Can an SBA loan pay off a business line of credit?

Yes, in two situations. Appendix 14, Paragraph A.1.e of SOP 50 10 8.1 covers revolving lines of creditlines of creditA credit limit you can draw on, repay and draw on again. , short-term or long-term, where:

• The original lender is unwilling to renew the line, or
• You are restructuring your financing to get a lower interest rate or longer term.

The payment test does not apply

Those lines are excepted from the payment improvement rule (App. 14, Para. A). The line must still be current for at least the last 12 months or the life of the loan, whichever is less. SBA-guaranteed loans may not pay a creditor in a position to sustain a loss (13 CFR 120.201).

Moving it to a Working Capital CAPLine

A Working CapitalWorking CapitalMoney for day-to-day costs such as payroll, rent and inventory. Full definition CAPLine may refinance only short-term revolving debt (App. 14, Para. B.4). These conditions apply:

• The old line must be terminated after payoff.
• You need a borrowing base or collateral that supports the CAPLine plus other short-term debt.
• The new loan should carry at least the same collateral and lien priority.
• If the old line is the same lender's and you default within 90 days of initial disbursement, SBA presumes a prohibited shift. SBA may then deny liability on the guaranty.

Programs that cannot help

Contract, Seasonal and Builders CAPLines cannot refinance debt (App. 14, Para. B.5). The working capital part of any 7(a) loan cannot repay the line either (Sec. A, Ch. 3, Para. A.2.d.iii). The payoff has to be listed as refinancing.

Appendix 14 does not say how much of a line must be drawn, or how long it must have been open. Ask your lender how it sizes the request.