The SBA has clarified that certain new practices in the world of "search funds" are not allowed under the 7(a) Loan Program

May 30, 2025

by a professional from The University of Texas at Austin - Red McCombs School of Business in Dallas, TX, USA

A search fund is when an entrepreneur raises money from investors to buy a business that they plan to run themselves. Recently, some investors have been trying to avoid SBA rules by: Buying less than 20% of the business (so they don’t have to personally guarantee the loan), and Making side deals with the entrepreneur that secretly give them control of the business. The SBA says this is not allowed if: The entrepreneur isn’t truly in control of the business, or The investor has a deal that lets them get their money back before the SBA guaranty is released. Two key updates were made: In the rules about ineligible businesses: If any non-guarantor investor has a side agreement that gives them control, that business can’t get a 7(a) loan. In the rules about equity: If the money from investors has to be paid back or earns them distributions before the SBA guaranty is released, it’s considered a loan—not equity—and it’s not allowed. This applies even if it’s called something else, like redeemable preferred stock.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Just so everyone is aware, these rules pretty much already existed. You had to be in control as the primary owner before, any change of ownership had to be approved by the SBA, and there could not be any mandatory requirements to pay investors until the SBA loan was repaid. I cannot speak for all lenders and maybe some lenders were not following these rules, but pretty much all lenders we work with were. I think the only change here is that the SBA is watching these transactions more closely so lenders are going to do the same.

Reply by a professional
from The University of Texas at Austin in Dallas, TX, USA

Thank Brad, "SBA clarified"

Join the discussion