SBA Refinancing Rules Have Changed: Why Merchant Cash Advances Are No Longer Eligible and Where Factoring Can Fit In
Written by: Tom Ingrassia, CRO, CapFlow Funding Group
Small businesses have always had to make financing decisions in imperfect conditions. Whether it’s rising input costs, uneven customer payment cycles, labor constraints, or shifts in interest rates, liquidity management remains one of the most persistent challenges in the market.
Over the past decade, the growth of alternative financing products, particularly merchant cash advances, has given business owners faster access to capital, often outside of traditional underwriting frameworks. At the same time, SBA-backed lending has remained one of the most important and stable channels for long-term small business funding.
In recent years, many borrowers, advisors, and funders began to view SBA loans as a potential “exit ramp” from expensive short-term obligations like MCAs. However, that assumption is no longer valid.
Beginning in 2025, the SBA implemented a significant policy shift: SBA loan proceeds can no longer be used to refinance merchant cash advances. This change has meaningful implications not only for borrowers but also for funders, brokers, and working capital providers across the commercial finance ecosystem.
This article provides an educational overview of the SBA, explains how MCA refinancing became part of the conversation, and outlines what has changed under updated SBA guidance. From there, we’ll delve into what these developments mean for borrowers and funders today, and what can realistically be expected as we move through 2026.
The SBA’s Role in Small Business Finance
The U.S. Small Business Administration was created to support the development and stability of small businesses, widely recognized as the backbone of the American economy.
Importantly, the SBA does not function as a direct lender in most circumstances. Instead, it operates primarily through loan guarantee programs, partnering with approved banks and financial institutions.
Under programs like the widely used 7(a) loan program, the SBA guarantees a portion of a lender’s loan. This reduces the lender’s exposure to loss and enables financing that might otherwise be unavailable through conventional credit channels.
SBA loans are typically associated with:
Longer repayment terms
More favorable pricing compared to many short-term products
Structured amortization
Flexible use of proceeds (within guidelines)
Support for businesses that may not qualify for traditional bank loans
For many small businesses, SBA financing represents one of the most affordable and sustainable sources of growth capital available.
Why Merchant Cash Advances Became So Common
To understand why the SBA’s refinancing change matters, it helps to understand the role MCAs have played in the market.
Merchant cash advances are not technically loans. They are typically structured as a purchase of future receivables, repaid through daily or weekly withdrawals based on revenue performance.
MCAs have become popular because they offer:
Speed of funding
Minimal documentation
Less emphasis on traditional collateral
Access for borrowers with thin credit profiles
For some businesses, particularly those facing urgent cash needs, MCAs can provide immediate liquidity when other options are unavailable.
However, the tradeoff is often a high effective cost of capital and an aggressive repayment structure. Frequent debits can strain operating cash flow, especially when layered with additional advances or when revenue softens.
Over time, many businesses find themselves seeking a way to restructure these obligations into something longer-term and more manageable.
How SBA Loans Were Previously Used to Refinance MCAs
Historically, SBA loans have been used not only for expansion or acquisition, but also for certain forms of debt refinancing.
In practice, some borrowers used SBA 7(a) proceeds to refinance short-term, high-cost financing, including MCAs, into loans with:
Monthly repayment schedules
Longer amortization horizons
Lower overall financing costs
Improved cash flow stability
This approach became increasingly common as MCA usage expanded. For business owners, it seemed logical: replace expensive daily-payment obligations with structured long-term financing.
For advisors and lenders, SBA refinancing was sometimes positioned as a “graduation” path, a way for businesses to move from emergency capital to sustainable credit.
But as MCA volumes increased, so did concerns around risk layering, borrower distress, and the use of government-backed guarantees to resolve private high-cost debt.
The SBA’s Policy Shift: MCA Refinancing Is Now Prohibited
That brings us to the key change.
Under updated SBA guidance, specifically SOP 50 10 8, effective June 1, 2025, the SBA now explicitly prohibits the use of SBA loan proceeds to refinance:
Merchant cash advances
Certain other nontraditional receivables-based financing structures
In other words:
SBA loans can no longer be used to pay off or consolidate MCA debt.
This is a significant departure from how refinancing was approached in prior years, and it reflects the SBA’s intent to protect both borrowers and the integrity of the guarantee program.
Legal and industry summaries of the change note that MCA obligations are now excluded from SBA-eligible refinancing categories going forward.
Why Did the SBA Make This Change?
The SBA has not framed this shift as a judgment on any single product category, but the rationale is widely understood in the market.
MCAs differ fundamentally from traditional amortizing debt. They often involve:
High annualized costs
Short-duration repayment expectations
Daily cash flow extraction
Multiple stacked obligations
Limited underwriting consistency across providers
From the SBA’s perspective, refinancing these obligations introduces several challenges:
1. Portfolio Risk
Government-backed guarantees are designed to support stable small business lending, not to absorb losses from distressed high-cost obligations.
2. Borrower Viability
If a borrower requires repeated MCA financing, it may raise questions about underlying cash flow sustainability.
