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SBA 7(a) Program Eligibility: “Eligibility of Debt Refinance”

Posted by Prudent Lenders in Blog, SBA 7(a) Lessons Learned – SBA Question? - Ask the Experts with No Comments

In order to use the proceeds of an SBA 7(a) loan for the refinance of debt, lenders must document that the debt was eligible. It should be noted that this issue is distinct from the eligibility concerns raised in previous articles in that only those funds used to refinance ineligible debt should be subject to the SBA’s denial of liability. In instances where only part of loan proceeds were used to refinance ineligible debt, the guaranteed percentage of that portion of the loan, and not the entire guaranteed portion of the loan, would be subject to a denial of liability by the SBA. While the SBA’s requirements for documenting the refinance of debt have changed over time, the basic requirements have been consistent. Debt is only eligible for refinance with SBA loan proceeds if the lender is able to document that: 1) the debt was incurred for an eligible purpose, 2) the debt is currently on unreasonable terms, 3) the creditor to be refinanced is not in a position to sustain a loss, and 4) the refinance of the debt will provide a substantial benefit to the small business concern. Additionally, the documentation requirements for the eligibility of credit card debt have changed significantly. In instances where a credit card is held in the name of a principal and there are no itemized credit card statements to clearly demonstrate that the debt was incurred for business purposes, a repair in the amount of the SBA’s share of those proceeds is warranted.

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