Typical Businesses That Are Ineligible for an SBA Loan
A vast majority of businesses are eligible for financial assistance from the Small Business Administration (SBA). However, the applicant businesses must operate for profit, must be engaged in or propose to do business in the United States or its possessions, must have reasonable owner equity to invest, and must first use alternative financial resources including personal assets.
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A vast majority of businesses are eligible for financial assistance from the Small Business Administration (SBA). However, the applicant businesses must operate for profit, must be engaged in or propose to do business in the United States or its possessions, must have reasonable owner equity to invest, and must first use alternative financial resources including personal assets. So not everyone can get funded. Can you? Here are some of the businesses that are ineligible for financial assistance from the SBA.
- Real-estate investment firms
Firms exist when the real property will be held for investment purposes, as opposed to loans to otherwise-eligible small business concerns for the purpose of occupying the real estate being acquired.
- Businesses engaged in speculative activities
Those firms developing profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business, are excluded from being eligible for an SBA loan. Dealers of rare coins and stamps are also not eligible. SBA considers speculative activities too risky; it is not the objective of SBA to lend to risky opportunities.
- Firms involved in lending activities
The SBA lends money to borrowers to carry out business in the normal course of trade of goods and services. However, the SBA specifically excludes the following firms from receiving an SBA loan: banks, finance companies, factors, leasing companies, insurance companies (not agents), and any other firm whose stock-in-trade is money. SBA excludes such firms (whose business is lending) since they are not actually borrowing the money from SBA for business operations but are lending out the same money they borrowed.
- Businesses that use pyramid sales plans
Pyramid sales plans are characterized by endless chains of distributors and sub-distributors where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants. Since the products in such cases are usually cosmetics, household goods, and other soft goods that lend themselves to this type of business, they are not eligible for an SBA loan. SBA excludes them since such businesses only prosper if the chain grows; there is no real growth due to business endeavor.
- Firms engaged in any illegal activities
Illegal activities are by definition those activities that are against the law in the jurisdiction where the business is located. Included in these activities are the production, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that permits illegal prostitution. Because the very nature of the business activities is illegal, these companies are excluded from getting an SBA loan.
- Firms in the gambling industry
The “gambling industry” includes any business whose principal activity is gambling. While this precludes loans to race tracks, casinos, and similar enterprises, the rule does not restrict loans to otherwise eligible businesses that obtain less than one-third of their annual gross income from either (a) the sale of official state lottery tickets under a state license, or (b) legal gambling activities licensed and supervised by a state authority. The outcome in gambling activities is a matter of chance and/or luck. Thus, SBA would not lend to any business whose profitability or income is a matter of chance or luck.
- Charitable, religious, or other non-profit institutions
Charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not eligible for SBA loans. Again, SBA has excluded these institutions since they do not delve into any business endeavor, and making profit is not even their objective.
Source: Small Business Administration (www.sba.gov).