For small businesses in need of quick funding, Merchant Cash Advances (MCAs) can appear to be an accessible solution. However, these financial products, which typically involve selling future receivables at a discount, often come with high effective costs and demanding repayment schedules that can strain a business’s cash flow. With the Small Business Administration’s (SBA) new Standard Operating Procedure (SOP) 50 10 8 taking effect on June 1, 2025, it’s vital for business owners to understand how SBA 7(a) loans can, and crucially, cannot, be used in relation to previously obtained MCA debt.
The SBA’s Position: 7(a) Loans Can’t Refinance MCA Debt
A common question from businesses burdened by MCA debt is whether an SBA 7(a) loan can be used to refinance these advances. The new SOP 50 10 8 is unequivocal on this point: Merchant cash advances and factoring agreements are not eligible for refinancing with 7(a) loan proceeds.
This rule is consistent across various 7(a) loan products, including Standard 7(a) Loans (over $350,000), 7(a) Small Loans ($350,000 or less), SBA Express loans, Export Express loans, and International Trade (IT) loans. This stance reflects the SBA’s core mission to promote financially sound, sustainable growth for small businesses, as the structure and high cost often associated with MCA debt generally does not align with the prudent, long-term financing objectives of the SBA 7(a) loan program.
“I’m Dealing with MCA Debt. What Are My Next Steps?”
If your business has taken on MCA debt, it’s important to proactively manage the situation. Here are some steps to consider:
- Deeply Understand Your MCA Terms: Before anything else, thoroughly review your MCA loan agreement. Make sure you understand the total amount to be repaid (including all fees), the factor rate or implied interest cost, the exact repayment mechanism (often daily or weekly ACH payments), and the remaining duration.
- Seek Professional Financial Advice: Consult with a trusted CPA, a qualified financial advisor, or a reputable non-profit credit counseling agency specializing in small business finances. They can help you analyze the true cost of your MCA and develop a comprehensive strategy.
- Explore Non-SBA Refinancing Options (With Vigilance): While an SBA loan isn’t an option for directly refinancing an MCA, some specialized non-SBA lenders or alternative financial institutions may offer products designed for MCA consolidation or refinancing. Approach these options with extreme caution. Scrutinize all terms, interest rates, fees, and repayment schedules to ensure you are genuinely improving your financial position and not just exchanging one high-cost obligation for another.
- Attempt to Negotiate with Your MCA Provider: Although it can be challenging, it may be worth discussing your situation with your MCA provider. Some may be willing to consider modified payment terms, particularly if you can demonstrate a clear path to improved business performance.
- Focus on Business Fundamentals: Implement strategies to increase your revenue and reduce operational costs. Improved cash flow from your core business activities is the most sustainable way to manage MCA payments or position your business for better financing alternatives down the line.
How an SBA 7(a) Loan Might Still Provide Strategic (Indirect) Assistance
While SOP 50 10 8 prohibits the use of 7(a) loan proceeds for direct MCA refinancing, an SBA loan could still offer indirect support by strengthening your business’s overall financial foundation, assuming your business is otherwise eligible for SBA financing.
Address Other Critical Capital Needs: If your business qualifies, an SBA 7(a) loan can be used for a variety of other eligible purposes that support growth and stability. These can include:
- Purchasing essential machinery and equipment.
- Acquiring or making improvements to commercial real estate.
- Securing working capital for future operational needs, allowing for more sustainable cash flow management. (Note: this working capital cannot be used to pay existing MCA debt ).
- Refinancing other eligible business debts (excluding MCAs) under terms that improve your monthly cash flow.
Enhance Overall Financial Health & Repayment Capacity: By strategically using a more affordable, longer-term SBA loan to address these fundamental business requirements, you may improve your company’s overall financial health and free up operating cash flow. This enhanced cash flow, generated by a stronger business, could then be used to more comfortably service or accelerate the payoff of your existing MCA obligations directly from your business revenues.
SBA Eligibility is Key: It is crucial to understand that your business must meet all standard SBA eligibility criteria for the specific 7(a) loan program and the intended, eligible use of loan proceeds.
Key Takeaways for Borrowers Navigating MCAs
Under the new SOP 50 10 8, SBA 7(a) loans cannot be used to directly refinance MCA debt. If you have MCA debt, take proactive steps to explore all viable strategies to manage or mitigate this high-cost financing. Consider SBA 7(a) loans for their intended purposes, strategic investments in equipment, real estate, eligible debt refinancing, or sustainable working capital, which can contribute to your business’s long-term strength and potentially ease the burden of existing MCAs indirectly through improved operational cash flow. Managing business debt, especially complex instruments like MCAs, requires careful planning and informed decision-making. Understanding the rules of engagement, including the latest SBA SOP changes, is a critical first step.
Guiding Lenders Through MCA Complexities and SOP 50 10 8
The explicit prohibition of refinancing Merchant Cash Advances in SOP 50 10 8 requires lenders to be vigilant. Guiding clients on the proper use of loan proceeds, while accurately assessing the credit risk of a business already burdened by high-cost debt, is a significant challenge. Effectively managing these scenarios requires deep program knowledge, but you don’t have to navigate this complexity alone.
This is where Windsor Advantage becomes a critical partner. With more than 150 years of cumulative SBA lending experience, our team has the deep expertise required to help you confidently underwrite loans for businesses with complex debt situations. We provide banks, credit unions, and CDFIs with a comprehensive outsourced SBA 7(a) and USDA lending platform, built on cutting-edge technology and rigid, consistent processes.
For lenders who need to ensure compliant use of proceeds and make sound credit decisions for applicants with existing MCA debt, Windsor Advantage acts as an extension of your team. We ensure every loan is structured and underwritten with the highest level of diligence, mitigating compliance risks and enabling you to support small businesses with responsible, long-term financing, even when they are navigating challenging financial circumstances.
At Windsor Advantage, we are dedicated to keeping our bank and credit union partners informed and equipped to navigate the evolving SBA landscape. Our expertise in government-guaranteed lending, combined with tools like the Windsor Accel platform, helps enhance SBA loan origination efficiency. We are committed to helping you understand and implement these new requirements seamlessly. For questions about structuring loans or prequalification needs under the new SOP, please feel free to reach out to [email protected].
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