Kelly Loeffler, U.S. President Donald Trump’s Administrator of the Small Business Administration. The agency this week issued new guidance on its crackdown over SBA loans.
(Photo by Kevin Dietsch/Getty Images)
The Small Business Administration has finally made official its crackdown on small business investors, and it’s not as sweeping as some involved with SBA-guaranteed loans had feared.
Forbes reported in March that the SBA had quietly begun rejecting loan guarantees for businesses if any of their owners or investors–even a passive investor–had previously backed a business that defaulted on an SBA-guaranteed loan. Then, and subsequently, the SBA didn’t respond to Forbes’ requests that it confirm or clarify the policy change, which seemed to be a dramatic expansion of the traditional rule: If a deal goes bad, only the borrower who signed the personal guarantee is barred from future SBA and other government-backed loans.
Finally, yesterday, the SBA issued a two-page guidance document that set out its new standard, and it appears the crackdown isn’t as sweeping as some experts had feared. But the SBA still left itself plenty of wiggle room, setting up a case-by-case review process for investors who meet certain standards.
“The news, and the big splash is, it’s not an automatic ‘no,’” said Lynn Ozer, president of Pennsylvania-based MultiFunding LLC, an SBA loan brokerage. “They’re really talking specifically about these non-controlling minority equity investors. So it’s a very, very slim definition and they’re leaving themselves open to be able to decide at their discretion whether or not (a given investor) deserves to be part of another SBA loan.”
“This is good; the agency is trying to be proactive in helping small business,” Ozer added.
Overall, the new guidance is positive news for both investors and small businesses, said Eric Pacifici, a partner at SMB Law Group, an SBA-focused law firm that helps companies navigate lending waters.
“What they’re responding to was, the investment community was very afraid that if they were on a cap table that had a default, they’d be shut out” from any future SBA loans, Pacifici said. “I even have some clients that were actively trying to get off of cap tables of existing businesses, surrendering equity … to preserve their eligibility.”
From that perspective, Pacifici said, the guidance is a “net benefit” simply because it makes clear what the landscape and rules for investors are under the Trump SBA.
“It allows a lot of people who otherwise don’t have the personal liquidity to buy businesses, which creates more overall liquidity for business owners,” Pacifici said.
The policy switch – made at some unclear point since President Donald Trump returned to the White House in 2025 – is key to who is eligible now for the SBA’s 7(a) and 504 loan programs, which were just expanded to make up to $10 million in guaranteed loans available for entrepreneurs. The agency is helmed by former U.S. Sen. Kelly Loeffler of Georgia, who signed the new guidance.
In the document issued Thursday, the SBA announced that it was establishing a new waiver process for investors that have backed small businesses but who also have been involved in one or more government loans that defaulted in the past.
To qualify for such a waiver, any investor will have to meet three strict criteria, according to the new guidance:
1. No ownership stakes of more than 20% in any company that defaulted on an SBA loan or any other type of federal government loan.
2. The investor cannot have been a loan guarantor or co-borrower on any SBA or government loan that defaulted.
3. The investor can’t have had “any control over the business” that defaulted on a past SBA or government loan.
“Once these threshold criteria are met, SBA will evaluate the full circumstances surrounding the loss on a case-by-case basis,” the new guidance document stated, adding that any waiver application would be evaluated by the SBA’s Fraud Risk Framework. The guidance expires June 1, 2027.
Before granting or denying a waiver, the SBA will consider any investor applicant’s history with 7(a) and 504 loans for other small businesses, the “number and percentage of defaulted SBA loans,” when those loans were defaulted on, and how much capital the investor has relative to the requested loan amount, the guidance stated.
The SBA framed the investor crackdown as an effort to both “clean up the lax ‘Do What You Do’ underwriting policies of the Biden years to restore program integrity,” and to modernize its procedures. The case-by-case waiver procedure, it added, is designed “to support greater access to capital for small businesses.”
There are still, however, plenty of unanswered questions about how exactly the new waiver process will work and how frequently waivers will be granted.
“My question would be, how many of these waivers are actually going to be approved?” asked Scott Oliver, a partner at Indianapolis-based law firm Lewis Kappes, who works closely with lenders to get SBA loans approved. “I think we’re going to learn a lot more about that in the coming months.”
There’s also not much clarity yet on how long such a waiver process might take, Ozer said, noting it could be as short as a week or perhaps much longer, depending on how many resources and staff the SBA chooses to devote to the process and how inundated it gets with waiver applications.
Pacifici said he’s still advising caution for clients, simply because there are still plenty of unknowns moving forward about who precisely will qualify – or be denied – for small business investment waivers.
“What if you’re a minority investor and you’re on, just by dumb luck, a lot of cap tables and five of them default through no fault of your own?” Pacifici asked rhetorically. “If you’re on 50 cap tables as an investor, it’s quite likely in this space that you’re pissing in the wind a little bit, and to even know … whether you have defaults is a bit of a challenge.”
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