SBA’s New Citizenship Requirements: How Business Buyers Raising Equity Are Affected

The Small Business Administration (SBA) has issued new guidelines on business ownership eligibility, significantly tightening restrictions on who can own a business financed with an SBA 7(a) or 504 loan.

These changes, stemming from Executive Order 14159, introduce stricter citizenship and residency requirements, which will directly impact business buyers - especially those looking to raise equity from investors.

While SBA loans remain one of the most attractive financing options for acquiring a business, these recent policy shifts mean that business buyers must be more strategic in structuring their deals. In this edition of The Buyer Advocate, we will:

• Examine how the SBA’s ownership rules have changed compared to previous guidelines;
• Discuss the specific impact on business buyers raising investor capital;
• Explore alternative capital structuring strategies to remain compliant; and
• Outline how Pioneer Capital Advisory LLC helps business buyers navigate these complexities and secure financing.

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What Changed? SBA’s New Citizenship & Ownership Rules

As of March 7, 2025, the SBA has updated its ownership eligibility criteria for businesses seeking SBA 7(a) or 504 financing. The key changes include:

1. Businesses must now be 100% owned by U.S. citizens or Lawful Permanent Residents (LPRs).
2. All non-citizen owners who do not hold LPR status are now ineligible, including:
   • Foreign nationals
   • Visa holders (e.g., E-2, H-1B, L-1, etc.)
   • Individuals granted asylum or refugee status
   • Deferred Action for Childhood Arrivals (DACA) recipients
   • Undocumented individuals
3. Lenders must verify and report at least 81% of Beneficial Owners in E-Tran, SBA’s loan processing system.
4. All Beneficial Owners must provide alien registration numbers if applicable and certify that no ineligible persons hold any ownership interest in the business.

These updates override prior SBA guidance and apply to both new loan applicants and existing businesses seeking SBA financing.

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How This Differs from Prior SBA Guidelines

Before these changes, the SBA allowed businesses to have some degree of foreign ownership as long as U.S. citizens or Lawful Permanent Residents (LPRs) held at least 51% of the company.

That rule has now been replaced with a requirement that 100% of ownership be held by U.S. citizens or LPRs, eliminating the ability for foreign investors to hold even a minority stake in SBA-financed businesses.

Under the previous rules, certain visa holders, asylees, and other legal non-citizens were permitted to own shares in an SBA-financed business as long as they were not the majority owner.

This is no longer the case; all non-citizen investors who are not Green Card holders are now completely ineligible to own any portion of an SBA-financed company.

The verification process for ownership has also changed. Previously, SBA lenders had to ensure that the business was majority-owned by eligible individuals, but they were not required to verify ownership beyond that threshold. Under the new rules, lenders must now verify and report at least 81% of all Beneficial Owners, adding a significant compliance burden to the loan application process.

This marks a substantial tightening of eligibility criteria, cutting off many investors from participating in SBA-backed business acquisitions.

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Implications for Business Buyers Raising Capital

If you plan to raise equity from outside investors, these changes mean you must be more selective in structuring your deal.

Foreign Investors Are No Longer Eligible for SBA-Financed Businesses

Previously, business buyers could bring in non-citizen investors with certain visa statuses and allocate them equity in an SBA-financed business. That is no longer an option.

✔ Action Step: If you had planned to raise funds from non-citizen investors who are not LPRs, you must now either find replacement investors or pursue non-SBA financing options.

Structuring Investor Participation Becomes More Complex

For buyers seeking external capital, investor participation must now comply with the SBA’s new ownership restrictions. Several alternative structuring methods could still allow non-citizen investors to participate:

• Investor Loans Instead of Equity: Instead of an ownership stake, non-citizen investors could structure their participation as debt financing (a loan to the business). However, SBA lenders closely scrutinize debt arrangements, so this must be carefully structured to avoid violating SBA affiliation rules.
• Holding Company Structures: Some business buyers might explore creating separate entities in which foreign investors hold an ownership interest outside of the SBA-financed entity. This structure, however, requires extensive legal review to remain compliant.
• Exploring Non-SBA Loans: If non-citizen investors are essential to your deal, you may need to explore conventional bank financing, private lending, or alternative investment sources that are not subject to SBA restrictions.

✔ Action Step: Work with a transaction attorney and SBA-experienced lender to evaluate whether an alternative structure could allow your investors to participate while remaining compliant.

Expect Increased Scrutiny & Compliance Checks

SBA lenders will require more extensive ownership disclosures and certifications from loan applicants, including:

• Certification that all Beneficial Owners are eligible under the new rules.
• Submission of alien registration numbers for all Green Card holders.
• Disclosure of all direct and indirect ownership interests, ensuring no ineligible individuals hold any stake in the SBA-financed business.

✔ Action Step: Organize your ownership documentation early to prevent last-minute issues during the loan process.

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Navigating SBA Financing with Pioneer Capital Advisory LLC

Navigating SBA financing has become increasingly complex, and structuring deals correctly is now more important than ever. At Pioneer Capital Advisory LLC, we specialize in helping business buyers secure SBA financing, navigate compliance requirements, and structure deals effectively.

Our Proven 6-Step Process for SBA Financing

1️⃣ Intake & Onboarding – We provide a customized checklist to ensure all required documents are gathered upfront, minimizing delays.

2️⃣ Document Submission – We create a secure data room for financial documents, reviewing submissions to ensure completeness.

3️⃣ Lender Deck Creation – We craft a professional lender deck that includes financial projections, debt service coverage analysis, and cash flow documentation.

4️⃣ Term Sheets – We present multiple financing options, helping buyers compare and negotiate the best loan terms.

5️⃣ Underwriting – We guide buyers through lender due diligence, addressing financial projections and business plan refinements.

6️⃣ Deal Success & Closing – We coordinate final closing steps, ensuring a seamless transaction with lenders, attorneys, and escrow officers.

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Final Thoughts: Plan Ahead & Structure Deals Carefully

With these new SBA restrictions, business buyers must take a proactive approach to structuring their acquisitions. If you are preparing to raise investor capital, you should:

✅ Assess your investor pool to ensure all participants meet the new citizenship requirements.

✅ Re-evaluate your deal structure if you had planned to include non-citizen investors.

✅ Work with experienced professionals to ensure compliance and avoid last-minute financing complications.

📩 Need Help Structuring Your SBA Financing? Contact Pioneer Capital Advisory LLC at matthias@pioneercap.com to discuss your deal.

Stay informed, stay compliant, and keep closing deals!

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Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

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