Will A Criminal Record Prevent Me From Getting An Sba Loan Or Modifying One[yoast-breadcrumb]
Will A Criminal Record Prevent Me From Getting An SBA Loan Or Modifying One?
Getting approved for a small business loan from the Small Business Administration (SBA) can be challenging for entrepreneurs with a criminal record. The SBA has specific eligibility requirements regarding criminal history that aim to reduce the risk of default and fraud. However, civil rights groups have criticized some of these policies as discriminatory and counterproductive. Recent changes have loosened the restrictions, but limitations remain.
SBA Criminal History Eligibility Policies
The SBA has established several criteria regarding criminal records that can disqualify applicants from receiving an SBA 7(a) or 504 loan:
- Felony convictions within the last 5 years related to fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance are ineligible.
- Business owners currently on parole or probation are ineligible.
- Failure to disclose criminal history can also lead to denial or loss of the loan.
These policies apply to all 20+ SBA loan programs, including the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program introduced during the COVID-19 pandemic. The rules encompass any owner holding 20% or more equity in the business.
The SBA indicates these requirements aim to mitigate the risk of applicants with recent financial crimes reoffending. They argue limiting eligibility reduces defaults and protects taxpayers since many SBA loans involve government guarantees. However, critics counter that the arbitrary time periods and blanket restrictions go too far.
Criticisms of SBA Criminal Record Policies
Civil rights groups like the American Civil Liberties Union (ACLU) and Public Interest Law Center have challenged some SBA policies as discriminatory and counterproductive. They make several arguments:
- Blanket bans based on criminal records disproportionately affect minorities who face higher conviction rates.
- Old offenses may no longer predict risk of reoffending but still lead to exclusion.
- Denying loans prevents entrepreneurship and economic advancement of reformed ex-offenders.
- Arbitrary time periods like 5 years lack empirical basis in recidivism data.
For example, banning all felony convictions in 5 years affects minority applicants more due to racial disparities in sentencing. And recidivism rates decline substantially over time, so older offenses do not necessarily predict future behavior.
Excluding ex-offenders from SBA loans also hinders their re-entry and rehabilitation. Starting a small business can provide income and purpose that deters reoffending. But blanket bans block this path to advancement regardless of individual circumstances.
Recent Changes to SBA Criminal History Policies
In response to criticism and lawsuits, the SBA has eased some criminal record restrictions, particularly for PPP and EIDL loans:
- Reduced 5-year ban for financial felonies to 1 year.
- Removed exclusions based on defaults, bankruptcies, and tax liens.
- Waived 1-year ban for other felonies if $250,000 or less is received.
These changes significantly expanded eligibility for owners with a criminal history. For example, the 1-year lookback period for financial felonies aligns better with recidivism data. The waivers for smaller loans also provide opportunities for lower-risk entrepreneurs.
However, broader bans remain in place. All felony convictions within 1 year still lead to exclusion from larger loans. And parolees and probationers still cannot receive SBA loans regardless of offense or circumstances.
Getting an SBA Loan with a Criminal Record
Despite some reforms, business owners with a criminal history still face barriers to accessing SBA financing. But options exist if you have past convictions and need capital:
- Wait until any conviction exclusions no longer apply based on time elapsed.
- Seek alternate financing from private lenders or non-profit groups.
- Apply for SBA microloans which have more flexible eligibility.
- Request an exemption waiver for certain offenses.
- Explore pardons or expungement to remove convictions.
Consulting with a lawyer can also help navigate SBA policies and identify any recourse if you are denied due to criminal record. It may require patience and persistence, but small business financing is still possible for many entrepreneurs with past offenses.
Ongoing Debate and Potential Reforms
The debate continues around balancing risk management with opportunities for rehabilitated ex-offenders in SBA policy. Additional reforms advocates propose include:
- Individualized assessments instead of blanket bans.
- Clearer waiver and appeals processes.
- Better alignment with recidivism data.
- Removal of parolee and probationer exclusions.
- Consistent policies across all loan programs.
The bipartisan NEW START Act also aims to improve re-entry opportunities by preventing arbitrary exclusions from federal resources like SBA loans.
While progress has occurred, critics argue more reforms are still needed for fair and evidence-based policies that do not unduly limit financing options. But the recent changes demonstrate that advocacy and legal challenges can drive positive reforms.
Will A Criminal Record Prevent Me From Getting An SBA Loan Or Modifying One?
Having a criminal history does not automatically disqualify you from receiving SBA-backed financing or adjusting an existing SBA loan. However, it can negatively impact your odds and complicate the process. The nature of the offenses, when they occurred, and loan specifics will determine outcomes.
SBA Lending Considerations
The SBA directs lenders to review criminal records but make individual determinations on eligibility. Minor, old, or unrelated offenses should not cause loan denials.
Still, certain felony convictions within past 5-7 years like fraud, embezzlement, theft, forgery or other financial crimes will often bar SBA loans.
Lenders also cannot approve loans to businesses engaged in illegal activity or those principally owned by incarcerated individuals.
Case By Case Decisions
For other offenses, the SBA instructs lenders to assess recency, severity, frequency and rehabilitation when weighing criminal history. For example:
- Arrests without convictions have less impact than actual convictions
- Old DUIs may be overlooked but pattern of repeat offenses cause concern
- Violent crimes are viewed more harshly than non-violent crimes
- Evidence of rehabilitation helps offset past offenses
Documenting rehabilitation efforts can aid your application, like showing training certificates or parole officer letters.
Applying With An Owner Criminal Record
When a business owner has a criminal history, providing a thorough explanation and supporting materials in the loan application is advisable. This includes:
- Court records of convictions
- Records of incarceration, parole, probation
- Personal letters vouching for your character
- Proof of rehabilitation efforts
Being transparent gives lenders confidence in your integrity despite past offenses.
Modifying A Loan With A Criminal Record
If seeking to modify an existing SBA loan, a borrower’s criminal record also gets re-evaluated. Lenders will consider if crimes occurring after loan approval now make the borrower an unacceptable risk.
Modifications may be denied for felonies or financial crimes. But misdemeanors or unrelated records should not impact modifying otherwise healthy SBA loans.
Using A Co-Signer
Having a co-signer without a criminal history applies to both new loans and modifications. Their clean record provides the lender greater assurance.
It also shows you have responsible individuals willing to trust and vouch for you.
Asking SBA To Reconsider
If a lender denies your SBA loan application or modification due to criminal history, you can request the SBA review the decision. Provide supporting evidence of rehabilitation and good character.
The SBA may overturn a denial if no recent, serious, or financial convictions exist. But this is still a long-shot option.
If denied an SBA loan due to criminal history, reapplying after a waiting period can improve odds. Waiting periods give time to reestablish good conduct.
Typically 3-5 years from parole/probation completion is recommended. Longer periods may be warranted for felonies.
Alternative Financing Options
If SBA loans are unavailable due to criminal records, other small business financing options include:
- Online lenders and fintech platforms
- Merchant cash advances
- Peer-to-peer lending
- Friends and family loans
- Credit cards
These have more flexible eligibility standards that may overlook criminal histories.
The Bottom Line
A past criminal record does not necessarily mean you cannot get approved for an SBA loan or modification. But additional scrutiny should be expected. Mitigating risk factors with co-signers, equity, or time can help overcome criminal record bias.
An experienced small business attorney can advise you in structuring the strongest application possible.