If you’re in the middle of an SBA 7(a) deal—or even thinking about using SBA financing—you need to pay attention. On March 6th, the SBA dropped a major rule change that directly impacts foreign investors in 7(a) transactions. And if your deal includes non-U.S. investors, you might need to make some adjustments.
Let’s break down what’s happening, what it means for new and in-flight deals, and what you should do next.
The SBA’s New Foreign Investor Rule: What Changed?
The SBA has officially tightened restrictions on foreign ownership in 7(a) deals. While the program has always required majority U.S. ownership, there was previously some flexibility around minority foreign investors. That’s now changed.
Here’s what the new rule means in simple terms:
1. All owners must be U.S. citizens or legal permanent residents (green card holders).
- If any owner, regardless of their stake, is not a citizen or green card holder, the business is ineligible for a 7(a) loan.
- This is a hard rule—no exceptions.
2. Ownership now means any equity stake.
- Previously, foreign investors could hold a minority (non-controlling) position in a 7(a)-funded business. That loophole is gone.
- Even if they own just 5%, the entire deal gets disqualified.
3. No foreign-controlled entities allowed.
- This includes businesses with foreign parent companies, subsidiaries, or significant financial backing from international sources.
- If there’s foreign money anywhere in the ownership structure, the deal is dead for 7(a) funding.
Why Did the SBA Make This Change?
The SBA is prioritizing U.S. small business ownership and limiting foreign influence in businesses that receive government-backed loans. This aligns with broader efforts across federal agencies to scrutinize foreign investment in key industries.
From a lender’s perspective, foreign investors create additional risk:
- Enforcement & Recourse Issues – If a foreign investor refuses to comply with SBA rules, the government has little recourse.
- National Security Concerns – More oversight is being placed on foreign capital, particularly from certain countries.
- Program Integrity – Ensuring that SBA-backed businesses are truly benefiting U.S. citizens and permanent residents.
Regardless of the reasoning, the outcome is clear: foreign investors are now out of 7(a) transactions.
What This Means for Deals in Progress
If you’re mid-flight on a deal that includes foreign investors, you need to act fast. Here’s what this rule change could mean for you:
1. Your Deal Could Be Derailed
If you already have a 7(a) loan in progress, and any of your investors don’t have U.S. citizenship or a green card, your lender must reject the loan under the new rules.
2. You May Need to Replace Investors
If your deal includes foreign minority investors, your only option is to buy them out or replace them with U.S. investors before closing. Otherwise, you’ll need to find alternative financing.
3. Seller Financing or Alternative Capital May Be Needed
If your foreign investors were part of your down payment strategy, you’ll need to fill that gap with:
- More seller financing (if the seller is open to it).
- Additional U.S. investors.
- A larger personal cash injection.
What This Means for Future Deals
If you’re planning to acquire a business using SBA 7(a) financing, here’s how you should adjust your approach:
1. Screen Your Investors Early
- If you’re bringing in partners or investors, confirm that every single one is a U.S. citizen or green card holder before engaging with lenders.
- If not, they either need to exit the deal or be converted to a loan-style arrangement instead of equity.
2. Avoid Foreign Family or Friends as Investors
- If you planned on raising funds from family or friends abroad, that’s off the table for SBA financing.
- Instead, look at domestic private lenders, seller financing, or structuring their contribution as a loan instead of equity.
3. Consider Alternative Financing Options If Needed
- If replacing investors isn’t an option, you may need to look into conventional loans, private lenders, or an SBA 504 loan (which has different rules).
- SBA 504 loans are asset-based, so they may have more flexibility depending on the deal structure.
How to Salvage a Deal That’s Now at Risk
If you’re suddenly in a bind because of this rule change, don’t panic—there are ways to course-correct.
1. Talk to Your Lender Immediately
If you’re in an in-flight deal, your first step is to check with your lender. They’ll confirm if your deal is affected and what your options are.
2. Renegotiate with the Seller
• Can they offer more seller financing to replace foreign investor contributions?
• Can you adjust the deal structure to avoid foreign ownership?
3. Explore Alternative Financing
If SBA is no longer an option, you might need to look at:
- Conventional bank loans (often require higher down payments and stronger financials).
- Private lenders (more flexible but more expensive).
- Revenue-based financing (if the business has strong cash flow).
Final Thoughts: SBA 7(a) Just Got Tougher for Foreign Investors
The bottom line is this: if you were relying on foreign investors for an SBA-funded acquisition, you must restructure your deal—immediately.
If you’re already in an SBA deal, check your cap table now. If you have foreign investors, act fast to replace them before your loan gets denied.
For new deals, only work with U.S. citizens or green card holders. Otherwise, be prepared to finance the deal another way.
This change is a big deal, but it doesn’t have to kill your acquisition. Get ahead of it, adjust where needed, and keep moving forward.
