. Hotels, motels, recreational vehicle parks, marinas, campgrounds, or similar types of businesses are eligible if more than 50% of the business’s revenue for the prior year is derived from transients who stay for 30 days or less at a time and the business complies with all zoning and other legal requirements. If the Applicant is a Start-Up Business, the Applicant’s projections must show that more than 50% of the business’s revenue will be derived from transients who stay for 30 days or less at a time. Rentals of residential or commercial space, whether through an internet platform that connects travelers with hosts or whether reservations are made directly with the owner, must be in compliance with all local laws and regulations, including zoning codes, and homeowners’ or condominium associations’ rules. ii. Businesses that are licensed as nursing homes, assisted living facilities, or state-licensed equivalents, and provide healthcare and/or medical services are eligible. Healthcare and/or medical services include but are not limited to services such as wellness checks, monitoring and/or helping take medications, monitoring blood sugar levels, and having medical staff onsite (even on a part-time basis). The SBA Lender must consider the terms of the license under which the business operates or will operate when determining eligibility. iii. Businesses that offer services which require professional licenses to operate are eligible, provided that the ownership structure meets all applicable state requirements in which they are located. If the business is under a franchise agreement, the business must meet all applicable franchise requirements. The Lender must document the eligibility of the business and ownership structure, per state requirements, in the loan file (e.g., medspas). iv. Businesses that are engaged in leasing equipment, household goods or other items are eligible. (See Subparagraph E.2. above regarding the eligibility of businesses engaged in lending.) v. Businesses such as barber shops, hair salons, nail salons, and similar types of personal services businesses are eligible, regardless of whether they have employees or contract with individuals to provide the services that the business is providing directly to the public. (See subparagraphs a) and c) above regarding ineligibility of developers and landlords.) k. An ineligible business cannot obtain an SBA Loan for any purpose, including the purchase or construction of a building for its own use. 4. Life insurance carriers are not eligible. 13 CFR § 120.110(d) 5. Businesses located in a foreign country are not eligible. (See Paragraph F below for additional restrictions on Borrower ownership). 13 CFR § 120.110 (e) 6. Businesses using pyramid or multilevel sales distribution plans are not eligible. 13 CFR § 120.110(f) 7. Businesses that obtain more than one-third of their annual gross revenue for the prior year, including rental income, from legal gambling activities are not eligible. 13 CFR § 120.110(g) a. If the purpose of the business is gambling, such as a pari-mutuel betting racetrack, a gambling casino, or skill games (e.g. video poker) the business is not eligible, regardless of the percentage of gross revenue derived from gambling. b. Circumstances exist in which businesses engaged in legal gambling activities may be eligible, including if the Applicant obtains one-third or less of their annual gross revenue, including rental income from: i. Commissions from official State lottery ticket sales under a State license; or ii. Gambling activities licensed and supervised by a state authority in those states where the activities are legal. 8. Businesses that are engaged in any activity that is illegal under federal, state, or local law are not eligible. 13 CFR § 120.110 (h) a. Applicants that are engaged in illegal activity under federal, state, or local law are not eligible. This includes Applicants who make, sell, service, distribute, or promote products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the Applicant’s intended market. If the business sells products made from hemp or CBD or devices associated with consuming marijuana, the SBA Lender is responsible for obtaining from the Applicant documentation sufficient to demonstrate that the products sold by the business are not illegal under federal, state, or local laws. b. Marijuana: Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities may be ineligible for SBA financial assistance. The nature of the business’s specific operations determines whether a business is eligible. The following businesses are ineligible: a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This also includes businesses that sell smoking devices, pipes, bongs, inhalants, or other products if the products are primarily intended or designed for marijuana use or if the business markets the products for such use. This applies to recreational use and medical use even if the business is legal under local or state law where the Applicant is or will be located. c. Hemp: Consistent with the Agriculture Improvement Act of 2018 (Public Law No. 115-334), a business that grows, produces, processes, distributes or sells products made from hemp is eligible only if the hemp meets the definition in section 297A of the Agricultural Marketing Act of 1946 and any applicable state definition of hemp. (It is important to note that some states define hemp as having a lower level of THC than the federal definition.) The SBA Lender is responsible for obtaining from the Applicant documentation sufficient to demonstrate that the hemp meets the applicable definitions. In addition, for Applicants who will be growing, producing, and/or processing hemp, the SBA Lender is responsible