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Proposed Federal Policy Change Could Remove Loan Barriers for Entrepreneurs With Criminal Records

A potential rule change could see the Small Business Administration expand access to capital for justice-involved people.

Many small businesses were forced to close or reduce operations because of COVID-19. When Congress passed the CARES Act in March 2020, the goal was for small-business owners to gain access to forgivable loans to cover payroll and other operating costs under the Paycheck Protection Program. However, 140,000 of the nation’s 1.1 million small-business owners with criminal records were shut out of the assistance.

Sekwan Merritt was in the middle of training for a career as an electrician in Baltimore. But that goal was interrupted when he was sentenced to 25 years in prison for possession of heroin with intent to distribute. Merritt ultimately served five years before he was paroled in 2017. Upon release, he returned to his community determined to start an electrical company that would employ other formerly incarcerated people.

I came home thinking that I want to start my own business and make things easier for people who have been through the same thing I have,” Merritt, 39, says. 

His business, Lightning Electric, has grown steadily since that time, surpassing $600,000 in revenue last year. But when Merritt tries to take out small business loans, he hits a brick wall because of his criminal record. The Small Business Administration (SBA) and other institutional lenders have routinely denied him, making it difficult to hire and take on larger contracts.

That problem became acute during the shutdowns of the COVID-19 pandemic. As business slowed, Merritt could barely cover his overhead and payroll. His application for the SBA’s Paycheck Protection Program (PPP) — which approved nearly 12 million loans totaling just under $800 billion — was denied because of his criminal record, and he was forced to begin laying off employees.

It pushed me to the brink of quitting,” Merritt says. It feels like just because I’m formerly incarcerated, my workers and I are not worthy, that we’re not even human.” 

It feels like just because I’m formerly incarcerated, my workers and I are not worthy, that we’re not even human.
Sekwan Merritt owner of Lightning Electric

Entrepreneurs like Merritt, who have previously been involved with the justice system, often start small businesses as a response to discrimination and exclusion by traditional employers; around 4% of all small businesses have an owner with a criminal conviction. But they face dire challenges when trying to access capital through the SBA, the federal agency that connects small businesses with lenders to help them launch and develop.

Merritt became a plaintiff in a landmark federal lawsuit that led the SBA, in June 2020, to roll back its restrictions on PPP loans and other economic relief for people with criminal records, helping many across the country. A few months earlier, U.S. Sens. Rob Portman, R‑OH, and Ben Cardin, D‑MD, had come together to urge the SBA and Treasury Department not to block small business owners with criminal records from applying to the program.

More recently, the agency has begun taking steps to lift other discriminatory restrictions, removing a good character” requirement that blocked justice-involved people from participating in one of its programs and proposing a rule change that would get rid of such requirements across the board.

Advocates say these new developments are promising, but they’re just the beginning of needed reforms that would make loans broadly available to formerly incarcerated entrepreneurs. 

The SBA controls billions of dollars,” says Margaret Love, co-founder and director of the Collateral Consequences Resource Center (CCRC). This capital is critically important to helping people with a criminal record establish themselves in the community and to closing the racial wealth gap. These are people who are trying to create permanent, functioning businesses.”

The funds that the SBA distributes are largely intended to contribute to economic development in disadvantaged communities, often the same low-income communities of color that have suffered the most during the era of mass incarceration and tough-on-crime policies. Excluding people with criminal records, advocates say, is counterproductive to the SBA’s goals.

Inhibiting Economic Growth

Analysis of the SBA’s loan policies by CCRC, an Arnold Ventures (AV) grantee, has shown that potential borrowers who reveal a past conviction on application forms — even convictions that have been expunged or sealed — may find it difficult to qualify for SBA-approved bank loans or disaster assistance. 

Another recent study by the RAND Corporation, supported by AV, found that during the pandemic, SBA restrictions on those with a felony conviction in the past five years disqualified an estimated 212,000 small businesses from economic relief in 2020. Those restrictions may have had a range of negative consequences for small business owners with criminal records, explains Shawn Bushway, the senior policy researcher at RAND who conducted the study. Bushway says that there’s reasonable evidence to suggest that criminal records are playing a role in the SBA loan application process, even beyond pandemic economic relief, and such restrictions could be inhibiting communities’ economic growth. 


amount of small business owners with a criminal conviction

Healthy communities have businesses, and SBA loans are one way that small businesses grow and develop,” says Bushway, who has done extensive research on criminal records and employment. Places that have high crime, poverty, and other issues have fewer businesses than they could, and one reason may be that the people who want to develop businesses can’t get a loan.”

