SBA Loans to Refinance High-Cost Debt: How to Help Your Clients in Uncertain Times

Today, it goes without saying that many small businesses are in survival mode. One of the many strategies they’re using to stay afloat is finding creative ways to free up capital to put at work in their business. And now, more than ever, they need your help.

A great way to provide critical support is to offer the opportunity to refinance high-cost debt using an SBA loan. A refinance can significantly reduce monthly debt payments, improve cash flow, and make it easier to pay back loans and reinvest in a business.

With interest rates at record lows, we’re expecting a significant uptick in requests and opportunities to refinance debt. Understanding the basics of how these types of SBA loans work will ensure you’re prepared to help as many businesses as possible.

Start by reviewing the SBA’s general criteria for loan refinances, which we review below. Then, use Prudent Lenders’ straightforward, two-step process—which includes our proprietary Fast Track Assessment—to help your small business clients refinance high-cost business debt and get past these challenging times.

Get to know the high-level SBA refinance criteria

The SBA has some general criteria for loans used to refinance debt. The more familiar you are with their requirements for different scenarios, the easier it will be to quickly assess whether it makes sense to move on to the next steps. Here’s what you need to know upfront:

In any of the following scenarios, the new monthly payment must reduce the existing installment amount by at least 10%:

• A loan carries an interest rate that exceeds the SBA maximum rate based on size, term and 7(a) processing method
• A loan that is over-collateralized, based on the SBA’s collateral requirements
• A loan with a mismatched maturity, such as a three-year term for equipment with a 15-year useful life
• A loan used to finance a change of ownership (in this case, a seller note must be in place for two years)
• A loan that you, as a lender, believe no longer meets your client’s needs

These scenarios are eligible for refinancing without the 10% reduction requirement:

• Short- or long-term debt structured with a demand note or balloon payment
• Business-related credit card debt
• Short-term loans that financed equipment for less than the SBA term of 10 years
• Revolving lines of credit in which the original lender is unwilling or unable to renew the line, or the client is refinancing to obtain a lower interest rate or longer term
• High-interest-rate loans

Keep these additional requirements in mind

Before presenting an SBA-backed loan as a debt refinance option for your small business clients, it’s helpful to know that:

• SBA-guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made.
• SBA-guaranteed loan proceeds may not be used to pay a creditor in a position to sustain a loss.
• If the debt to be refinanced originated with your bank, an SBA-guaranteed loan can’t be used toward the debt if it seems that a potential loss will be shifted to the SBA. That’s why in this scenario, a transcript of payments for the last three years is required.
• If the refinance involves an existing SBA loan, the SBA requests evidence that the current lender won’t or can’t approve a loan increase or an additional loan and is unable or unwilling to modify the current payment schedule.

Uncover more stones by individually considering industry and financial profiles

Keeping the door open for your clients when they need your help the most is one of the most important things you can do to support small businesses in your community. You can keep more doors open by evaluating businesses on a case-by-case basis, rather than applying blanket policies and decisions on the industries and financial profiles that you’ll consider for refinance. This way, you’ll uncover more stones in the long run.

For example, restaurants may seem risky overall, but business could be booming for those that have built strong reputations (and takeout menus!) in their communities. Similarly, many gyms are struggling but some have managed to expand their geographical footprint with outdoor classes. Taking a look under the hood will allow you to spot opportunities that would blanket policies would miss.

This will also allow you to help the community by serving businesses in industries that are more vulnerable than ever to predatory lending, such as retail, restaurants and bars, boutique hospitality businesses, personal care, gyms, and others. These are working-capital-intensive businesses with high staff and inventory expenses, and they additionally face new safety regulations that limit capacity or otherwise add to their operational costs.

Also be sure to take a look under the hood at a business’s financial profile. When a prospect’s financials are in rough shape, try to determine whether the business is truly struggling or if it’s suffering the consequences of a poorly structured short-term loan (at Prudent Lenders, we’re seeing refinances for short-term loans carrying interest rates as high as 30-35%).

My client seems eligible. Now what?

Once you’ve determined that a customer is a good candidate for debt refinance using an SBA loan, take the following steps to move forward:

Step 1: Complete a Fast Track Assessment Request

Get started by using our Fast Track Assessment, or FTA. It’s a proprietary, efficient and easy-to-use tool that helps determine a borrower’s SBA eligibility before going through the full application process.

With straightforward questions about the business, our FTA can help determine the likelihood of getting to a ‘yes’ before you and your client spend a lot of time on an SBA application. Within 48 hours of submitting the FTA to Prudent Lenders, you’ll have data-driven information to help you determine whether to move forward with the underwriting process.

Step 2: Gather as much information as possible about the borrower’s existing debt

If you do move on to the underwriting process, the more information you have early on, the quicker and easier it will be for you and your client to get to the finish line.

Prudent Lenders will provide you with a checklist of the information you’ll need to gather. You can expect to request copies of notes, security agreements, leases or other documents that show evidence of the debt to be refinanced. In the case of credit card debt, you’ll also need the most recent statement showing the name of the cardholder.

It’s also very helpful to get updated debt schedules, current interest rates on the outstanding loan and current payments.

Prudent Lenders makes it easier to serve your clients

If you’re an existing Prudent Lenders client, know that we stand ready to assist you and your clients through these uncertain times. And if you don’t work with us yet but are interested in offering SBA loans, contact us today. Partnering with Prudent Lenders is an excellent way for financial institutions to offer SBA loans quickly, easily and without the high overhead costs of establishing an SBA department.