Refinancing business debt with an SBA loan: what qualifies, the 10% test and what it costs

An SBA 7(a) loan does not have to pay for something new. It can pay off debt the business already has: a term loan from an online lender, a credit card balance, a line of credit the bank will not renew.

SBA's manual for lenders sets the conditions in one appendix. Most of it is a list of what may and may not be refinanced. The rest is a test of whether the borrower ends up better off, and SBA measures that one way only: by the monthly payment.

This guide goes through the list and the test, and then works out what the test leaves unmeasured. To run your own debts through it, use the refinancing calculator.

Which debts a 7(a) loan can pay off

Three conditions sit above the list and apply to every debt on it.

It has been paid on time. The debt must be current, and must have been for the last 12 months, or for its whole life if it is newer than that. Current has a precise meaning: no required payment left unpaid for more than 29 days. A loan that matured and was not paid off within 29 days is not current, and cannot be refinanced.

It is business debt. The manual says debt on the business's balance sheet may be refinanced if it also appears on the business's tax returns, with the interest paid on it. For a sole proprietor that means Schedule C. Credit cards and home equity lines need a certification from the borrower that the money went only to the business. The lender is allowed to rely on it.

The lender is not moving its own loss. A loan backed by SBA may not be used to pay a creditor that stands to lose money on the borrower. This is why refinancing debt held by the same lender carries extra conditions, described below.

The 10% test

For most debt there is one more hurdle. The manual's words are that the new installment "must be at least 10 percent less than the existing installment amount(s) in aggregate."

Three things follow from that sentence.

• Debts are added together. When several are refinanced at once, the manual lets them go into one calculation. A debt that would fail alone can pass with the others.
• It is about the payment. The test does not ask what the debt costs over its life, or what rate it carries.
• Rising payments are judged forward. If the old note has payments that step up, the new installment is compared with the one expected within the next 12 months.

Four kinds of debt are exempt: notes payable on demand or with a balloon payment, credit card debt, home equity lines used for the business, and revolving lines of credit that the lender will not renew or that are being restructured for a lower rate or a longer term.

In this example 2 debts are subject to the test. Together they cost $4,700 a month, so the new installment on them may be no more than $4,230. Over 10 years at 9.75% it comes to $1,373, which is 71% lower.

The credit card goes into the new loan without being tested. The cash advance does not go in at all.

What passing costs

The example passes with room to spare, and most of that room comes from time. The term loans it replaces had 34 and 20 payments left. The new loan runs for 120.

The rate does little of the work. At 9.75% but on the schedules they have now, those loans would cost $4,474 a month, 5% less than today. The rest of the fall is the longer term.

As they stand, those loans will take another $123,400 to pay off. Inside a 10-year SBA loan the same debt costs $164,771. The payment falls by 71% and the total rises by $41,371.

A shorter loan changes the answer. Over 3 years the installment is $3,376, still 28% lower than today, and the total is $1,873 less than the debts would have cost. Over 2 years the installment would be $4,833, more than the business pays now, and the test fails.

At this rate the shortest term that passes is 28 months.

Neither end is right for everyone. A business that cannot meet its payments needs the lower installment, and the extra interest is what that relief costs. A business that can meet them should know that the test will not stop it from choosing the dearer option.

Two rules in the manual bear on the term.

• A lender must give the shortest term that fits the purpose of the loan and the borrower's ability to repay.
• The longest term depends on what the old debt paid for: ten years for working capital, generally ten for equipment and up to fifteen where the asset's useful life supports it, and 25 for real estate. A loan for more than one purpose may take a blend, or the full 25 years if 51% or more of it is for real estate.

There is also a fee. SBA's upfront guaranty fee applies to a refinancing as to any other 7(a) loan. On the example it is $2,125. If it is added to the loan, the tested installment becomes $1,396.

Merchant cash advances and factoring

The manual in force until September 30, 2026 said that merchant cash advances and factoring agreements could not be refinanced. The current one keeps the bar on factoring and opens a narrow door for advances.

It calls them sales-based repayment agreements: funding in which a business receives cash in exchange for a percentage of its future sales. One can be refinanced only if all three of these are true.

• The agreement has been converted to a term loan.
• That loan has been amortizing, meaning paid down in installments, for at least 24 months.
• No further agreement of the kind has been taken since the conversion.

An advance that is still active is not eligible. That is the position of the advance in the example, which is why its $40,000 stays outside the new loan.

The arithmetic of that matters more than the rule. Before the refinancing, the business pays $14,300 a month on all of its debts. Afterwards it pays $10,635: the new SBA loan, plus the advance, which is still taking $9,000 a month until it is collected. An SBA loan can clear the debts around an advance. It cannot clear the advance.

If the same advance had been turned into a term loan paying $1,900 a month, and 24 months had passed, it would join the others. The loan would be $165,000 and the test would cover $6,600 of monthly payments.

