SBA Guidelines: Debt Refinance Eligibility

Refinancing debt can be a pivotal step for small business customers looking to improve and grow their operations. When done correctly, the benefits are both quantifiable and immediate. The U.S. Small Business Administration (SBA) loans maintain a variety of purposes, including debt refinance, and are a common alternative for customers who fall outside a lenders’ conventional credit box.

In this summary, we share the primary benefits of refinancing business debt and relevant SBA-eligible refinance guidelines. Reviewing these items before you begin working with borrowers will ensure your loan intake process runs smoothly and efficiently.

Benefits of refinancing business debt

When existing debt comes with a high interest rate and/or with an unreasonable repayment term, it can be debilitating for small business owners. However, when you work with your borrowers to refinance their high-cost business debts, you can help them lower their monthly payments, improve their cash flow, and potentially save them hundreds or even thousands of dollars each month.

Types of eligible business debt

SBA loan programs offer a guarantee as high as 85%. Borrowers may receive extended repayment terms and, as such, lower payment requirements as compared to many conventional loan options. This makes SBA loan programs a worthwhile option for small business clients who have existing business-related debts that require refinancing. The SBA makes several kinds of business debts eligible for refinance.  The most common scenarios are as follows:

• A lender can provide financing at a longer maturity, such as refinancing a three-year equipment loan that is better suited for a ten-year term;
• Lines of credit can be termed out to create a fixed payment plan;
• Credit cards and other high interest rate debt can be refinanced at a better interest rate to allow a borrower to save on monthly payments and free up working capital;
• Loans originally used for a business acquisition may be refinanced with more favorable terms; and
• Loans that have a balloon payment, or that are due on demand, can be termed out to provide stable monthly payments.

It’s worth noting that in several of the above cases, the new monthly payment (meaning a post-refinance payment) must represent a reduction of at least 10% from the existing monthly payment.  Additionally, for most refinance requests the SBA will require copies of notes, security agreements, leases or other documents that evidence the debt to be refinanced. If you have specific questions about a particular refinance request, we’re here to help and are only a phone call away.

Refinancing an existing SBA-guaranteed loan

When a refinance involves an existing SBA loan, you’ll need to work with your borrower to collect the following items for your file:

• Proof the current lender can’t or won’t approve a loan increase or an additional loan; and
• Proof the current lender can’t or won’t modify the current payment schedule to make repayments easier on the borrower.

Refinancing same-institution debt

In cases of same-institution refinance, the SBA requires payment transcripts for three years preceding the refinance to ensure an SBA loan isn’t being used to shift potential losses from the lender to the SBA.

Prudent Lenders makes the SBA loan process as easy as possible for you and your clients by addressing eligibility items at the beginning of every new loan request.  Our team is here to assist you with any debt-refinancing questions and transactions. Not a partner yet? Get in touch today to talk through your lending needs.