for obtaining from the Applicant documentation of the testing protocols the business will follow to ensure that the hemp and any product(s) they extract or produce from it continue to meet the applicable definitions. d. Cannabidiol (CBD): The factors to be considered in determining the eligibility of CBD-related businesses include, but are not limited to, the following: i. Where the CBD is derived from (whether from hemp or marijuana); ii. What types of products are being produced and/or sold (e.g., topical products or products to be ingested). Based on FDA guidance, it is illegal under the Food, Drug, & Cosmetic Act to add CBD to any food (human or animal), any dietary supplements, and certain cosmetics because cannabidiol is the active ingredient of an FDA-approved drug and has not been approved for other use. Please refer to FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD); iii. What health claims, if any, are being made about the product(s); and iv. Whether all products being produced and/or sold comply with all applicable federal, state, and local laws and regulations, including those issued by the FDA. v. The SBA Lender is responsible for obtaining from the Applicant documentation sufficient to demonstrate that the products containing CBD being sold by the Applicant comply with all applicable federal, state, and local laws and regulations, including necessary certificates of lab analysis. 9. Businesses that restrict patronage for any reason other than capacity or that have discriminatory hiring practices are not eligible. 13 CFR §§ 120.110(i) and 113.3(a) a. Businesses that restrict patronage for any reason other than capacity are not eligible. For example, a men’s or women’s only health club is not eligible. b. Circumstances exist in which certain businesses, like fitness centers that market to one gender, may be eligible if they permit both men and women to join and/or use the facility. SBA Lenders must document the file with the following: i. Affidavit signed by the Applicant that the business is open to both men and women; and ii. Evidence that the facility is open to both men and women, such as appropriate bath/locker rooms, or documented membership demographics. c. Except as permitted under §702(a) of the Civil Rights Act of 1964 (42 U.S.C. § 2000e-1), businesses that have discriminatory hiring practices are not eligible. For example, a restaurant that employs only servers of one gender is not eligible. 10. Government-Owned Entities, except for businesses owned or controlled by a Native American tribe are not eligible. 13 CFR § 120.110(j) a. Businesses owned by municipalities and other political subdivisions are not eligible. b. Special Requirements Applicable to Native American Businesses: i. A Native American tribe is a Governmental entity and is not eligible. ii. A small business that is owned in whole or in part by a state or federally-recognized Native American Tribe may be eligible, provided the small business meets all other criteria set forth in SBA Loan Program Requirements and: a) Establishes that it is a separate legal entity from the tribe and submits the documents authorizing its existence; and b) For federally-recognized tribes, the tribe waives sovereign immunity with respect to the collateral pledged for the loan, and collection of the loan from the Applicant, AND agrees to a “sue and be sued” clause specifically naming U.S. Federal courts as “courts of competent jurisdiction.” (Note: Tribes that are recognized only by a state do not have sovereign immunity. Therefore, this requirement is not necessary if the tribe is only recognized by a state.) c. SBA Lenders may seek the advice and assistance of the Bureau of Indian Affairs (BIA) personnel when dealing with loans collateralized by Indian lands held in trust. 11. Loan Packagers, including Lender Service Providers, and other businesses earning more than one third of their gross annual revenue from packaging SBA loans are not eligible. 13 CFR § 120.110(m) 12. Businesses with an Associate who is currently incarcerated, serving a sentence of imprisonment imposed upon adjudication of guilty, or is under indictment for a felony or any crime involving or relating to financial misconduct or a false statement are ineligible. A business that is owned by an individual(s) who is currently on parole or probation may be eligible, but if the success of the business operations is primarily dependent on such individual, the Applicant must provide to the SBA Lender a plan for the continued operations of the business in the event of reincarceration, and the SBA Lender should consider whether it would be prudent, in order to protect SBA’s and the SBA Lender’s interests, to require an additional individual to provide a full or limited loan guaranty. 13 CFR § 120.110(n) 13. Businesses in which an SBA Lender or any of its Associates owns an equity interest, directly or indirectly, are not eligible. The only exception is when the Associate of the Applicant is a Small Business Investment Company (SBIC), in which case the requirements of 13 CFR § 120.104 apply. 14. Businesses that present live performances of a prurient sexual nature or that derive more than de minimis gross revenue, directly or indirectly, through the sale of products, services or the presentation of any depictions or displays of a prurient sexual nature. 13 CFR § 120.110 (p) a. SBA has determined that financing lawful activities of a prurient sexual nature is not in the public interest. The SBA Lender must consider whether the nature and extent of the sexual component cause the business activity to be prurient. b. A business is not eligible for SBA assistance if: i. It presents live or recorded performances of a prurient sexual nature; or ii. It derives more than 5% of its gross revenue, directly or indirectly, through the sale of products, services or the presentation of any depictions or displays of a prurient sexual nature. For this purpose, the 5% threshold is interpreted as the de minimis threshold for gross revenue. 