Glossary · The loan itself
Circular Financing
In short
This is when the seller or an affiliate provides funds for your equity injection or uses loan proceeds to repay their own debt. It's strictly prohibited by the SBA.
What it means in a deal
Circular financing is a red flag for the SBA because it suggests the buyer isn't truly investing their own capital or that the loan isn't for a legitimate business purpose. Ensure your equity injection comes from seasoned funds that are genuinely yours and not from the seller or a related party. Any attempt at this will lead to immediate loan denial.
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 Circular Financing
- Which types of businesses are typically ineligible for SBA 7(a) financing?
- Does the SBA 7(a) loan program allow for seller training period financing?
- What makes a business 'speculative' and thus ineligible for SBA 7(a) financing?
- How does seller financing structure impact the required equity injection for a business acquisition?
- What specific due diligence is required for seller financing in a change of ownership?
- What specific franchise agreement clauses are generally unacceptable to the SBA and could prevent financing?
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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