Can a business owned by a trust get financing?

Trust ownership is not unusual and it is not a red flag. It is a documentation problem, and documentation problems are solvable if you start on them before you apply rather than three days before closing.

The two questions a lender has to answer

How the SBA handles it, which is instructive

SBA's rules on trusts tell you how the rest of the market thinks. In the 8(a) context, 13 CFR 124.105 provides that "ownership by a trust, such as a living trust, may be treated as the functional equivalent of ownership by a disadvantaged individual where the trust is revocable, and the disadvantaged individual is the grantor, a trustee, and the sole current beneficiary of the trust".

Three conditions, and they define the easy case: revocable, and the same individual is grantor, trustee and sole current beneficiary. When all three hold, the trust is transparent — it is the person, in a different wrapper — and everyone can proceed.

On the lending side, 13 CFR 120.111 contemplates a trust as an eligible passive company, noting that "any ownership structure or legal form may qualify" and that trusts may qualify with trustee certifications required, and it exempts a trust from the requirement that the eligible passive company itself be small. The guarantee rule is unchanged: "each holder of an ownership interest constituting at least 20 percent of either the Eligible Passive Company or the Operating Company must guarantee the loan", and the general 7(a) rule at 13 CFR 120.160 is that "holders of at least a 20 percent ownership interest generally must guarantee the loan".

Trace the ownership through the trust and you find the person who signs.

The document walkthrough

1. The trust instrument, or a certification of trust. Most states allow a certification — a short document, signed by the trustee, stating the trust exists, who the trustees are, what powers they hold, and how the trust takes title — without disclosing the full dispositive terms. Ask the lender whether a certification will do. Many will accept it and most owners never ask, handing over a document their family has good reasons to keep private.
2. Every amendment and restatement. A trust amended four times is governed by the current restatement, and lenders will want the chain.
3. Evidence of the trustee's identity and authority to act alone. Co-trustees who must act jointly are a common cause of closings slipping, because one of them is always travelling.
4. The successor trustee provisions. A lender lending on a ten-year term wants to know what happens if the trustee dies. So should you.
5. Beneficial ownership information. Under 31 CFR 1010.230, banks identify each individual who owns 25 percent or more of the equity interests of a legal entity customer and one individual with significant responsibility to control it. Where a trust holds the equity, the bank will look through to the relevant natural persons under its own procedures. Expect the question and have the names ready.
6. A trustee resolution or consent authorising this specific borrowing, this guarantee and this pledge, referencing the loan amount and the lender. A general power is not the same as a specific authorisation, and lenders want both.
7. The tax position. Whether the trust is a grantor trust matters for whose return the business income appears on, and therefore for which tax return supports the cash flow analysis. State it up front.

Where it gets hard

The sequence to follow

Start with your own lawyer, not the lender. Have them read the instrument and give you a one-page answer to three questions: may the trustee borrow, may the trustee pledge the business interest, and may the trustee guarantee. Take that answer to the lender at first contact. A file that arrives with the authority question already resolved moves at ordinary speed; one that does not can lose a month.

Then ask the lender, early: will you accept a certification of trust, or do you require the full instrument? And: who do you need as guarantor?

What to refuse

Refuse to amend a trust for the convenience of one loan without independent advice — the estate-planning consequences outlast the financing.

Refuse to transfer the business out of the trust simply because a lender's checklist has no box for it. That reverses years of planning to solve a paperwork problem, and a lender that cannot handle trust ownership is telling you it is not the right lender.