The U.S. Small Business Administration (SBA) allows for the refinance of existing business loans under its Section 7(a) and Section 504 programs. These refi programs help small business owners like you gain access to continued capital or financing for long-term assets integral to your business survival and success. The loans to be refinanced are not necessarily and may not be SBA-guaranteed loans, the agency has a rule on that. Find out if your old business debts can qualify for a refinance using SBA loans.
SBA loans under Section 7(a) are multi-purpose business loans made for eligible small businesses. One of its basic purposes is to refinance existing business loans.
For you to refinance your old business loans with an SBA 7(a) loan, you must meet these minimum requirements:
1. That the original loans were incurred for an eligible purpose or would have been eligible for SBA guarantee.
2. That the new loan will result in a substantial benefit to you as a borrower, such as reduction in payment of at least 10%.
3. That the existing business loans are made on unreasonable terms and that for each loan, there’s a written justification to prove the unreasonableness of its terms. Unreasonable terms can be:
- The existing loan has a balloon maturity repayment.
- The existing loan is a revolving line of credit or a credit card.
- The existing loan is overcollateralized.
- The existing lender is unwilling to renew.
- The existing debt was incurred due to a change of ownership.
This type of SBA loans can’t be used to refinance existing debt where the lender will sustain a loss and the agency will take over such loss through the refinance.
Generally speaking, the SBA does not allow for the refinancing of its existing guaranteed loans. But there are exceptions, meaning it may be done or considered if the borrower has shown new financing needs to which the existing lender has declined to provide, or that the existing lender declined to modify the terms of the existing SBA loan in order to include the new loan.
The SBA previously expanded its 504 Certified Development Company Loan Program or Section 504 to allow refinancing of certain qualified business debt. The refinancing program per se was terminated in September 2012 but it has been authorized to return as a permanent feature of the 504 Loan program, subject to statutory changes, in December 2015.
To be eligible to refinance with the Section 504 program, you must meet these requirements:
1. Your business has been operating for two years, as evidenced by financial statements, such that the two-year period ends on the date the refi application was submitted. If there is a change of ownership within that period, your business will be considered new and your debt will not be eligible for a 504 debt refinance.
2. Debts to be refinanced under the relevant program must include a qualified debt, and eligible business expense may be included as well.
The SBA defines qualified debt as a commercial loan or a combination of two or more loans, provided that each loan has these attributes:
- Whose 85% or substantially all of its proceeds were used to acquire an eligible fixed asset as defined by regulations.
- That was incurred two years before the refinance loan application.
- That was made for the benefit of the small business seeking to refinance.
- That is being secured by the eligible fixed asset for at least two years.
- Whose status is current, i.e. all payments due have been made for a year before the application date.
- That is not guaranteed by a federal agency or department.
- That is not considered a third party loan that is part of an existing project, defined as the purchase, lease or improvement of a small business’s long-term fixed assets using 504 financing.
Third party loan is a loan sourced from a private or commercial lender, investor or federal, state or local government. This means you can’t refinance SBA loans such as 7a and 504, under the program.
3. Debts to be refinanced will be subject to 90% loan-to-value limit.