Part of building a business is deciding how to finance it, and that can include taking out a loan. When investors look into the E-2 category, many want to know whether a loan is acceptable and how it fits within the rules. The official guidance does not list every possible funding method, so it helps to understand what it says about lawful sources of funds and what counts as an investment.
The Foreign Affairs Manual explains that the source of an E-2 investment may include capital assets or funds from savings, gifts, inheritance, contest winnings, loans secured by the applicant’s own personal assets, or other legitimate sources. It also states that the source of funds does not need to be outside the United States. The key standard is that the investment must not come from illicit activities. Officers can request whatever documentation they need to evaluate the lawful origin of the funds, and the investor must show possession and control of the money or capital assets. The guidance also notes that inheriting a business itself does not constitute an investment.
When loans do not qualify
A loan cannot count toward an E-2 investment when it is secured by the business itself. If the business is used as collateral, the investor is not the one taking on the financial risk. Mortgage debt or commercial loans backed by the business’s assets fall into this category. Even if the investor adds some personal collateral, the loan still does not qualify when the business is the main guarantee.
For example, an investor may apply for a bank loan to start a service company. The bank approves the loan but requires the new business’s equipment and future earnings as collateral. The investor also offers a small personal asset, but the core security remains the business. Because the business is protecting the loan, the funds cannot be treated as part of the E-2 investment.
When loans can qualify
A loan may count toward the E-2 investment when it is secured by the investor’s own personal assets. In this case, the investor is the one at risk if the business fails. A second mortgage on a personal home is one example. An unsecured loan based only on the investor’s credit or signature is another. These loans qualify because the business is not used as collateral, and the investor carries the full responsibility if repayment becomes difficult.
For instance, an investor who needs more capital may choose to take a second mortgage on a home and use those funds for the business. The home is the collateral, so the investor’s property, not the business, is exposed to loss. This meets the requirement for an E-2 investment.
Another example involves an investor who gets an unsecured personal loan based solely on credit history. The lender relies on the investor, not on business assets, to guarantee repayment. Since the business is not involved as security, this kind of loan may qualify.
Conclusion
Understanding how different types of loans are treated under the E-2 rules helps investors choose funding methods that support the goals of their application. A thoughtful approach at the start can make the rest of the process more manageable.
Source:
- Fam.state.gov. https://fam.state.gov/FAM/09FAM/09FAM040209.html