Can You Transfer an SBA Loan to Another Person or a Buyer?

Assumption versus payoff: the two real paths

An assumption keeps the existing loan with a new obligor after approval. A payoff retires the loan at closing, usually with the buyer's new financing or cash.

When the SBA must sign off

Lenders can handle some routine servicing actions, but an assumption that releases an existing borrower or guarantor, and many ownership changes, require prior SBA approval.

SBA servicing rules for 7(a) loans are set out in its standard operating procedures. SBA's servicing guidance lists assumptions that release an obligor among actions that need SBA approval, and SBA has said lenders may not unilaterally approve ownership changes within the first 12 months after final disbursement. Rules are revised from time to time, so ask your lender which version applies; the SBA's 7(a) lender resources page lists current procedures.

The SBA's review generally considers whether the new owner qualifies, whether ownership stays within program limits, and whether the new owners have caused a prior loss to the government. 504 loans have their own process involving the lender and the certified development company.

What the buyer has to show

Expect the buyer to go through underwriting similar to a new SBA borrower: credit, experience, cash flow projections, and often an equity contribution.

• Personal credit reports and a personal financial statement.
• Relevant industry or management experience.
• Projections showing the business can cover the existing payment under new ownership.
• The purchase agreement and how the price is being paid.
• Any new guarantees the lender requires from the buyer.

If the buyer would not qualify for a new SBA loan, an assumption is unlikely to be approved either.

What happens to the seller's personal guarantee

Your guarantee stays in place unless the lender, and SBA when required, specifically release you in writing. Selling the business does not end it by itself.

This is the trap many sellers miss. If the buyer takes over the business and the payments but you are never released, you remain liable if the buyer defaults later. Before closing:

1. Get a written release of your guarantee as part of the assumption approval.
2. If a release is refused, insist on a payoff at closing instead.
3. Make the sale contract conditional on the release or payoff.

Our personal guarantee guide explains what you signed originally.

An illustrative sale

In most sales, the buyer's new financing pays off the seller's SBA loan at closing, which is simpler and cleanly ends the seller's guarantee.

Illustrative example. A dental practice owner has $180,000 left on an SBA 7(a) loan and agrees to sell the practice for $650,000. The buyer arranges new financing and contributes a down payment. At closing, the title or escrow company pays the seller's lender from the proceeds using a payoff letter, the lien is released, and the seller's guarantee ends with the loan. The seller nets the rest of the price, minus costs. No SBA assumption process is needed.

The assumption route would make more sense if the existing loan had an unusually attractive rate and term, the buyer was strong, and both sides could wait for approval.

Partial ownership changes and new partners

Adding or removing a partner, or changing ownership percentages, can also require lender and sometimes SBA approval, even if the business itself is not sold.

A full sale is not the only event that triggers SBA rules. Common situations include:

• Buying out a partner. The departing partner usually wants a release from their guarantee, and the remaining owner may need to show the business still qualifies.
• Bringing in an investor. A new owner above certain ownership levels may need to provide a guarantee and pass the lender's review.
• Gifting shares to family. Even a transfer with no money changing hands can be an ownership change under your loan documents.
• Converting the entity. Moving from an LLC to a corporation or merging companies can require consent.

Tell your lender before the change, not after. An unapproved ownership change can be treated as a default under many loan agreements. For partner exits, see funding for buying out a partner.

Steps to take before you list the business

Request a payoff figure, read your loan documents for transfer and prepayment terms, and talk to your lender early.

• Ask the lender for a current payoff estimate and any prepayment fee.
• Find the sections on transfer, sale of assets and change of ownership in your note and security agreement.
• Ask the lender whether it would consider an assumption and what it would need.
• Talk to a business attorney and your accountant about structure and taxes.
• Read how to sell a small business for the broader process.

ROI Funder does not place SBA loans for business acquisitions. If you are the buyer and the business you bought later needs working capital, an owner with 6+ months of operating history in that business, $20,000+ monthly revenue and 500+ FICO can apply with a soft pull.