Currently for the 7(a) and 504 business loan programs, SBA considers an applicant ineligible if the business has an Associate who is incarcerated, on probation, on parole, or is under indictment for a felony or any crime involving or relating to financial misconduct or a false statement, and for Microloans, in addition to incarcerated, an Associate who is on probation or parole for an offense involving fraud or dishonesty.
SBA proposes to remove those barriers while maintaining the prohibition against only those businesses with a Principal who is currently incarcerated.
SBA understands the original intent of these restrictions was to protect the performance of SBA’s capital programs against a presumed higher likelihood of default. Data and research, however, refute what may have animated SBA’s initial rationale. Importantly, SBA reviewed the relevant research and found no evidence of a negative impact on repayment for qualified individuals with criminal history records in any American business loan program. This lack of data demonstrates that continuing to rely on this restriction for that purpose would contradict the available evidence and although the restrictions may have been originally put in place with the goal of protecting program performance, the lack of data suggests continuing to rely on this restriction would reflect an outdated, inaccurate structural bias against individuals with criminal history records.
SBA believes that modernizing the character requirements regarding consideration of the criminal history records of SBA loan applicants and Associates of business loan applicants is timely and appropriate to reflect changes in the public and private sector that have reduced unnecessary barriers to access to capital and successful reentry. Doing so also promotes equitable consideration for applicants who are ineligible for federal assistance in SBA’s programs due to pending indictments that have not led to convictions; prior convictions that have been adjudicated; and terms of incarceration that have been served.
Section 120.110(n) What businesses are ineligible for SBA business loans? Current section 120.110(n) for the 7(a), 504 and Microloan programs states that ineligible businesses are those with an Associate who is currently incarcerated, on probation, on parole, or is under indictment but not convicted for a felony or any crime involving or relating to financial misconduct or a false statement. SBA proposes to revise this regulation to remove some of those barriers while maintaining the prohibition against businesses with an Associate who is currently incarcerated. This revision is therefore narrowly tailored to reduce barriers to access for qualified justice-impacted small business owners. Section 636(a)(1)(B) of the Small Business Act states that SBA may verify an applicant’s criminal history background, but does not require such verification, nor does it prohibit
For public safety reasons, however, SBA will retain the prohibition against making a loan to a childcare business, where an Associate is on probation or parole for an offense against children.
Comments must be received by November 14, 2023.