As of March 7, 2025, the U.S. Small Business Administration (SBA) has rolled out significant updates to the eligibility criteria for its 7(a) and 504 loan programs, with a sharp focus on ownership and citizenship requirements. These changes, alongside additional updates effective March 27, 2025, are big changes for borrowers from out of country. Restaurant buyers, that are foreign investors or non-permanent residents are subject to the new rules.
In addition, new guaranty fees for SBA loans go into place tomorrow along with changes to whether a landlord subordination agreement will be required. Lease terms are also impacted on the purchase of restaurant. With the ever-changing restaurant industry, understanding these new rules is critical for anyone looking to buy, sell, or finance a food-service business.
What’s Changed?
The SBA has tightened its lending policies to prioritize U.S.-based ownership and introduced new financial and lease-related requirements. Here’s a breakdown of the key updates:
- Ownership Requirements: Businesses seeking SBA 7(a) or 504 loans must now be 100% owned by U.S. citizens, U.S. nationals, or Lawful Permanent Residents (LPRs). Previously, the SBA permitted up to 49% foreign ownership, offering flexibility for international investors. Under the new rules, any ownership stake held by foreign nationals-including those on valid work visas like the E-2-renders a business ineligible for SBA financing. This shift eliminates a once-common pathway for foreign entrepreneurs to leverage SBA loans in the U.S. restaurant market.
- Certification and Documentation: Loan applicants are now required to certify that all beneficial owners meet these strict eligibility standards. Lenders must document at least 81% of beneficial ownership details in the SBA’s E-Tran system and verify LPR status through U.S. Citizenship and Immigration Services (USCIS). This heightened scrutiny aims to ensure transparency and compliance, but it also adds layers of paperwork and verification that buyers and sellers must prepare for upfront.
These changes are based on making sure that American citizens are prioritized for lending. In addition, there are other changes to the Small Business Administration guidance. These affect the guaranty fee and the lease structure.
- SBA Guaranty Fee Expansion: Effective March 27, 2025, all SBA loans will incur an SBA guaranty fee. Historically, this fee applied only to deals with term loan exposure exceeding $1 million. Now, regardless of loan size, borrowers will face this additional cost, which covers the SBA’s guarantee to lenders against default. For restaurant buyers, this change increases the upfront expense of financing, potentially affecting smaller transactions that once avoided the fee.
- Lease and Landlord Subordination Rules: New guidelines tie lease terms and landlord subordination agreements to loan composition. If a loan consists of 33% or more in Inventory plus Furniture, Fixtures, and Equipment (FFE), a 10-year lease and a Landlord Subordination Agreement are mandatory. However, if the combined allocation of Inventory and FFE falls below 33%, shorter lease terms are permitted, and no subordination form is required. This flexibility can benefit buyers purchasing restaurants with lower equipment or stock-heavy valuations, easing lease negotiations. How a restaurant buyer and seller allocate the assets will now play a critical rule on whether a landlord subordination is needed.
The subordination document is traditionally a sticking point with many landlords since they are effectively agreeing to prioritize the lender’s interest over their own in certain situations. Specifically, it subordinates (or lowers the priority of) the landlord’s claim to the leased property or assets in favor of the lender’s lien or security interest. This is important when a business, like a restaurant, uses leased space and the lender wants assurance that their loan collateral—such as equipment, inventory, or the business itself—remains protected if the borrower defaults or if the landlord tries to reclaim the property.
In practical terms, here’s how it works for restaurants.
When a restaurant buyer takes out an SBA loan to purchase a business, the lender routinely secures the loan with the business’s assets, including Furniture, Fixtures, and Equipment (FFE). If the restaurant operates in a leased space, the landlord could have a claim to those assets under the lease agreement. For example, if the owner defaults on lease payments, he might want to take over the equipment. A subordination agreement put’s the lender’s claim first, increasing risk to the landlord but reducing risk to the lender.
- What It Does: The landlord agrees not to interfere with the lender’s ability to repossess or sell the collateral if the borrower defaults. For example, if a restaurant fails and the lender needs to seize the kitchen equipment, the landlord can’t block that process or claim the equipment for back rent ahead of the lender.
- When It’s Required: As noted in the updated article, starting March 27, 2025, SBA loans require a Landlord Subordination Agreement (along with a 10-year lease) only if the loan amount consists of 33% or more Inventory plus FFE. If the Inventory + FFE allocation is less than 33%, this requirement is waived, allowing more flexibility in lease terms.
