An SBA 7(a) loan can refinance a merchant cash advance only after the advance has been converted to a term loan, that loan has amortized for at least 24 months, and no new advances have been taken since. An advance that's still being collected isn't eligible under the SBA lending rules in effect since October 1, 2026.
The SBA rule on using a 7(a) loan to refinance a merchant cash advance
On the 7(a) side, refinancing isn't a standalone program. It's one permitted use of loan proceeds, governed by Appendix 14, "7(a) Debt Refinancing Requirements," of SOP 50 10 8.1, the SBA's lending rulebook that took effect October 1, 2026.
The SOP calls a merchant cash advance (MCA) a Sales-Based Repayment Agreement, and Appendix 14 says: "Sales-Based Repayment Agreements (e.g., Merchant Cash Advances) are only eligible for refinancing if the original agreement has been converted to a term loan, has amortized for at least 24 months, and no additional Agreements have been implemented since the conversion of the prior agreement(s). If the Sales-Based Repayment Agreement is still active, it is not eligible for refinancing."
Three things follow from that wording:
- An active advance is out. While a funder is still collecting, 7(a) proceeds can't pay it off. The sentence just before the rule adds, "Factoring agreements are not eligible for refinancing."
- The clock starts at conversion, as we read it. The SOP doesn't define "converted" or "active," or say how a conversion has to happen. A term loan from another lender that pays off the advance, or a funder rewriting the balance as a note with scheduled principal and interest, could both fit those words in our reading, so ask the SBA lender what proof it accepts.
- Working capital isn't a workaround. The SOP says, "Working capital proceeds may not be used to refinance existing debt or to finance any ineligible purpose."
The regulation behind the rule, 13 CFR 120.201, is one sentence long. A borrower "may not use 7(a) loan proceeds to pay any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from an existing debt" (eCFR, as of October 1, 2026).
Conditions the converted term loan has to meet
After 24 months, the term loan is judged like any other debt a 7(a) loan refinances. Appendix 14's list of eligible debt includes loans priced above the SBA maximum rate and another lender's loans that meet the 10 percent test below.
| Condition | What SOP 50 10 8.1 requires |
|---|---|
| Payment history | The debt "must be, and must have been, current for at least the last 12 months or for the life of the loan, whichever is less." Current means no required payment has stayed unpaid for more than 29 days. |
| Benefit to the business | The new installment "must be at least 10 percent less than the existing installment amount(s) in aggregate." Exceptions include balloon notes, business credit cards and certain revolving lines. |
| Cash flow | Debt service coverage of at least 1.15, and 1:1 on a global basis, on Standard 7(a) loans (over $350,000). At least 1.10:1 on 7(a) Small loans ($350,000 or less) for purposes other than changes of ownership. |
| Business purpose | You certify before disbursement that the debt was used exclusively for the business. |
| No loss shifting | The refinance can't pay a creditor in a position to sustain a loss, including the lender itself. |
Coverage is measured with the new loan in place, because the SOP defines debt service as "the future required principal and interest payments on all business debt, inclusive of new SBA loan proceeds." A lower payment can lift a borderline ratio, as our debt service coverage guide explains.
If the SBA lender already holds your term loan, the SOP calls it same institution debt. The lender may process that refinance under its delegated (PLP) authority but can't use that authority to reduce its own credit exposure to you. Its file needs a payment transcript for the prior 36 months or the life of the loan, whichever is less, with any late payments explained in writing.
The math: from a daily debit to a monthly SBA payment
Picture a commercial cleaning company with $120,000 in monthly sales. Every figure here is a hypothetical assumption chosen to show the arithmetic.
The company takes a $100,000 advance at a 1.40 factor rate, so it owes $140,000, collected at $1,000 each business day, or $21,000 in a 21-business-day month. After 40 business days it has paid $40,000, and a non-SBA lender pays off the remaining $100,000 (no early-payoff discount assumed) with a five-year term loan at 22% fixed. Twenty-four on-time payments later the balance is $72,319, and a 7(a) lender refinances it at 13.00%. That is the maximum variable rate Appendix 18 and 13 CFR 120.214 allow on a loan of $50,001 to $250,000 (prime or the SBA Optional Peg Rate plus 6.0%), with prime at 7.00% in early October 2026 (Federal Reserve H.15, release of October 6, 2026).
| Active advance | Term loan | 7(a) loan, 10 years | |
|---|---|---|---|
| Amount owed at start | $140,000 | $100,000 | $72,319 |
| Price | 1.40 factor rate | 22% fixed | 13.00% variable |
| Cash out per month | $21,000 | $2,762 | $1,080 |
| Share of monthly sales | 17.5% | 2.3% | 0.9% |
Run to completion, the advance would cost $40,000 over 140 business days, an estimated annual rate near 128%. That figure is the daily rate that makes 140 payments of $1,000 equal $100,000, multiplied by 252 business days.