Our cash advance calculator turns a factor rate into an annual rate, which is the first step in deciding what an advance is costing.

When the test is hard to pass

In the example a longer term did the work. Debt that is already long-term has no such help.

Take a commercial mortgage with $300,000 outstanding and a payment of $2,400. The new installment may be at most $2,160. At 9.75%, the median for 7(a) loans of that size, a 25-year loan costs $2,673 a month. That is more than the business pays now, and 25 years is the longest term SBA allows. A longer one would not help in any case: the interest alone is $2,438 a month. Over 25 years the refinancing passes only at 7.2% or below.

The exemptions matter here. If that mortgage were structured with a balloon payment, the 10% test would not apply to it at all.

What a 7(a) loan costs

medianmiddle half of loans

6%7%8%9%10%11%12%13%14%

$25,000 or less11.25%

$25,001–$50,00010.5%

$50,001–$150,0009.75%

$150,001–$350,0009.75%

$350,001–$1 million9%

$1–$2 million8.75%

$2–$5 million8.5%

Source: The Mercantile Record analysis of SBA 7(a) loan records as of June 30, 2026. Method.

Show the numbers as a table

Loan size	Loans	25th percentile	Median	75th percentile
$25,000 or less	4,805	9.75%	11.25%	13.25%
$25,001–$50,000	6,368	9.25%	10.5%	12.24%
$50,001–$150,000	10,980	9.25%	9.75%	10.5%
$150,001–$350,000	10,794	9%	9.75%	10%
$350,001–$1 million	8,720	8.25%	9%	9.5%
$1–$2 million	4,152	7.8%	8.75%	9.5%
$2–$5 million	3,701	7.75%	8.5%	9.25%

The rate depends heavily on the size of the loan. Among 7(a) loans approved in the twelve months to June 30, 2026, the median was 10.5% for loans of $25,001–$50,000, 9.75% for $50,001–$150,000 and 9% for $350,001–$1 million. Our study of 7(a) rates breaks them down further.

SBA also caps what a lender may charge. These are the limits for a loan with a variable rate. Fixed rates have a maximum of their own, which SBA publishes separately.

Those caps are the measure for one line of the eligibility table. Debt at a rate above the most SBA allows for a loan of its size may be refinanced, subject to the 10% test.

Debt owed to the same lender, and other SBA loans

The same lender. A bank may refinance its own loan with a 7(a) loan, but the manual adds conditions. The lender may not use its delegated authority to reduce its own exposure to the borrower, and may not refinance where it appears to be shifting a likely loss to SBA. Its file must hold the payment record for the last 36 months, or for the life of the loan if shorter, with a written explanation of any late payment.

Another lender's 7(a) loan. This is allowed on the same conditions as other debt. If the old loan had a term of 15 years or more and is less than three years old, paying it off triggers a fee to SBA: 5% of the amount prepaid in the first year, 3% in the second and 1% in the third.

The lender's own 7(a) loan. A lender with delegated authority may do this only when it cannot change the terms of the existing loan because an investor who bought it will not agree, or when the existing loan cannot be increased.

A 504 loan. A 7(a) loan may refinance one only together with the bank loan that sits beside it, or after that loan has been repaid and the refinancing is part of a larger loan to expand or renovate the property.

What the lender has to put in writing

For a standard 7(a) loan the application must carry a written analysis. It is worth knowing what the lender has to answer, because the borrower supplies the facts.

• Why the debt was taken on.
• Why it is being restructured. The manual's examples are over-obligation and imprudent borrowing.
• How the new loan will improve the business's financial condition.
• Why the old debt no longer meets the business's needs.
• Why the refinancing does not pay a creditor that stands to lose.
• A list of every creditor to be paid $10,000 or more.

The lender also keeps a copy of each note being paid off, with its security agreement, and the latest statement for any credit card.

For loans of $350,000 or less and SBA Express loans, the same rules apply, but the manual does not require the written credit memorandum. The supporting documents still have to be kept.

Collateral and guarantees on the new loan

A refinancing does not shed collateral. The new loan must be secured by at least the same assets, in the same lien position, as the debt it replaces. Receivables and inventory are excepted. If the old debt held more collateral than SBA would ask for and the new loan stays fully secured, the lender may release the excess.

The owners guarantee the new loan like any other 7(a) loan. Our guide to personal guarantees and collateral covers who signs and when a home is pledged. Replacing unsecured debt with an SBA loan can therefore put collateral and a personal guarantee behind debt that had neither.

The lender must also show that the business can carry the new loan. The DSCR calculator applies SBA's minimum.

What this guide cannot show

SBA's public loan file does not say which loans refinanced debt. There are no figures here on how many did, at what rates, or how they turned out. The rates above are for all 7(a) loans of each size.

This article is general information. It is not an offer of credit, and we are not a lender.