15. Prior Loss to the Government 13 CFR § 120.110 (q) a. An Applicant is not eligible for a 7(a) or 504 loan if there is a prior loss to the Federal government. A “Prior Loss” has occurred when: i. The Applicant has previously defaulted on a Federal loan or federally assisted financing, resulting in a loss to the Federal government or any of its agencies or departments; or ii. Any other business owned, operated, or controlled by the Applicant or an Associate of the Applicant, previously defaulted on a Federal loan or federally assisted financing (or guaranteed a loan which was defaulted), resulting in a loss to the Federal government or any of its agencies or departments. b. For purposes of this paragraph, “loss” means any deficiency on a Federal loan or federally assisted financing that has been incurred and recognized by a Federal agency after it has concluded its write-off and/or close-out procedures for the particular account and includes any amount compromised for less than the full amount, discharged through bankruptcy, and any unreimbursed advance payment under 8(a) or a similar program operated by a Federal agency. NOTE: “Loss” does not include unpaid/delinquent taxes or any loss incurred by the Federal Deposit Insurance Corporation (FDIC) when it sells a loan at a discount. c. “Federal loan or federally assisted financing” includes: i. Any loan that is made for business purposes (including Federal disaster loans) by any Federal agency or department either directly or on a guaranteed basis; and ii. Any advance payments under 8(a) or similar programs operated by any Federal agency. NOTE: “Federal loan or federally assisted financing” does not include any loan purchased, held, or securitized by Fannie Mae or Freddie Mac or any Federal loan or federally assisted financing issued to an individual (e.g. student loan). d. All SBA Lenders must check the Credit Alert Verification Reporting System (CAIVRS), to determine if the Applicant is ineligible for a 7(a) or 504 loan because the Applicant or a business owned, operated, or controlled by the Applicant or any of its Associates has a Prior Loss. SBA Lenders must retain documentation of the CAIVRS check in the loan file. i. CAIVRS allows the SBA Lender to enter multiple tax identification numbers (either SSN or EIN) to conduct a search in connection with a loan application. ii. SBA Lenders may access CAIVRS at https://entp.hud.gov/caivrs/public/home.html. e. If a Prior Loss to the Government is fully satisfied, the application can be processed, including under an SBA Lender’s delegated authority. The SBA Lender must document its file as to how the loss has been fully satisfied. f. All SBA Lenders must inform the Applicant that if the small business defaults on the SBA-guaranteed loan and SBA suffers a loss, the names of the small business, the guarantors of the SBA-guaranteed loan, and any Associate(s) that control the Applicant, will be referred for listing in the CAIVRS database, which may affect the eligibility of a business owned or controlled by any such individual(s) or entity(ies) for future financial assistance from SBA or other Federal agencies or departments. g. Exceptions to the Prior Loss rule: Non-controlling Minority Equity Investor: Under SBA’s waiver authority at 13 CFR § 120.110 (q), a waiver may be granted for an Applicant whose owner was a Non-controlling Minority Equity Investor in a business that incurred a prior loss on an SBA 7(a) or 504 loan. To be eligible for this waiver, the aforementioned owner of the current Applicant must have: h. Held less than 20 percent of the equity of the business with the prior loss; i. Was not a guarantor or co-borrower on the defaulted SBA 7(a) or 504 loan to that business; and j. Did not have any control over the business with the prior loss For purposes of this paragraph, “Non-controlling Minority Equity Investor” means an owner of the current Applicant who satisfies paragraphs i. through iii. above with respect to the business that incurred the prior loss. Once these threshold criteria are met, SBA will evaluate the full circumstances surrounding the prior loss on a case-by-case basis, at the time of Application, through the Risk Mitigation Framework, using its discretion to determine whether granting a waiver is consistent with the purposes of the 7(a) and 504 programs. SBA will consider, among other factors: (i) the prior 7(a) or 504 loan(s) involving the Non-controlling Minority Equity Investor; (ii) the number and percentage of defaulted SBA loans involving the Non-controlling Minority Equity Investor; (iii) the timing of defaults (including whether a loan would have been considered an early default); and (iv) the Non-controlling Minority Equity Investor capital investment relative to the total SBA loan amounts. This waiver applies only to prior losses incurred under SBA Agency loan programs and does not apply to prior losses involving non-SBA Federal loans, other federally assisted financing, PPP loans, SBA EIDL, or SBA COVID-19 EIDL program loans. 