3. Program Integrity
The SBA wants to ensure its loans are used primarily for productive business investment, not as a mechanism to restructure expensive private financing.
This policy change signals a clearer boundary between SBA-backed lending and certain short-term alternative finance products.
What This Means for Small Businesses
For business owners, the impact is immediate and practical. SBA refinancing is no longer an option for paying off merchant cash advance obligations, and businesses carrying MCA debt may now face reduced eligibility for SBA-backed financing altogether.
Existing daily or weekly payment structures can also constrain debt service coverage ratios, making it harder to qualify under traditional underwriting standards. As a result, borrowers must explore alternative restructuring or liquidity strategies outside of the SBA framework. This shift also means businesses need to think more carefully before taking on short-term capital under the assumption that it can later be “converted” into SBA financing. The new reality is that once MCA debt is embedded in a company’s cash flow, it may limit access to the most affordable long-term capital sources.
What This Means for Funders and Advisors
For funders, brokers, and advisors, this change requires a recalibration of expectations and guidance.
SBA lenders will need to:
Screen MCA exposure more rigorously
Educate borrowers earlier in the process
Avoid assumptions about takeout eligibility
Structure working capital solutions with clearer long-term planning
It also creates an opportunity for the broader commercial finance industry to emphasize responsible product matching, aligning funding tools with the specific operational realities of the business.
Where Factoring Fits as a Working Capital Tool
In this evolving environment, factoring remains an important component of the working capital ecosystem.
Factoring is not designed for debt refinancing. Instead, it is fundamentally a cash flow management tool.
In a typical factoring arrangement:
A business sells its accounts receivable (invoices)
The factor provides immediate liquidity against those invoices
Cash flow is accelerated while the customer pays on normal terms
Factoring can be especially useful for businesses with:
Long payment cycles (net 30–90+)
B2B invoicing models
Growth-driven working capital needs
Seasonal or contract-based revenue timing gaps
Unlike MCA structures tied to future revenue extraction, factoring is tied directly to completed sales and existing receivables.
Its role is often to:
Bridge timing mismatches
Support payroll and operating expenses
Enable fulfillment of new orders
Provide liquidity without long-term amortized debt
For many industries: staffing, transportation, manufacturing and distribution, factoring has long served as a stable financing tool precisely because it aligns funding availability with invoice generation.
Why Factoring Can Fill the Gaps
A common question that comes up is why merchant cash advances can no longer be refinanced through SBA-backed loans, while factoring is still widely used as a working capital tool. The key distinction lies in how the SBA defines eligible debt and the risk profile of these products. Merchant cash advances are typically structured as a purchase of future receivables rather than a traditional amortizing loan, with repayment occurring through daily or weekly withdrawals that can significantly strain cash flow. Because MCAs often carry very high effective costs and are frequently associated with distressed or stacked borrowing, the SBA has moved to prevent its government-guaranteed programs from being used as a “rescue mechanism” for these obligations.
Factoring, by contrast, is generally viewed less as long-term debt and more as a transactional form of cash flow acceleration tied directly to existing invoices. In a factoring arrangement, a business sells completed receivables to access liquidity while waiting for customers to pay on standard terms. That said, it is important to clarify that the SBA’s updated SOP guidance prohibits refinancing both merchant cash advances and factoring agreements with SBA loan proceeds. Factoring is not exempt as a refinance target, but it remains a legitimate and established working capital tool for businesses managing timing gaps in receivables.
A Changing Capital Landscape Requires a Clearer Strategy
The SBA’s prohibition on refinancing MCAs represents more than a technical rule update. It reflects a broader shift toward ensuring that SBA-backed lending remains focused on long-term sustainability rather than short-term debt restructuring.
For small businesses, the message is clear:
Short-term capital decisions have long-term consequences
Not all obligations can be refinanced into SBA loans
Cash flow tools must be matched carefully to business models
Working capital planning matters more than ever
Factoring, when used appropriately, remains one of the established tools that can help businesses manage receivables-driven liquidity needs, not as a bailout mechanism, but as a working capital solution aligned with operational cash flow cycles.
As the financing environment continues to evolve, education and strategic alignment will be essential for borrowers, lenders, and the commercial finance community alike.
About the Author:
Tom Ingrassia has been with CapFlow Funding Group since 2024, serving as Chief Risk Officer. Before joining CapFlow, Thomas spent over 15 years at Capstone Capital Group, LLC, where he was Vice President of Due Diligence and Underwriting, overseeing risk assessment and underwriting strategies. He also served as Corporate Finance Manager at Amincor, Inc., managing financial operations for nearly 14 years. Earlier in his career, Thomas worked in Prime Brokerage Operations at Goldman Sachs, gaining valuable experience in financial services. As Chief Risk Officer, Thomas is responsible for managing risk, ensuring compliance, and driving strategic financial decisions that support CapFlow’s continued growth. Thomas holds an MBA in Finance and Management from Fordham Gabelli School of Business, where he was a member of the Phi Kappa Phi Honors Society, and a B.S. in Mathematics from Syracuse University.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.