A group of researchers at the University of Michigan Law School is currently studying the effects of SBA laws, rules, and regulations on access to capital and entrepreneurship more broadly. They are particularly interested in the willingness of people with criminal records to apply for loans. J.J. Prescott, Henry King Ransom professor of law at the university, notes that such rules are likely to deter people with criminal records from starting businesses and submitting loan applications in the first place. The rules also sway other institutional lenders to employ similar restrictions. 

The SBA influences the norms of the industry and gives the broader private market a justification for also looking at criminal records as a way to judge creditworthiness,” Prescott says. Once you have a policy like this in place, there is a bit of a domino effect.” Prescott further notes that people’s criminal records have no clear impact on whether they repay loans, according to research.

Restrictions Should be Limited

Most entrepreneurs need loans of $50,000 or less to start their business, according to Small Business Majority, a national organization that supports small business owners. But Awesta Sarkash, public policy director of the organization, explains that an ambiguous SBA rule requiring that applicants exhibit good character” in order to receive loans and contracts likely causes the agency to reject submissions from justice-involved borrowers.

We know that entrepreneurship is a proven pathway to decrease recidivism, so it’s disappointing to see any barriers to access to capital created for people who have paid their debt to society,” Sarkash says. We are encouraged by the SBA’s proposed changes to reduce restrictions on capital programs for the smallest businesses. Justice-impacted people should not be further marginalized or perceived as a credit risk simply because of their past. It’s critical to ensuring that people who come out of the system have a path toward financial wellbeing.”

We know that entrepreneurship is a proven pathway to decrease recidivism, so it’s disappointing to see any barriers to access to capital created for people who have paid their debt to society.
Awesta Sarkash public policy director of Small Business Majority

Without access to capital through the SBA and other lenders, many formerly incarcerated entrepreneurs must rely on personal savings or often-scarce resources within their communities. 

Merritt ended up working with Baltimore Community Lending, a local Community Development Financial Institution that supported him with two separate small loans. The organization works in the city of Baltimore, which is home to the highest concentration of justice-involved people in the state. It makes loans to small business owners without collateral, who are disproportionately people of color. 

We’re not another bank,” explains Bonnie Crockett, vice president and small business director of Baltimore Community Lending. We’re out here to help people who can’t get loans anywhere else.” 

Crockett says she would like to see the SBA remove its strict requirements for borrowers, which can act as barriers to entire populations.”

Indicators of Change

Recently, the SBA has begun to do just that. The agency’s June 2020 change to relax requirements for PPP loans eventually made it easier for applicants with criminal records to access emergency funds during the pandemic. In February 2021, the Biden Administration further reduced these restrictions on access to PPP loans for people with criminal histories. Announcing these changes, the Biden Administration specifically acknowledged that it was influenced by the reforms set forth in the bipartisan PPP Second Chance Act, co-sponsored by Sens. Ben Cardin, D‑MD; Rob Portman, R‑OH; Cory Booker, D‑NJ; and James Lankford, R‑OK.

Importantly, the SBA has built upon these pandemic-related reforms to address long-standing exclusions in other SBA lending programs. In November 2022, the SBA removed the good character” requirement from its program to award Veterans Association contracts. Around the same time, the agency also requested public comment on a proposed rule change that would do away with good character” requirements altogether. 

We commend the SBA for proposing this significant change and therefore advancing second chances for people with past criminal histories,” says Carson Whitelemons, director of criminal justice at AV. The SBA guaranteed more than $44.7 billion in loans in 2021 and serves as a particularly important lender for disadvantaged communities. We must continue to ensure that all justice-impacted people have equitable access to economic opportunity — it’s an absolutely integral part of helping people move forward and improving public safety.”

Advocates consider this an encouraging sign, one that has the potential to affect billions of dollars in loans for small businesses and expand the Biden administration’s commitment to providing second chances for people with criminal records.

We want to see banking institutions that have historically discriminated against certain groups of people, including justice-involved people, recognize that a person’s criminal background doesn’t define whether they have good character’ when it comes to repaying their loan,” Sarkash says. Small businesses are the economic backbone of many communities, and of state economies as well. We’re really hopeful that this change will ensure that folks who want to start and grow their business are able to do so without having to jump through dozens of hoops.”

Merritt says the rule change would create a seismic shift for his business, and for many others, making it possible to grow larger, take on more business, and contribute to their communities. 

There are so many formerly incarcerated people who are coming home and trying to change,” Merritt says. I hope they do relax the restrictions, so we can compete, get on with our lives, and be recognized as humans on this earth.”