A federal loan program created in 1980 to help small-business owners sell their companies to employees has been rendered largely unusable by a new Small Business Administration citizenship-verification rule, according to the National Center for Employee Ownership, the nonprofit that helped write the program's original authorization.
What Is the SBA's ESOP Loan Program?
The program lets the Small Business Administration make direct loans to the trust that holds an employee stock ownership plan, financing the purchase of a company from a retiring owner on behalf of the workforce. It was authorized under the Small Business Employee Ownership Act of 1980 and modernized nearly four decades later under the Main Street Employee Ownership Act, a 2018 measure championed by Senator Kirsten Gillibrand, according to the National Center for Employee Ownership (NCEO).
The nonprofit's founder, Corey Rosen, who wrote the original 1980 legislative language, says the program has struggled to function almost since its inception. In the 1980s, he recalls, the SBA declined for years to issue implementation guidance at all, and agency officials disputed his own reading of a law he had drafted. After the 2018 revival, NCEO says the SBA again wrote regulations that "undermined the intent of Congress," leaving the loan authority mostly theoretical rather than usable by lenders and business owners.
What Changed Under the New Citizenship Rule?
The latest obstacle is narrower but, according to NCEO, more disqualifying. New federal rules bar government agencies from lending to non-citizens, and the SBA has applied that restriction by "looking through the trust" that legally owns the company's stock on employees' behalf, checking the citizenship status of every worker enrolled in the plan. Because an ESOP trust can include dozens or hundreds of participants, a single non-citizen employee-owner is enough to disqualify the entire company's loan application, bankers who work on these deals told the group. NCEO characterizes the practical result in stark terms: the citizenship look-through has "effectively killed the program" for most companies with mixed-citizenship workforces.
Independent SBA materials point to the same shift. The agency's own lender-training library lists a February 2026 briefing devoted to "updates to citizenship and residency requirements" for its flagship 7(a) loan program, the umbrella authority under which ESOP loans are made — confirming that eligibility rules tightened around the date NCEO describes, even though the SBA's public 7(a) program page does not spell out ESOP-specific terms.
Who Does This Actually Affect?
The rule reaches two overlapping groups: retiring small-business owners who had planned to sell to their employees rather than a competitor or private-equity buyer, and the workers inside companies with any non-citizen staff, who lose access to the one federal financing tool built specifically for employee buyouts. Lenders lose it too — bankers structuring these transactions now have to route around SBA financing entirely or restructure deals to exclude affected participants, both of which raise cost and complexity for a type of transaction that was already a small niche of small-business lending.
What Do the Numbers Say About Employee Ownership Today?
The dispute over one federal loan channel lands on top of an employee-ownership sector that is otherwise sizable and growing incrementally. As of 2023, the most recent year with published federal filing data, the United States had 6,609 ESOP plans covering 6,411 companies — 5,993 of them private and 418 public — according to NCEO's analysis of Department of Labor Form 5500 filings. That year alone added 309 new ESOPs and roughly 56,663 new participants.
| Metric (2023, most recent filed data) | Figure |
|---|---|
| Total ESOP plans | 6,609 |
| Companies covered (private / public) | 6,411 (5,993 / 418) |
| New ESOPs formed in 2023 | 309 |
| New participants added in 2023 | approx. 56,663 |
| Total ESOP participants | 15.1 million |
| Active participants (currently employed) | 10.9 million |
| Total plan assets | over $2 trillion |
| Employer securities held in plans | $397.9 billion |
| Contributions to accounts in 2023 | $114.9 billion |
| Benefits paid to participants in 2023 | $166 billion |
None of that growth runs through the SBA loan program, which NCEO says has financed only a small fraction of ESOP transitions even in years when it functioned as Congress intended. Most ESOP purchases are financed through conventional bank loans, seller notes, or a combination of the two — the SBA channel was meant to widen access for smaller companies and thinner-margin deals that conventional lenders pass on, not to replace private financing altogether.
What Happens Next?
NCEO's account, published August 19, 2026, stops short of predicting a fix, saying only that the organization hopes "future administrations will change the rules in a way that will reinvigorate the SBA program." No agency timeline for revisiting the citizenship look-through has been announced. For now, business owners weighing a sale to their own employees are left with the financing options that existed before the 2018 revival — bank debt, seller financing, and private ESOP lenders — while the federal tool Congress built specifically for that purpose sits, by the trade group's account, largely unused.
Frequently Asked Questions
What is an ESOP? An employee stock ownership plan is a retirement plan that holds company stock in trust on behalf of employees, often used to let a retiring owner sell the business to its own workforce over time.
Does the citizenship rule end all ESOP financing? No. It affects only loans made directly by the SBA. Companies can still finance employee buyouts through conventional bank loans, seller notes, or private ESOP lenders.
How many U.S. companies are employee-owned through ESOPs? As of 2023, 6,411 companies operated under 6,609 ESOP plans, covering 15.1 million total participants, according to NCEO's analysis of federal filing data.
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