A current hot topic in SBA lending has been whether Merchant Cash Advance (“MCA”) debt is eligible for refinancing under SBA’s 7(a) guidelines. The growing demand to refinance these facilities combined with the fact that SOP 50 10 (the “SOP”) was silent as to whether these facilities could be refinanced, has, until recently, left SBA lenders and other industry participants uncertain as to how to handle requests to refinance this type of debt. SBA has also struggled with how to handle these requests because MCA debt does not have many characteristics of a more traditional loan, such as an expressly stated interest rate an express term and a clearly defined payment obligation to allow for an easy determination as to eligibility under the SOP.
In an effort to address this issue in a timely manner for the SBA lending community, SBA issued Procedural Notice 5000-862692, effective December 6, 2024, which, among other things, clarifies that MCA debt is eligible to be refinanced with an SBA 7(a) loan. The Procedural Notice states that: “Lenders may refinance merchant cash advances, factoring agreements, and
non-amortizing credit facilities” with a 7(a) loan. The rationale for this clarification is to “provide borrowers with a means to exit these credit facilities” which SBA states are eligible for refinance as they are “presumed to not be made on reasonable terms.” Accordingly, the Procedural Notice amends the SOP to add “Merchant cash advances, factoring agreements, and non-amortizing credit facilities” as eligible type of debt for refinance under the 7(a) program.
Further, the Procedural Notice amends the SOP provisions requiring a ten percent improvement in the installment payment amount, to add merchant cash advances, factoring agreements, and non-amortizing credit facilities to the categories of debt already exempt from this requirement (demand or balloon notes, credit cards or HELOCs used for business purposes and revolving lines of credit not being renewed) due to the presumed unreasonable nature of these arrangements.
In order for merchant cash advances, factoring agreements, and non-amortizing credit facilities to be eligible for refinancing under the 7(a) program, lenders must demonstrate and document their credit memo and with the following evidence that the debt being refinanced has been current for the last 12 months, or life of the debt, whichever is less:
i. a statement obtained from the credit provider that the debt is current.
ii. if such statement cannot be obtained, Lender may obtain bank statements from the applicant for 12 months or for the life of the loan, whichever is less, evidencing that periodic ACH debits, initiated by the creditor, have occurred each month. Lender must review documentation for any evidence of late payments or penalties.
iii. If there are late payments or penalties, Lender must explain in the credit memorandum, and these loans must be processed by SBA under non-delegated procedures.
iv. The credit facility and any security interests must be terminated with the refinance.
Although not set forth as a requirement in the Procedural Notice, SBA Lenders should also consider including negative covenants prohibiting entering into such arrangements while the SBA loan remains outstanding and requiring Borrowers to maintain their banking relationship with the Lender to ensure transparency and compliance with this requirement. Otherwise, Borrowers may very likely enter into such arrangements again, lessening the positive impact of refinancing these debts in the first place.
SBA Lenders will surely appreciate the additional clarity provided by SBA confirming the eligibility of MCA debt for refinance. However, prudent lenders will ensure that their loan files are properly documented to ensure compliance with the requirements of the new guidance from SBA as outlined herein. For more information on SBA’s updated 7(a) refinancing rules, contact Ethan at 267-470-1186 or esmith@starfieldsmith.com.
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