SBA rules · SOP 50 10 8.1
Can an ESOP get an SBA loan?
Yes, an ESOP itself may obtain a 7(a) loan for specific purposes with the employer small business as a co-borrower, and an eligible business owned or controlled by an ESOP can obtain either a 7(a) or 504 loan.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- 7(a) loans to an ESOP: For 7(a) loans only, SBA may assist a qualified ESOP trust to purchase a controlling interest (at least 51%) in the employer small business or to purchase qualified employer securities, provided the small business is a co-borrower on the loan.
- 7(a) loans to the employer small business: SBA may guarantee a 7(a) loan to an employer small business to re-lend funds to an ESOP to acquire at least 51% ownership, or directly to an eligible small business owned or controlled by an ESOP.
- 504 loans: CDCs may make 504 loans to an eligible business owned or controlled by an ESOP, but ESOP trusts themselves are not eligible to borrow under the 504 program.
- Guaranties and equity injection: The ESOP trust and its members are not required to provide personal guaranties, but outside owners of 20% or more must guarantee, and a seller who remains a partial owner must provide a full unlimited guaranty. Loans to ESOPs to acquire at least 51% controlling interest are exempt from equity injection requirements.
- Ineligible structures: An SBA loan involving an ESOP cannot be structured as an EPC/OC transaction under either the 7(a) or 504 loan programs because IRS regulations prohibit the ESOP from guaranteeing the loan.
The source
What the SOP says
“For 7(a) loans only: SBA may assist a qualified employee trust (or equivalent trust) that meets the requirements and conditions for an ESOP prescribed in all applicable IRS, Treasury, and Department of Labor regulations.
“In the case of either a. or b. above, the small business concern must be a Co-Borrower on the 7(a) loan.
“SBA may guarantee a 7(a) loan to an eligible employer small business for the sole purpose of making a loan to a qualified employee trust (ESOP) that results in the qualified employee trust owning at least 51 percent of the employer small business concern.
“Lenders may process loans to an ESOP or to an eligible small business owned or controlled by an ESOP under delegated authority.
“CDCs may make loans to an eligible business owned or controlled by an ESOP or equivalent trust.
“The IRS prohibits ESOPs from guaranteeing a loan; therefore, SBA does not require the ESOP to guarantee the loan. In addition, members of the ESOP are not required to personally guarantee the loan.
“The application cannot be structured as an EPC/OC.
“Loans to ESOPs for the purpose of purchasing a controlling interest (at least 51 percent) in the employer small business are not subject to the SBA requirement for equity injection.
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.