No More Refinancing Merchant Loans With SBA Loans
No More Refinancing Merchant Loans With SBA Loans
Are you a small business owner or franchisee struggling with the crushing payments of a merchant cash advance (MCA)? You might be eyeing an SBA loan to refinance that high-cost debt and stabilize your finances. Unfortunately, the SBA’s rules, updated in SOP 50 10 8 (effective June 1, 2025), explicitly prohibit refinancing MCAs with SBA 7(a) or 504 loans. This restriction protects businesses from predatory debt cycles but ironically now prohibits SBA loans to help refinance out of predatory type lending.
Why the SBA Bans MCA Refinancing
The SBA prohibits refinancing MCAs or similar high-cost loans for several reasons:
Predatory Terms: MCAs feature exorbitant effective interest rates (20%–150%+ annually) and aggressive repayment schedules (e.g., daily deductions), far exceeding SBA loan rates (9%–11%). The SBA views these as exploitative, harming businesses rather than supporting growth.
High Lender Risk: MCAs’ short terms (3–18 months) and high default rates make them unstable, clashing with the SBA’s focus on secure, long-term loans backed by government guaranties.
Program Integrity: Allowing MCA refinancing could encourage businesses to take on predatory debt expecting an SBA bailout, undermining the 7(a) and 504 programs’ mission to aid underserved businesses. This ban protects borrowers and lenders but requires you to find alternative ways to manage MCA debt.
What Debt Can Be Refinanced with SBA Loans?
While MCAs are off-limits, SBA loans can refinance other types of debt, provided they meet eligibility criteria:
Business Loans: Loans used for equipment, inventory, operations, or expansion (e.g., a $500,000 term loan for machinery).
Commercial Real Estate Mortgages: Loans for business property, such as a retail storefront.
Business Credit Card Debt: Debt incurred for documented business expenses (e.g., supplies, marketing).
Existing SBA Loans: Refinance 7(a) or 504 loans to secure better rates or terms.
Requirements: Refinancing must pass the Credit Elsewhere Test (proving no affordable non-SBA financing) and meet SBA standards.
Why This Restriction Matters
The MCA refinancing ban protects your business from cycling through predatory debt, encouraging healthier financing choices. While it limits SBA loan use for MCA relief, it seems to be intended to drive you toward loans with lower rates and longer terms, stabilizing your cash flow. The problem is that many of the business owners who utilize merchant loans got themselves into a scenario where they needed fast cash and were unable to wait for a more traditional loan process. I have never met a business owner who compared merchant and bank lending options and chose the merchant loan other than the time-to-funding difference.
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