The $1,080 payment clears the 10 percent test, since anything at or below about $2,486 would. The SOP caps working capital loans at 10 years, the likely limit for debt that funded operations, and says the term "must be the shortest appropriate term." A longer term costs more in total:
| 7(a) term | Monthly payment | Total of payments | Against the $99,428 left on the term loan |
|---|---|---|---|
| 10 years | $1,080 | $129,576 | $30,148 more |
| 5 years | $1,645 | $98,729 | $699 less |
| 3 years | $2,437 | $87,722 | $11,707 less |
All three rows assume the rate never changes, which a variable rate can't promise. If the company's operating cash flow is $54,000 a year and other debt payments total $18,000, coverage is 1.06 with the term loan and 1.74, 1.43 or 1.14 with the 10, 5 or 3-year 7(a) loan, against the 1.10:1 minimum for a 7(a) Small loan.
Statements and documents the lender will ask for
The first item is our inference from the MCA rule. The rest come from the SOP's file requirements.
- Conversion trail. The original advance agreement, the payoff or zero-balance letter, and the term note that replaced it, with at least 24 months of payment history.
- Debt documents. Lenders must retain "copies of the note(s) being refinanced, security agreements, leases, and other documentation evidencing the debt to be refinanced."
- Payment transcripts for the most recent 12 months, "to prove debt being refinanced is current," plus a written explanation of any late payments.
- Bank statements. On 7(a) Small loans, the two most recent months for the primary operating account, which the lender uses to confirm the debts in its coverage calculation. A new advance's debits would show up here.
- Financials. The SOP's general list calls for business financial statements or tax returns for the last 3 years, interim statements dated within 120 days of submission, and a detailed debt schedule. SBA Express lenders may follow their own policy on which financial statements to collect.
Appendix 14's general requirements also call for a written analysis of why the debt was incurred, why it's being restructured and how the new loan improves the business's financial condition. For 7(a) Small and SBA Express loans, it says a "written credit memorandum is not required," which we read as waiving that analysis, though supporting documents for the debt must still be retained.
How the payoff works at closing
In the loan's SBA Terms and Conditions, the SOP requires that the refinancing be "specifically identified" in the Use of Proceeds section, with an itemization of debts repaid when an individual creditor is to be paid $10,000 or more.
The lender must document each disbursement and obtain evidence, "such as cancelled checks or paid receipts," that proceeds were used as stated. In practice, lenders typically get a written payoff figure from the creditor and pay that creditor directly. Afterward, confirm that collections have stopped and ask the old lender to release its lien filing. In a settlement announced April 22, 2021, the FTC alleged that one cash advance provider "continued withdrawing money from businesses' bank accounts for days after their balance had been repaid."
Budget for the SBA guaranty fee as well. For loans approved in fiscal year 2027, which began October 1, 2026, the SBA's fee notice sets it, for maturities over 12 months, at 2% of the guaranteed portion on loans of $150,000 or less and 3% on loans of $150,001 to $700,000. On the $72,319 loan above, with the SOP's 85% maximum guaranty, that's about $1,229 if the lender passes it on. The notice sets the fee at 0% on loans of $700,000 or less to manufacturers, listed food supply chain industries and businesses located in a rural area. See our SBA loan fees guide.
What to do if your advance is still active
A 7(a) refinance isn't available yet, so the first job is getting off daily debits and starting the 24-month clock. That usually means a term loan from a non-SBA lender, and in the example above that step alone cut monthly cash out by about 87%. Our guide to getting out of a merchant cash advance covers the options.
EQ Funding doesn't lend. One application reaches lenders who compete for your business, so you can compare business term loans for the conversion and SBA loans once the term loan has seasoned. Lenders assess credit and repayment ability, and approval and terms vary by lender.