For SBA lenders
Short answer
A convertible note can trigger affiliation if it provides the holder with present control or the ability to obtain control of the applicant business, typically through conversion rights or board representation, regardless of immediate ownership percentage.
SBA's affiliation rules include agreements to merge, options, and convertible securities that, if exercised, would give the holder control over the applicant. If a convertible note allows the holder to convert into an equity stake that, combined with other holdings, would grant control (e.g., 50% or more), or if the note terms provide significant negative controls or board seats, affiliation can be triggered before actual conversion.
A startup applies for a $1,000,000 7(a) loan. An investor holds a $250,000 convertible note that allows conversion into 30% of the company's equity. While 30% might not constitute control, if the note also grants the investor a board seat and veto power over significant corporate actions, the lender must analyze if this constitutes 'present control' or the 'power to control' for affiliation purposes.
13 CFR Part 121 - Small Business Size Regulations
SOP 50 10 - Lender and Development Company Loan Programs
Affiliation and Lending Criteria for SBA Business Loan Programs - Final Rule
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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