How to Refinance Your SBA Loan
June 27, 2022 | Last Updated on: February 7, 2023
June 27, 2022 | Last Updated on: February 7, 2023
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Typically, when taking out a loan, people do it with the understanding that if more favorable terms become available, for example, a lower interest rate, they can refinance to take advantage of this new opportunity. But loans backed by the U.S. Small Business Administration (SBA) aren’t typical loans. The SBA is a government agency that provides support to small businesses through a variety of loan programs, like the 7(a) loan program, which offers loans for business purposes such as working capital, equipment, or real estate expansion. These loans are already lower in interest than typical loans, and are more complicated to receive since they are backed by the SBA but granted through a bank or online lender.
So the question is, if you took out an SBA loan, can you refinance to get a lower interest rate or lower payments? Or are you locked in where you signed the dotted line?
But first, let’s look at answers to common questions business owners ask:
SBA loans typically have great terms, but there are still several reasons why you might want to refinance your SBA loan, including:
You have a high-interest rate. If interest rates have dropped since you took out your loan, refinancing can help you get a lower rate and save money on your monthly payments.
You have a short-term loan. If you need more time to repay your loan, refinancing can give you up to 25 years to repay the debt.
You are eligible for a different type of loan. If you originally took out an SBA 7(a) loan for working capital but now need a loan for real estate expansion, you can refinance into an SBA 504 loan.
You’ve defaulted on your existing business debt. If you’re in default on your SBA loan, refinancing can help you get back on track by consolidating your debt and getting a lower interest rate. You will also need to prove that you will be able to afford the new repayment terms.
The Economic Injury Disaster Loan (EIDL) program provides low-interest loans to small businesses that have been affected by a natural disaster. Many businesses became eligible for the EIDL loan program because of the COVID pandemic. If you have an EIDL loan, you may be able to refinance it through the SBA 7(a) loan program.
Your EIDL loan must be current, and you must have used the loan for its original purpose (working capital, equipment, or real estate expansion) to be eligible for refinancing. You’ll also need to qualify for a new SBA 7(a) loan, which means meeting the SBA’s size standards and having a good credit history.
If you’re looking to consolidate your debt or get a longer repayment term, refinancing your EIDL loan through the SBA 7(a) program may be a good option.
A cash-out refinance is a type of loan where the borrower takes out a new larger loan to replace an existing debt and receives the difference in cash. For example, if you have a $100,000 loan, you could do a cash-out refinance for $110,000 and receive $10,000 in cash.
The SBA does not allow borrowers to do a cash-out refinance of their 7(a) loans. However, you may be able to do a cash-out refinance of other existing loans, like the SBA 504. Or you may be able to do a cash-out refinance of your property if it is collateral for an SBA 7(a) loan. You’ll need to get approval from the SBA before doing a cash-out refinance of your property.
If you’re considering a cash-out refinance of your SBA loan, make sure to speak with a lender or SBA-approved intermediary to get more information on the eligibility requirements and process.
In order to be eligible to refinance an SBA loan, you must meet the following requirements:
– You must have made at least 12 months of payments on your existing SBA loan.
– Your business must be in good standing with the SBA. This means that you can’t have any outstanding judgments or tax liens against your business.
– You must be able to show that you have the ability to repay the loan. This usually means having a strong business financial statement, reliable cash flow, and good personal credit.
You can refinance your SBA loan as often as you like, as long as you meet the eligibility requirements. However, keep in mind that each time you refinance, you’ll have to pay closing costs and fees, so it’s important to weigh the costs and benefits of refinancing before doing so.
You should also look at whether you will be subject to any prepayment penalties on your existing loan before refinancing.
There are several benefits of refinancing an SBA loan, including:
Lower interest rates. If you can get a lower interest rate, you’ll save money on your monthly payments.
Longer repayment terms. If you need more time to repay your loan, refinancing can give you up to 25 years to repay the debt. The longer repayment term will lower your monthly payment amount.
Getting out of default. If you’re in default on your SBA loan, refinancing can help you get back on track by consolidating your debt and getting a lower interest rate.
Refinancing an SBA loan can be a great way to save money on your monthly payments or consolidate your loans into a single loan. However, it’s important to compare rates and loan terms from multiple lenders before refinancing your loan.
The owner’s credit score may affect the eligibility for refinancing an SBA loan. The lender will use the credit score to determine the risk of lending money to the business. If the credit score is low, the lender may be less likely to approve the loan.
The SBA requires a credit score of 640, but you increase your chances of finding a lender if you have a credit score over 680. Higher credit scores may make your loan eligible for a lower interest rate.
If you are eligible, you can refinance your SBA loan through your existing lender, or you can search and find another lender with a better rate and terms.
These are the steps you’ll need to take:
When you apply to refinance your SBA loan, you’ll need to provide some financial information about your business. The lender will use this information to determine if you’re eligible for a new loan and how much they’re willing to lend you.
Some of the documents you may need to provide during the application process include:
Tax returns. The lender will want to see your business’s tax returns for the past two years.
Financial statements. You’ll need to provide your business’s financial statements, including your balance sheet and income statement.
Personal financial information. If you’re personally guaranteeing the loan, you’ll need to provide a personal financial statement and other information, including your tax returns.
Financial Projection. If you have a newer business, the SBA may request a financial projection showing projected cash flow for 1-2 years.
Business licenses and permits. You’ll need to provide copies of any business licenses or permits you have.
Collateral. The lender may require you to pledge collateral for the loan, such as commercial real estate or equipment.
Providing these documents will help the lender determine if you’re eligible for a new loan and how much they’re willing to lend you.
There are a few potential negatives to refinancing your SBA-backed loan.
You may have to pay fees. Some lenders may charge origination fees or other fees to refinance your loan.
Your interest rate may increase. If you’re refinancing with a new lender, your interest rate may be higher than your current rate.
You may have to provide collateral. The lender may require you to pledge collateral for the loan, such as real estate or equipment.
You may lose your SBA guarantee. If you refinance with a private loan instead of an SBA loan, you’ll no longer have the SBA guarantee on your loan.
Before you refinance your loan, be sure to compare rates and terms from multiple lenders to find the best deal.
The amount you can save by refinancing your SBA loan depends on a number of factors, including:
The interest rate on your new loan. If you can qualify for a lower interest rate, you’ll save money on your loan payments.
The term of your new loan. If you extend the term of your loan, you’ll lower your monthly payments, but you’ll pay more in interest over the life of the loan.
The fees associated with the loan. Some lenders may charge origination fees or other fees to refinance your loan.
Your personal credit score. If your personal credit score has improved since you got your original loan, you may be able to qualify for a lower interest rate.
Your business’s financial situation. If your company has grown and is now generating more income, you may be able to qualify for a lower interest rate.
Refinancing your SBA loan can save money, but it’s essential to compare rates and terms from multiple lenders to find the best deal.
For an example of how a new influx of cash from a small business loan helped a company grow, read about Danny Star and his company Website Flow.