The SBA Rule Change That Caught MCA Borrowers Off Guard

Few tools in small business finance have been as popular - and as perilous - as refinancing merchant cash advances (MCAs) through the U.S. Small Business Administration's (SBA) 7(a) loan program. Historically, this maneuver allowed struggling businesses burdened with high-interest MCA debts to seek relief by consolidating them into long-term, low-interest SBA loans. Recent amendments to the SBA's Standard Operating Procedure (SOP) have fundamentally altered this.

Merchant cash advances offer quick cash in exchange for a share of a business's future revenue, at high cost and risk. You get an upfront sum, which you repay through a fixed percentage of your daily sales. Unlike traditional loans, MCAs use "factor rates" (often 1.1 to 1.5), meaning you repay 10-50% more than you received, with no early payment savings. The money comes fast, but the daily deductions strain cash flow and the true cost often rivals predatory lending.

"Stacking" MCAs means taking out multiple advances at once. Businesses stack when one MCA's daily payments overwhelm their cash flow, and they borrow another to cover the gap. Sometimes it's necessary to keep the doors open, but each new advance multiplies the daily outflow, turning a tough financial situation into a crisis. The irony is that when merchants fall behind, the resulting legal trouble could in theory be resolved by refinancing into a new MCA - yet for many, this is just another round in the cycle that led to default in the first place.

The SOP and the New Seasoning Period

The SBA's SOP provides a framework for lenders and borrowers participating in the 7(a) loan program. It dictates the terms and conditions under which loans can be granted, and amendments to it can have significant ramifications.

For years, the strategy was simple: a business burdened with one or more high-cost MCAs would apply for an SBA 7(a) loan, which typically carries a much lower interest rate and a longer repayment period. Once approved, the funds would be used to pay off the existing MCAs, replacing onerous daily or weekly payments with a manageable monthly obligation. This provided immediate relief and allowed businesses to regain financial stability.

The revised guidelines impose a six-month "seasoning" period. Businesses must wait at least six months after their last MCA funding before they are eligible to apply for an SBA 7(a) loan for refinancing purposes.

The Impact on Borrowers

For business owners who have relied on the ability to quickly refinance their MCA debts, the seasoning period introduces a period of limbo. During this six-month window, businesses must continue servicing their existing MCA debts without the option of seeking relief through an SBA loan. For many, this delay can prove insurmountable, leading to defaults, legal troubles, and potentially the shuttering of the business.

According to the SBA, the change was driven by concerns over the financial health of borrowers and the stability of the 7(a) program. By imposing the seasoning period, the SBA aims to discourage the practice of repeatedly refinancing MCAs, which can lead to a cycle of dependency and financial instability, and to protect both businesses and lenders from the risks associated with excessive debt.

Critics argue the new rule may have unintended consequences, pushing struggling businesses towards less regulated, high-interest financing options in the absence of viable alternatives. The timing raises questions too. The SBA introduced the seasoning period at a time when many small businesses were still reeling from the economic fallout of the COVID-19 pandemic. For businesses that had already taken on MCA debt to survive the crisis, the new rule represents yet another hurdle. Many have relied on the SBA's support as a last resort, and the seasoning period effectively cuts off that lifeline - in many cases, the delay can be the difference between survival and insolvency.

How the Marketplace Has Responded

For lenders, the new rule introduces additional layers of complexity and risk assessment, requiring them to carefully vet borrowers' financial histories and MCA activity before approving an SBA loan. This can slow down the approval process and reduce the number of businesses eligible for refinancing, narrowing the pool of potential applicants.

The change also hits brokers and financial consultants who built their businesses around facilitating MCA refinancing through the SBA. With the new restrictions in place, these professionals must seek alternative solutions for clients who no longer qualify. The seasoning period restricts some traditional refinancing paths, but it also elevates the value of expertise and creative deal-structuring. By helping clients meet the new requirements and strategize ahead, brokers can differentiate themselves and potentially capture a larger share of a smaller market.

For business owners who find themselves in default or facing legal action due to an inability to refinance, it is crucial to seek legal counsel early. The window for taking proactive legal action is often short, and waiting too long can severely limit a business's options.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.