Transferring an SBA loan isn’t a straightforward process. Whether you’re selling your company or planning for a family succession, understanding how to transfer an SBA loan and what’s legally allowed is critical for staying compliant and protecting your finances. In this article, we discuss what you should know about SBA loan transfers, including key rules, approval requirements, and potential pitfalls.
Can You Transfer an SBA Loan?
SBA loans are tied to both the borrower and the business. This means you can’t freely transfer an SBA loan to someone else without meeting specific conditions and obtaining approval from both the SBA and the lender. That said, a buyer or successor can assume the loan and take over responsibility for repayment under certain circumstances. This often comes up during the sale of a small business, a family succession plan, or an internal ownership transition.
Why Transfer an SBA Loan?
Transferring an SBA loan can make financial sense in a few scenarios:
- Business Sale: The buyer of your business may prefer to assume your existing SBA loan rather than apply for a new one, especially if the current loan has a low interest rate.
- Avoid Prepayment Penalties: Keeping the loan in place can help both the buyer and seller sidestep prepayment fees that might apply if the loan were paid off early.
- Family Succession or Ownership Change: In cases where the business stays in the family or shifts to a co-owner, transferring the loan can ensure continuity and reduce the need for new financing.
- Preserve Cash Flow: Assuming an SBA loan allows the new owner to avoid upfront loan origination costs, which helps to preserve more working capital during the transition.
How to Transfer an SBA Loan
- Contact the Lender First
Your first step is to speak with your lender to determine if the loan is eligible for transfer to a new owner. If you have a 504 loan, you’ll contact the Certified Development Company (CDC).
- Submit a Formal Request
If your lender determines that the loan is eligible, both you and the prospective borrower will need to submit a written request that outlines the terms of the proposed transaction. It should also include an explanation of why the loan should be assumed; an analysis of the business’s current financial standing; and details about the new borrower, who must meet SBA eligibility requirements, including the financial ability to repay the loan (they should be prepared to submit personal financial statements, tax returns, a business plan, and other documents that may be requested).
- Get Lender or SBA Approval
For SBA 7(a) loans, the lender often has delegated authority to approve assumptions, which means they can approve it internally. However, larger or more complex transactions could still be submitted to the SBA for approval. For SBA 504 loans, the process is more restrictive and typically involves both the CDC and SBA.
Why a Buyer Might Want to Assume an SBA Loan
From the buyer’s perspective, assuming an existing SBA loan offers several benefits:
- Quicker Access to Financing: Assuming an existing SBA loan can speed up the purchase process by bypassing the lengthy loan approval timeline.
- Potentially Better Loan Terms: The current loan may have lower interest rates or more favorable terms than what’s available in the market today.
- No Need to Start from Scratch: The buyer avoids the hassle of compiling a new loan application, underwriting, and approval process without having to start from square one.
From the current business owner’s perspective, transferring the loan could have key benefits as well:
- Preserve favorable loan terms: If the existing SBA loan has a low interest rate or favorable repayment terms, transferring it can make the overall deal more attractive to the buyer.
- Avoid Prepayment Penalties: Some SBA loans come with prepayment penalties if paid off early, but transferring the loan would allow the seller to avoid those fees.
- Support Familial or Internal Ownership Transfer: If the business is being passed to a family member or business partner, transferring the loan can help maintain the company’s financial stability and streamline the business transfer process.
- Keep More Cash on Hand: If the loan is transferred, the seller can avoid using proceeds from the sale to pay off the remaining loan balance upfront.
Potential Drawbacks
Transferring an SBA loan can be a time-consuming and paperwork-heavy process. Keep in mind that approval isn’t guaranteed, the process can take weeks or sometimes months, SBA loans can only be assumed once (a second transfer is not permitted), and SBA 504 loan assumptions are more limited (they often require more scrutiny).
A successful SBA loan transfer can be a win-win, but it’s essential to consult your lender early and work closely with financial and legal professionals to ensure a smooth transition. Just be prepared for some red tape along the way.
