Glossary · People and paperwork
Arm's-length Employment(Arm's length)
In short
Employment where the terms and conditions are fair and independent, as if the parties were unrelated, preventing conflicts of interest. The SBA requires this for certain relationships within a business.
What it means in a deal
The SBA requires that any employment or compensation arrangements with immediate family members or affiliates of key principals be on "arm's-length" terms. This means their salary and benefits must be reasonable and comparable to what an unrelated person would receive for the same role, preventing inflated expenses that could impact the business's ability to repay the loan.
Official sources
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 — Lender and Development Company Loan Programs
U.S. Small Business Administration · SBA Standard Operating Procedure
Last checked 2026-06-15. Official sources control — verify before relying on any rule for a live deal.
Related terms
Common questions about Arm's-length Employment
- What documents are needed to prove a partner buyout is an arm's length transaction for SBA purposes?
- What constitutes an acceptable 'arm's length transaction' for a change of ownership between related parties for a 7(a) loan?
- What are the specific requirements for a religious organization's business arm to be 7(a) eligible?
- What is the average repayment term length for an SBA 7(a) loan?
- If a seller note is on standby, is the seller prohibited from any post-sale employment with the business?
- How does a lender confirm an owner's U.S. citizenship if they were born in a U.S. territory or abroad to U.S. parents?
Defined by CapBench SBA Intelligence — plain-English definitions for business buyers, lenders, advisors, and AI agents, grounded in public SBA rules and records. Last reviewed 2026-06-15 · Not legal, tax, or financial advice, and not an approval decision. Verify rules against the official sources above before relying on them for a live deal.
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