Glossary · Reading the business
Pyramid Sales Scheme
In short
A business model where participants profit primarily from recruiting new members, rather than from selling actual products or services. These are generally illegal and ineligible for SBA loans.
What it means in a deal
The SBA explicitly prohibits loans to businesses involved in pyramid sales schemes. During due diligence, carefully examine the business's revenue model. If income is heavily reliant on recruiting new distributors rather than genuine product sales to end-users, it's a red flag. This can lead to an outright 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 Pyramid Sales Scheme
- How does the SBA evaluate the eligibility of an applicant business involved in multi-level marketing or pyramid sales schemes?
- Are proceeds from personal investment sales eligible for equity injection?
- How does a lender evaluate the market value of collateral when there are limited comparable sales?
- Can I get an SBA 7(a) loan if my business is a startup with no sales yet?
- How does a lender ensure timely and accurate reporting of 7(a) loan sales on the secondary market to the SBA?
- What are the SBA's reporting requirements for 7(a) lenders regarding sales of guaranteed loan portions on the secondary market?
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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