16. Delinquent Federal Debt 31 CFR § 285.13 a. An Applicant is not eligible for a 7(a) or 504 loan if the Applicant or any guarantor (except a Supplemental Guarantor) owes an outstanding nontax debt to the Federal Government, or any agency thereof, that is in delinquent status (hereafter referred to as “Delinquent Federal Debt”). b. A nontax debt owed to the Federal Government includes any amount of money, funds, or property that has been determined by an appropriate official of the Federal Government to be owed to the United States, or an agency thereof, by a person (including an individual, corporation, partnership or other type of entity), including debt administered by a third party as an Agent for the Federal Government. c. A debt is in “delinquent status” when the debt has not been paid within 90 days of the payment due date. The payment due date is specified in the creditor agency’s initial written demand for payment or other applicable agreement. A debt is considered “delinquent” even if the creditor agency has suspended or terminated collection activity with respect to such debt. d. A debt is not considered “delinquent” if: i. The creditor agency has released the obligor from paying the debt or has agreed to accept a compromise amount in lieu of payment in full, or the obligor has cured the delinquency under terms acceptable to the creditor agency; ii. The obligor is subject to, or has been discharged from, the debt in a bankruptcy proceeding and, if applicable, the obligor is current on any court authorized repayment plan; iii. The obligor has entered into a satisfactory written repayment agreement with the creditor agency to pay the debt, in whole or in part, under terms and conditions acceptable to the creditor agency, and the obligor is paying as agreed; or iv. The debt is in an administrative or judicial appeal process. NOTE: If there was a Loss (as defined in Paragraph 15.b. above) associated with any of these debts, the Applicant remains subject to the Prior Loss rule. e. SBA Lenders must check the Credit Alert Verification Reporting System (CAIVRS), to determine if the Applicant is ineligible for a 7(a) or 504 Loan because the Applicant, or any guarantor or Associate of the Applicant, has any Delinquent Federal Debt. CAIVRS allows the SBA Lender to enter multiple tax identification numbers (either SSN or EIN) to conduct a search in connection with a loan application. SBA Lenders may access CAIVRS at https://entp.hud.gov/caivrs/public/home.html. SBA Lenders must retain documentation of the CAIVRS check in the loan file. f. If a Delinquent Federal Debt is fully satisfied, the application can be processed, including under an SBA Lender’s delegated authority. The SBA Lender must document its file as to how the debt has been fully satisfied. g. SBA does not routinely grant waivers under 31 CFR § 285.13. However, in the rare circumstance in which it is warranted, SBA may exercise its waiver authority as stated in 31 CFR § 285.13, Paragraph (g) Waivers by the agency. The regulation permits the authorized agency official to waive the eligibility requirement. The “authorized agency official” for purposes of the regulation is the head of the agency who may delegate this authority to the Chief Financial Officer, or Deputy Chief Financial Officer. h. All SBA Lenders must inform the Applicant small business that if the small business defaults on the SBA-guaranteed loan and the Applicant is deemed to have a Delinquent Federal Debt, the names of the small business, the guarantors of the SBA-guaranteed loan, and the Associates of the small business, will be referred for listing in the CAIVRS database, which may affect their eligibility for further financial assistance from SBA or other Federal agencies or departments. 17. Businesses primarily engaged in political or lobbying activities are not eligible. 13 CFR § 120.110 (r) An Applicant that derives over 50% of its gross annual revenue from political or lobbying activities is not eligible. 18. Speculation 13 CFR § 120.110 (s) a. Speculative businesses are not eligible. This prohibits loans to an Applicant for: i. The sole purpose of purchasing and holding an item until the market price increases; or ii. Engaging in a risky business for the chance of an unusually large profit. b. Speculative businesses include: i. Wildcatting in oil; ii. Dealing in stocks, bonds, commodity futures, and other financial instruments; iii. Mining gold or silver in other than established fields; iv. Research and Development; and v. Building homes for future sale (except under the 7(a) Builders CAPLines program). Note: Construction of homes for future sale with no sales contract in place (spec homes) is eligible under the 7(a) Builders CAPLines program. 13 CFR § 120.391 c. Non-speculative businesses that may be eligible include: i. A business, such as a grain elevator, that uses a commodity contract to lock in a price; ii. A farmer who uses a commodity contract to lock in the sale price of his or her harvest; iii. A business engaged in drilling for oil in established fields; and iv. A business engaged in building a home under contract with an identified purchaser. 19. A Small Business Lending Company (SBLC) may not make a loan to an Applicant that has received financing (or a commitment for financing) from a Small Business Investment Company (SBIC) that is an Associate of the SBLC. 13 CFR § 120.476 20. Businesses located within the Coastal Barrier Resource System. 13 CFR § 120.175 21. The business is ineligible if the Applicant business has an existing 7(a) or 504 loan that is not current at the time of issuance of the new 7(a) or 504 SBA loan number. “Current” means that a required payment has not remained unpaid for more than 29 days. A loan that has matured and not been paid within 29 days of the maturity date is not current and is not eligible for refinancing. Note: The SBA Lender will see a “caution” pop-up when entering the application in the SBA Loan System if the business is delinquent on a 7(a) or 504 loan.

Source: SBA SOP 50 10 8.1, A.Ch1.E — Types of Ineligible Businesses · source URL · snapshot 0fb0c4692cf52938