MCA and Factoring Debt Refinancing Blocked by SBA
- Stephanie Pflaum
- 3 days ago
- 4 min read
Updated: 2 days ago
As of June 1, 2025, the U.S. Small Business Administration (SBA) will no longer allow its loan programs, including the 7(a) and 504 loans, to be used to refinance Merchant Cash Advances (MCAs) and factoring agreements.
Why the new SBA loan restrictions?
Higher risk of default and growing concerns that SBA funds were unintentionally propping up predatory lending practices caused the SBA to enact new restrictions on the use of SBA loans.
Prior to this rule, many startups used SBA loans to refinance MCA or factoring debt—swapping sky-high APRs and cash flow draining repayments for more manageable long-term payments and terms. But the SBA saw a pattern where businesses would refinance MCA debts with SBA loans and then take on new MCA obligations. This cycle contributed to increased default rates on SBA loans.
Definitions
SBA Loans
An SBA loan is a government-backed small business loan offered through private lenders (like banks and credit unions) and partially guaranteed by the U.S. Small Business Administration (SBA). It’s designed to support small businesses that might not qualify for traditional business loans due to limited collateral, credit history, or early-stage operations.
Merchant Cash Advances (MCAs)
A Merchant Cash Advance (MCA) is a form of business financing where a lender gives you a lump sum of cash in exchange for a percentage of your future sales or revenue. It’s not technically a loan—there’s no fixed interest rate or repayment term—but it behaves like one in practice, often with very high costs and aggressive daily or weekly repayment schedules.
Factoring
Factoring loans, more commonly referred to as invoice factoring, are a form of short-term financing where a business sells its unpaid accounts receivable (invoices) to a third party (called a factor) at a discount, in exchange for immediate cash. This isn't a loan in the traditional sense—you're not borrowing money; you're selling future income for a fee.
Implications for startup founders
This is a major policy shift that directly impacts startup founders, especially those seeking a path out of high-cost, short-term debt traps. Businesses with existing MCA or factoring debts will no longer be able to use SBA loans to refinance those obligations. Lenders may also view existing MCA or factoring debts as higher risk and make the loan approval process more stringent.
Startups that need relief from costly MCA or factoring loans will need to look elsewhere for financing, such as traditional term loans, business lines of credit, or specialized MCA debt relief programs.
While this change may present immediate challenges from some, it’s yet another compelling reason for startup founders to build financially healthy, sustainable businesses and avoid using high-risk short-term debt to fund growth.
Learn more about debt financing for startups
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Is MCA and Factoring Debt Bad for Startups?
MCAs and factoring debt are not inherently “bad,” but they are expensive, high-risk startup financing options that can easily become problematic for businesses if not used strategically.
The Good
When might MCA and factoring loans make sense?
Bridge Funding: Quick capital for a time-sensitive opportunity (e.g., inventory to fulfill a large order).
Invoice Gaps: Factoring can work if your customers have long payment terms and your business is otherwise healthy.
Poor Credit Situations: When you’re shut out of traditional financing and need a lifeline—but only with a clear exit strategy.
The Bad
Why MCA and factoring debt is often problematic for startups.
Sky-High Effective Interest Rates: MCAs often come with APR equivalents of 40–200%. Factoring is cheaper but still costly, especially when used long-term.
These rates can eat into margins and cash flow.
Cash Flow Drain: Daily/weekly withdrawals (MCA) or surrendering receivables (factoring) can cripple liquidity, especially during slow revenue months.
Debt Traps: Many founders take another MCA to pay off the first, leading to a debt spiral. Once locked in, it’s hard to escape without major financial restructuring.
Red Flags for Future Lenders: Traditional lenders view MCA or factoring debt as a sign of financial distress, making it harder to secure financing later.
MCAs and factoring should be a last resort, not a growth strategy. They're fast and flexible, yes—but also expensive and risky. For most startups, it’s smarter to focus on building eligibility for lower-cost financing options like SBA loans, revenue-based financing, or even equity capital.
Practical Advice for Founders Considering Short-Term Debt
Lenders don’t always make it clear that they are offering MCA or factoring loans—they might call it revenue-based financing or offer you a term sheet with a discount rate. As the saying goes, the devil is in the details; so be sure to review the fine print and ask the lender specific questions about the terms they’re presenting.
Shopping for debt capital?
Don't sign a loan agreement until you've read our buyer's guide. It will help you avoid unexpected costs and unnecessary risk to get the best return on your investment.
For those considering short-term debt such as MCA loans or factoring, here are three guidelines to help you make the best decision.
Do the math: Know your effective cost of capital. If the APR exceeds your gross margin, it’s a no-go.
Use sparingly and short-term: These are band-aids, not solutions.
Have an exit plan: Don’t take on short-term debt without a plan to pay it off without resorting to more short-term debt.
Actions to Take if You Have Expensive MCA or Factoring Debt
Like financial nitroglycerin—powerful, fast, and volatile—short-term financing solutions may get your startup through a cash crunch, but they can easily trap you in a cycle of expensive debt. The recent SBA rule change (effective June 2025) closes off a major escape route startups once had for MCA loans and factoring debt.
What can founders do now to better manage debt and keep growing?
Assess Your Debt: Review your existing loan agreements to understand the terms and implications.
Explore Alternatives: Research and consider other startup financing options that are more sustainable and align with your business goals.
Talk to Financial Advisors: Consult a financial professional to develop a plan to manage and potentially restructure your existing debt.
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