SBA Debt Refinance Essentials

SBA debt refinancing can get complicated – and staying aligned with SBA guidelines for Lenders is essential.

The latest SBA guidance in SOP 50 10 8 provides clarification on multiple issues. They’ve updated how debt refinancing is handled, and they’ve also reinforced the importance of the long-standing message that SBA loans aren’t intended to transfer risk or cover Lender losses.

Let’s take a look at some of the updates so you can be sure you’re staying aligned with Lender SBA compliance requirements and SBA guidelines for Lenders.

To start with, SBA still allows refinancing of a broad range of business debt – as long as it meets eligibility standards.

Here’s what qualifies.

• Balloon or demand notes – short-term loans with looming payoffs

• High-interest debt, where the current rate exceeds SBA maximums

• Credit-card debt, as long as the Borrower certifies that the debt was solely for business purposes

• Loans backed by more collateral than SBA requires

• Non-renewed lines of credit

• Maturity mismatch, such as a 3-year note for a 15-year piece of equipment

• Change of ownership debt – Seller notes may be refinanced after 24 months as long as they’re current, and the new payments are at least 10% lower (see below)

• Debt on the business’s balance sheet that’s reflected in tax returns

• HELOC debt used exclusively for business

• And debt from another Lender may be refinanced if the new SBA loan adheres to the 10% rule as described below

Here’s what does not qualify.

• Merchant cash advances and factoring

• Debt in default

• Debt that shifts loss to

• SBA SBIC or NMVC debt

• Trade payables

Refinancing same-Lender debt has additional requirements.

• All cases must be processed through SBA directly (i.e., non-qualified)

• The Borrower must prove they’re not in default

• SBA requires a 36-month payment history

• Any late payments (over 29 days) must be explained

• New terms must adhere to the 10%-lower-payment rule

• For existing SBA loans, you can only refinance if the terms can’t be modified due to a secondary-market investor or you can’t increase the loan amount

About that 10% rule: the new loan’s installment payments must be at least 10% lower than the debt being paid off. The only exceptions are balloon or demand notes, business credit card debt, and HELOCs.

What to goes in the loan file and ETran Use of Proceeds section?

• A written explanation describing the purpose of the original debt, the Borrower’s benefit from refinancing, the reason for restructuring the debt, and why the original terms are no longer suitable

• Supporting documentation for each debt being paid off

• Credit card or HELOC statements showing business use

• An itemized list of any creditor being paid $10,000 or more

• The SBA loan number and amount if refinancing an existing SBA loan

Done correctly, debt refinancing offers real benefits to both the Borrower and Lender, helping to support small business. Just make sure you keep track of the requirements to avoid screen-outs and rejections!

Need help navigating a tricky refinance – or SBA training for your team on how these requirements impact your day-to-day efforts? Whether you’re structuring a loan, prepping an application, or just trying to make sense of the latest SBA rules, understanding the details now can save real time – and avoid real headaches! We offer expert SBA consulting services for SBA Lenders; we’re your SBA Geeks in your back pocket.

Call us today at 877-576-0819, or use our contact form to drop us a note, and we’ll be in touch.