- Impact on Restaurant Deals: For buyers, this can complicate negotiations with landlords, especially if the lease term must extend to 10 years. For sellers, it underscores the need to clarify lease terms and landlord cooperation early in the sale process to avoid delays.
Implications for Restaurant Buyers and Sellers
The new rules reshape the landscape for restaurant transactions, affecting both sides of the deal:
- Buyers: Prospective restaurant buyers must now closely examine the ownership structure of any business they’re considering, alongside loan and lease details. If a seller’s company includes foreign stakeholders, buyers relying on SBA loans may need to negotiate a restructuring or look elsewhere for financing. The new guaranty fee adds to borrowing costs across all loan sizes, while the Inventory + FFE threshold influences lease commitments. For example, a buyer eyeing a popular bistro with minimal equipment might secure a shorter lease, but one acquiring a fully equipped kitchen could face a decade-long lease obligation.
- Sellers: Restaurant owners planning to sell must recognize how their ownership makeup and asset allocation impact marketability. A business with foreign investors may struggle to attract SBA-dependent buyers, and those with high Inventory + FFE values might deter buyers wary of long-term leases. Sellers should disclose ownership records and asset breakdowns early, potentially restructuring to broaden their buyer pool or adjusting sale terms to offset the guaranty fee’s impact.
Alternative Financing Options for E-2 Visa Holders
For E-2 visa holders and other non-permanent residents, the SBA’s new restrictions don’t close the door entirely. They may simply shift the focus to creative financing. Here are viable alternatives:
- Personal Loans: E-2 investors can secure loans backed by personal assets, such as real estate or savings, to fund their restaurant purchase. Since these loans are personally guaranteed, the full amount counts toward the “at-risk” investment required for E-2 visa approval. However, this option demands careful planning to balance loan repayments-now including SBA fees if applicable-with business cash flow. For information on unsecured lending up to $250,000, restaurant buyers can visit this link.
- Non-SBA Loans: Some commercial lenders cater to non-permanent residents, offering loans free of SBA eligibility constraints. These often carry higher interest rates or stricter terms, but they sidestep citizenship and guaranty fee hurdles, making them a practical choice for E-2 holders. Information from one such lender is available here.
- Seller Financing: Structured as a personal loan from the seller, this can reduce upfront cash needs while meeting E-2 requirements. It avoids SBA-specific lease rules and fees, though legal precision is key to visa compliance. Learn more about seller financing.
- Private Investors: Partnering with U.S. citizens or LPRs can unlock SBA financing-despite the new fees-while allowing E-2 holders to retain operational roles. This hybrid approach balances compliance with investment goals.
Why Did the SBA Make These Changes?
The SBA aims to prioritize federal resources for U.S. citizens and LPRs, aligning lending with immigration and economic goals. The guaranty fee expansion ensures broader cost-sharing for loan guarantees, while lease rules streamline collateral requirements based on asset type. These shifts reflect a focus on domestic stakeholders and program sustainability, though they complicate access for foreign investors.
What to Do Now
Whether buying or selling, proactive steps can ease the transition:
- Review Ownership and Assets: Confirm all owners meet citizenship criteria and assess Inventory + FFE percentages to anticipate lease terms.
- Confirm Eligibility: Verify owner status and factor in the new guaranty fee when budgeting.
- Gather Documentation: Prepare citizenship proof and asset valuations to expedite lender reviews.
- Talk to Your Lender Early: Discuss ownership, fees, and lease requirements to avoid surprises.
- Consider Restructuring: Adjust ownership or asset allocations to meet SBA rules or opt for alternatives.
Where to Find Restaurants Qualified for Investment Visas?
For E-2 visa holders, finding visa-eligible restaurants is key. Visit We Sell Restaurants’ E-2 Visa Qualified Restaurants for Sale for a curated list of businesses meeting E-2 investment and management criteria. This resource, backed by expert brokers, simplifies the search for visa-friendly opportunities.
The SBA’s 2025 updates-spanning citizenship, fees, and leases-mark a pivotal shift for restaurant deals. At We Sell Restaurants, we’re committed to guiding clients through this evolving landscape with clarity and expertise.
Navigating these rules demands strategy and adaptability. E-2 investors can still succeed by leveraging alternatives and targeting visa-ready listings. Contact a Certified Restaurant Broker at We Sell Restaurants for tailored support in aligning your deal with these changes.