Refinancing business debt can be an excellent way to improve your cash flow and lower your interest rates. But what if you’re considering refinancing with an SBA (Small Business Administration) loan?
This can be a powerful tool for reducing the cost of debt, but there are specific guidelines and requirements you need to understand before you make the move.
In this article, we’ll walk you through the process of refinancing with an SBA loan, explore the potential benefits and drawbacks, and help you decide if it’s the right choice for your business.
What Does Refinancing With an SBA Loan Mean?
Refinancing means replacing existing debt with a new loan, ideally with better terms, such as a lower interest rate or a longer repayment period. With SBA loans, you can refinance an existing small-business loan (or multiple loans), potentially saving money on interest or improving cash flow.
However, refinancing isn’t as straightforward as simply taking out a new loan. There are specific eligibility requirements and qualifications that you need to meet. It’s crucial to understand how SBA loan refinancing works and what it requires.
Key SBA Loan Options for Refinancing
There are two primary SBA loan programs used for refinancing: the SBA 7(a) loan and the SBA 504 loan. Let’s look at each option and what makes them distinct.
1. SBA 7(a) Loan Refinancing
The SBA 7(a) loan is the most common SBA loan, offering flexibility in refinancing various business debts. It is designed for a range of business needs, from working capital to equipment purchases.
Requirements for SBA 7(a) Loan Refinancing:
- You must show that you’ve made timely payments on the debt you’re refinancing for at least the past 12 months.
- Your new loan payment should be at least 10% less than your current payments on the original loan.
Benefits:
- Flexible use: Can be used for multiple types of debt refinancing, not just specific assets.
- Lower interest rates: SBA 7(a) loans offer competitive interest rates, which could result in significant savings.
Important Tip: Refinancing with an SBA 7(a) loan is most beneficial when you’re looking to save money by securing a lower interest rate or reducing monthly payments. It’s also useful if you need to consolidate various business loans into one.
2. SBA 504 Loan Refinancing
SBA 504 loans are geared toward long-term investments, particularly real estate or equipment that will be used for at least 10 years.
Requirements for SBA 504 Loan Refinancing:
- At least 75% of the original debt must have been used for long-term assets like buildings or machinery.
- If refinancing without expansion, the original debt must be at least six months old, and the new loan must have a loan-to-value ratio of 90% or less.
- If refinancing with expansion, the new loan must provide better terms, and the amount used for refinancing cannot exceed the amount used for expansion.
Benefits:
- Long-term financing: Ideal for businesses that want to refinance property or equipment purchases.
- Cash-out options: If you want to refinance and expand, you may have access to additional funds for business growth.
Can You Refinance an SBA Loan With Another SBA Loan?
Yes, it’s possible to refinance an existing SBA loan with another SBA loan, but this process can be tricky. The primary challenge is that you’ll need to justify why refinancing is necessary, especially if your current SBA loan already offers favorable terms. You will also have limitations on which type of SBA loan you can use for refinancing, as SBA 504 loans are specific to long-term assets.
Additional Considerations for Refinancing With an SBA Loan
Before moving forward with refinancing your business debt using an SBA loan, consider the following:
- Fees and Penalties: SBA loans come with certain fees, such as origination fees and possible prepayment penalties. Be sure to factor these costs into your decision-making process.
- Longer Repayment Periods: While longer repayment periods may lower your monthly payments, they could also increase the total cost of the loan over time.
- Eligibility Requirements: SBA loans have stricter qualifications compared to conventional loans. You’ll need to meet credit score, business history, and debt repayment criteria.
When Should You Use an SBA Loan to Refinance?
Refinancing with an SBA loan can be a great move for your business under the right circumstances. Consider refinancing if:
- You can save money: If you can secure a lower interest rate or extend your repayment period, refinancing with an SBA loan can lead to long-term savings.
- Your business has improved: If your business is now more stable and profitable than when you originally took out a loan, refinancing can help you access better terms.
Key Takeaway:
SBA loan refinancing is most beneficial when your business has grown and you can qualify for a loan with better terms. If you’ve already secured favorable terms, refinancing might not provide substantial benefits.
How to Start the SBA Loan Refinancing Process
To begin refinancing your business debt with an SBA loan, follow these steps:
- Assess your current debt: Understand the terms of your existing loan(s) and determine if refinancing will actually save you money.
- Check eligibility: Ensure you meet the SBA’s requirements for the loan you want to use for refinancing.
- Consult with lenders: Reach out to SBA-approved lenders to discuss your refinancing options and get personalized advice based on your business situation.
- Prepare documentation: Gather the necessary documentation, including business financials, personal credit score, and information on the debt you wish to refinance.
Conclusion
Refinancing with an SBA loan can be a smart move for business owners looking to reduce debt costs and improve cash flow. However, the process involves meeting specific eligibility requirements and understanding the nuances between SBA 7(a) and SBA 504 loans. By carefully weighing the pros and cons, you can determine whether refinancing with an SBA loan is the right solution for your business.
If you think refinancing could benefit your business, start by consulting with SBA-approved lenders and gathering the necessary paperwork.
