Using the SBA 7(a) Loan to Refinance Debt

 Using SBA 7(a) loans to refinance business debt

 The SBA 7(a) loan is an excellent tool for improving your business's financial standing. Business owners can use the SBA 7(a) loan to get better terms on existing debts or business mortgages.

Most businesses have some debt, but if your loan terms are unreasonable and you can no longer meet the terms or afford the payments, you’re faced with the need to refinance the debt. The SBA 7(a) loan program helps small business owners refinance existing debt into loans with lower payments and/or longer terms in certain situations. If you’ve been struggling to get the funding you need, the SBA 7(a) loan program might be right for your business.

But First: What Is the SBA 7(a) Loan?

The United States Small Business Administration offers the SBA 7(a) loan, but the SBA itself doesn’t lend money. Instead, banks, credit unions, or other lending institutions lend to the business. The SBA simply backs the loan (agrees to repay it if the borrower defaults), ultimately reducing the amount of risk the lender takes on.

The loan can be used to buy real estate or land, treated like working capital, or spent on equipment costs. Small businesses can also use the SBA 7(a) loan to refinance existing debt.

Because your lender will need to get approval from the SBA to back your loan, the application process and paperwork for an SBA 7(a) loan can be lengthy. However, these loans typically boast better terms than traditional small business loans, and sometimes even come with counseling to ensure your business runs efficiently.

Who Can Refinance Debt with an SBA 7(a) Loan?

SBA 7(a) loans have attractive interest rates, repayment terms, and closing costs, but they do have stricter qualification requirements than some other business loans. Generally, here are the eligibility requirements for refinancing with an SBA 7a:

  • A credit score of at least 690

  • A record free of any bankruptcies in the past three years

  • At least a 10% down payment

  • For franchisees, a paid franchise fee before the loan funds are released

  • A clean criminal history, or the ability to explain any misdemeanors on your record

  • No current Federal debt

In addition, the business that will benefit from the refinanced debt will generally need to be:

  • A for-profit entity

  • A small business by definition

  • Based in the United States

  • A business with invested equity

  • A business that has exhausted its other financing options

These requirements ensure that the loan is eligible for SBA backing. If the loan is ineligible, you’ll need to seek other forms of small business financing to restructure your debt.

What Type of Debt is Eligible for Refinancing with the SBA 7a?

 Eligible debt for refinancing with a SBA 7(a) loan

SBA 7(a) loans are different from typical small business loans, and there are restrictions on what kind of debt you can refinance with these loans. In order for debt to be considered eligible for refinancing, lending institutions require documentation to prove that:

  1. The debt is currently on unreasonable terms, such as a maturity that has ballooned, or a maturity that’s inappropriate for the loan’s original purpose. Also, if interest rates exceed the maximum allowed by the SBA, or if the debt is on a revolving line or a credit card, the debt may be considered unreasonable.

  2. The debt to be refinanced had an original purpose that would have been eligible for SBA funding. These purposes include land acquisition, new construction, property improvement, renovations, equipment, furniture, inventory purchase, working capital, and acquiring a business.

  3. Refinancing the debt will significantly benefit the small business. The SBA requires that refinancing is not done frivolously, and will determine the benefit of refinancing to your business.

What about Credit Card Debt?

Refinancing credit card debt is a bit different than refinancing other types of business debt. In order to qualify for an SBA loan, any credit card debt that’s to be refinanced must also:

  • Have been used for only business purposes. There cannot be any personal charges incurred on the credit card to be refinanced by the SBA 7(a) loan.

  • Be likely to be sustained by the SBA in part or in full, or otherwise be covered by additional collateral or altered items.

 Who Guarantees the Loan?

All owners of your business who have at least 20% equity in the company will be required to guarantee the loan, and you’ll need to include the names and information for each of these owners in your application paperwork. In addition, if your spouse has at least 5% equity in the company and you and your spouse’s equity totals at least 20% (for example, if you have 15% equity and your spouse has 5% equity), your spouse will have to guarantee the loan, too.

One distinction: if you are a sole proprietor, you will not need to provide a separate personal guarantee for your SBA loan because you execute the note yourself as a borrower (instead of as a business).

What Documentation Will I Need to Provide?

Your lender will need specific information about your business, including the business type, size, age, location, and industry. You’ll also fill out forms providing your lender with your personal information, like your legal name, address, and immigration status.

The forms and documents commonly required in the application package include:

In order to refinance debt with your SBA loan, you’ll also need to provide proof that your debt qualifies. This means you’ll likely need:

  • Documents showing your loan’s terms, balance, and lender

  • Documentation of the purpose of the original loan you’re refinancing

  • Financial statements and projections showing the benefit of refinancing to your business

The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.

I'm Ready to Refinance with the SBA 7(a): What's Next?

Once you’ve decided that an SBA 7(a) loan is for you, you’ll need to contact a lender to help you get started. There are a whole array of SBA loan products -- from the Standard 7(a) to Veteran's Loans and the Express loan -- so it can be overwhelming to sort through the paperwork, terms, and jargon! If you want to cut to the chase, click the button below to connect with our partners at Lendio for a free SBA 7(a) loan quote!

Blog: Learn More About the SBA 7(a) Loan