Passing on an SBA loan to someone else isn’t like swapping a car title or even adding a new cardholder to your business credit card. This process requires both the lender and the Small Business Administration (SBA) to give their blessing. The person stepping in must clear the SBA’s strict eligibility checks, plus any additional criteria set by your lender.
Despite the bureaucratic hurdles, you might consider transferring an SBA loan to smooth the transition during a business change in ownership.
Let’s roll up our sleeves and get into how you can navigate this. To start, we’ll guide you through a brief questionnaire to pinpoint your specific needs. From there, our experts will walk you through the next steps with clarity.
What It Means to Transfer or Assume an SBA Loan
When someone takes over a small-business loan, a process known as "loan assumption," they officially take on the responsibility of repaying it. The loan’s conditions, like lender, interest rate, remaining balance, and repayment plan, stay the same—just the name of the borrower changes.
Usually, an SBA loan assumption arises when a business is sold. However, you might also transfer it when selling large equipment or real estate purchased with those loan funds.
How to Transfer Your SBA Loan to Someone Else
If you’re considering letting someone else take over your SBA loan, there are three major steps to keep in mind:
Step 1: Inform Your SBA Lender or Certified Development Company
Start by reaching out to your lender or the CDC if your loan is a 504 type, indicating your intention to transfer the loan. They’ll check whether your loan qualifies for this, discuss possible hurdles or fees, and list the documents you’ll need.
Step 2: Submit a Loan Assumption Request and Begin the Application Process
Next, both you and the person assuming the loan need to send a formal loan assumption request to the lender or CDC. This should include:
- A signed agreement detailing the terms of the assumption.
- Information about the new borrower.
- A summary of the current financial health of the business.
The new borrower must show they are capable of repaying the SBA loan, adhering to current SBA loan standards, which is a process much like applying for a new loan.
The new borrower should be prepared to present:
- Their credit report and personal financial statements.
- Evidence of management experience and knowledge of the industry.
- A comprehensive business plan.
For the transfer to proceed, these conditions should also be met:
- The new borrower must become the main owner of the business if it’s a sale.
- The financial stability of the business or the value of pledged assets shouldn’t suffer.
- No assets can be freed up as part of the agreement.
- The agreement must include a "due on sale or death" clause to prevent future assumptions.
Step 3: Gain SBA Approval
After your lender or the CDC approves the application and corresponding documents, they’ll forward the complete package to the SBA. The SBA reviews everything to make sure the new borrower is qualified. Once the SBA gives its nod of approval, you can proceed with signing the necessary papers to finalize the loan transfer.
Why Transfer an SBA Loan?
Typically, selling a business or any asset linked to an SBA loan means using the proceeds to settle the outstanding balance. While transferring the loan can be arduous and complicated, it might be sensible in certain cases.
Why a Current Borrower Might Consider Transferring Their SBA Loan
Here are a few scenarios in which a business owner might consider moving their SBA loan:
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To retain more profit from a sale: Opting to sell your business at a discount while letting a buyer assume your loan could allow you more cash from the transaction, bolstering your net sale price.
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To dodge prepayment penalties: By passing off the loan, you might avoid penalty charges for settling the loan early.
- To facilitate a business handover to a family member: If you’re passing the business to a family member, the loan could accompany the handover unless the current cash flow can satisfy the debt.
Why a Buyer Might Want to Assume an SBA Loan
For buyers, taking over an SBA loan could be motivated by:
- Lower overall financing expenses: If interest rates have surged since the existing owner secured the loan, assuming it could be cheaper than acquiring a new loan—from a financial standpoint, particularly if it means lower monthly payments and less interest over time. Even if additional funds are required, the combined cost may still be lower.
Potential Pitfalls to Be Aware Of
Despite the potential benefits, transferring an SBA loan does come with some drawbacks:
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It can be time-consuming: The rigorous requirements imposed by the SBA and lenders can slow down the assumption process, making it quite documentation-heavy. Some might find getting a new business acquisition loan from a conventional or online lender faster and simpler, particularly if they have a solid personal credit record and business success.
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Potential fees: Either party involved may face a fee—up to 1% of the remaining loan balance.
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The loan can only be assumed once: Once assumed, the loan must eventually be settled in full.
- Limitations on SBA 504 loans: Only the portion handled by the CDC can be assumed, leaving the original borrower responsible for the other part.
Frequently Asked Questions
Is a loan assumption the same as refinancing?
Not quite. Refinancing means you replace your current loan with a new one, usually to secure better terms. Assumption switches the borrower responsible for the balance, keeping the terms unchanged.
What happens to my SBA loan if I sell my business?
You’d generally pay off the loan with the sale proceeds, but if that falls short, you might need to cover the gap yourself. Alternatively, provided you have the lender’s and SBA’s approval, you could transfer the loan to the new owner.
What happens to my SBA loan if I close my business?
Closing doesn’t nullify your obligation. You must still settle the debt, possibly using collateral or personal assets. Without this, renegotiating terms with your lender or considering bankruptcy might be next steps.
