The SBA's updated SOP 50 10 8 closed one of the most common uses of SBA 7(a) refinancing: paying off merchant cash advances (MCAs) with SBA loan proceeds. The prohibition is explicit and categorical — no SBA loan proceeds may be used to retire MCA balances. Additionally, existing MCA debt must now be included in the borrower's debt service coverage ratio calculation.
Before June 2025, many small business borrowers used SBA financing specifically to escape high-cost MCA debt. MCAs — advances against future revenue — often carry effective annual rates of 40%–150% or more. Using an SBA 7(a) loan at 9%–11% to retire MCA balances was a legitimate and common debt management strategy. That path is now closed.
Beyond the refinancing prohibition, the SOP update changed how MCA debt is treated in underwriting. Prior to the update, some lenders excluded MCA payments from the DSCR calculation on the basis that the MCA would be retired with loan proceeds. Under the new rules, outstanding MCA debt must be counted in the DSCR calculation — including deals where the borrower does not intend to use SBA proceeds to pay off the MCA.
For a business with $8,000 per month in MCA payments and $10,000 per month in SBA loan debt service, the new DSCR calculation must account for $18,000 in total monthly debt service. This increases the cash flow required to meet the 1.25x DSCR threshold and may disqualify borrowers who previously would have qualified.
If you have outstanding MCA debt, address it before applying for SBA financing. Options include: paying down MCAs from operating cash flow over time, negotiating early payoff terms with the MCA provider, or using conventional non-SBA financing to retire the MCA first. Work with a financial advisor to develop the right sequence.
Not all debt refinancing is prohibited. SBA loans can still refinance conventional bank debt, SBA loans (in specific circumstances), and other term debt — provided the refinancing meets SBA eligibility criteria including a documented 10% reduction in total loan costs or the payoff of a balloon payment. The prohibition is specific to MCAs and factoring arrangements.
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