Can You Transfer Your SBA Loan to Another Person?

Transferring an SBA loan to another person isn’t as straightforward as transferring a car title or adding an employee to your business credit card. You’ll have to get approval from the lender and the Small Business Administration. The new prospective borrower must meet the SBA’s stringent eligibility criteria, as well as any lender criteria.

Despite the red tape, it may be worth trying to transfer an SBA loan if you want to minimize disruptions from handing over the reins of a business.

When you transfer a small-business loan to another person — a process known as “loan assumption” — the new borrower formally takes responsibility for repaying the loan. When a new borrower assumes a loan, the loan itself doesn’t change, only the person responsible for paying the balance. That means the lender stays the same, as does the loan’s interest rate, remaining balance and repayment schedule.

Loan assumptions for SBA loans are typically triggered by a business sale or transfer, but you may be able to transfer an SBA loan when selling a piece of heavy equipment or commercial real estate that you purchased with the loan proceeds.

To transfer your SBA loan to another person, you’ll have to follow three core steps:

Start by contacting your lender, or CDC (if you have a 504 loan), to inform them of your desire to transfer the SBA loan to a new owner.

It’ll let you know whether your loan is eligible for assumption. It’ll also outline any potential obstacles or fees, and provide the specific documentation required to move forward.

At this stage, both the current borrower and prospective borrower must submit a formal loan assumption request to the lender or CDC. This request should include:

• A signed written agreement outlining the terms of the assumption.

• Details about the new borrower.

• An overview of the business’s current financial condition.

The prospective borrower must demonstrate their ability to repay the SBA loan to the lender. Because the new borrower has to meet current SBA loan requirements, this process is similar to applying for an SBA loan from scratch.

The new borrower should be prepared to provide the following:

• Credit report and personal financial statements.

• Proof of business management experience and industry knowledge.

• A detailed business plan.

To move forward with the loan transfer, the following conditions must also be met:

• For a business sale, the new borrower must become the primary owner.

• The transfer must not negatively impact the business’s financial health or reduce the value of the pledged collateral.

• No collateral can be released as part of the assumption.

• The agreement must include a “due on sale or death” clause, which prevents future loan assumptions.

Once the lender or CDC approves the new borrower’s application and supporting documents, it’ll forward the complete loan assumption package to the SBA. The SBA will then conduct its own review to ensure all requirements are met and that the new borrower is qualified to take over the loan.

After receiving SBA approval, both parties can move forward with finalizing and signing loan transfer paperwork.

Normally, when you sell a business or asset tied to an outstanding SBA loan, the sale proceeds are used to pay off the remaining balance. Transferring an SBA loan is a time-consuming and complicated process. Nevertheless, there are some cases where it may make sense.

An existing business owner may decide to transfer their SBA loan in one of the following situations:

• You want to keep more cash from the sale. You may prefer to sell your business at a discount in exchange for the buyer assuming your loan. In that case, you’d be able to keep more of the sale proceeds (instead of using it to pay off your loan), resulting in a higher net sale price.

• You want to avoid prepayment penalties. If your SBA loan has a prepayment penalty, letting someone else take it over can help you sidestep pricey prepayment penalties you’d otherwise be on the hook for.

• You want to allow a family member to take over your business. If you’re giving away your business, say to a relative or trusted partner, you might also need to transfer your existing SBA loan over to them (unless the business’s cash flow can support paying off the balance early).

A prospective buyer may want to assume an existing SBA loan to:

• Lower total financing costs. If market rates have gone up since the original owner locked in a fixed-rate SBA loan (such as a 504 loan or EIDL) and the buyer needs financing to buy the business, taking over the loan can be a financially savvy move. That would be the case if the buyer ends up with smaller monthly payments and reduced interest costs from a low-rate SBA loan, as opposed to taking out a new, more expensive business acquisition loan. Even if additional financing is needed after assuming the loan, the overall cost may still be lower — for example, if the buyer only has to repay a small, higher-interest loan (in addition to the existing lower-rate SBA loan), rather than having to pay a large, higher-interest loan.

Take note of these potential drawbacks when transferring an SBA loan:

• Time consuming. Because of strict SBA and lender requirements, the loan assumption process can be time-consuming and document-heavy. It may be faster and easier for some borrowers to secure a new business acquisition loan from a traditional or online lender. This is especially true for borrowers with a proven history of business success and a strong personal credit profile.

• Fees may apply. Either the current or the new borrower may have to pay a fee of up to 1% of the balance of the loan being transferred.

• SBA loans can only be assumed once. Whoever takes over the existing loan must pay it off eventually.

• SBA 504 loan limitations. Only the CDC portion of an SBA 504 loan may be assumed. That means the current borrower will still be responsible for repaying the loan’s conventional lender portion.