SBA Loans and Refinancing
Starting a small business is a chance to take charge of your professional life and make money in ways you never dreamed of, but you probably can’t start or even grow such an operation by yourself. Taking out small business loans is often part of the process, and they can help you fund many different needs. From handling costs you didn’t anticipate to funding new staff hires and equipment purchases, loans help you meet your financial needs. The Small Business Administration, or SBA, offers many loans to help grow and support the economy. While these loans seem very helpful initially, you might discover that you would like to refinance them later. That leaves you wondering if SBA loans can be refinanced in the first place.
Can an SBA Loan Be Refinanced?
Can an SBA loan be refinanced? In most cases, the answer is, unfortunately, no. The SBA is very stringent about when it permits refinancing or loan changes. Even though SBA loans are provided through commercial outfits, they are backed by federal guarantees and assurances, and the legal status of these loans is why they are highly regulated products that are challenging to change. If you get an SBA loan, you’ll likely be stuck with the specific terms and conditions you start until you pay the entire loan off. However, you still have a few options if you want to get better loan terms or if your business is having trouble paying the loan back.
Notable Exceptions
The SBA does permit loan refinancing in certain situations, but they are rare. In some cases, the SBA might mandate that the original lender remain the primary lender after refinancing and that there isn’t an interim lender in between the original and refinanced loans.
SBA loan modifications might be temporary or permanent. Temporary changes are modifications you enjoy for a short term before the loan reverts to its original conditions, and permanent modifications last the duration of the loan. Sometimes, borrowers ask for loan modifications that the lender can’t do if the loan is securitized on the secondary market. In such cases, the SBA would have to arrange for an entirely new loan, so that the borrower would need good standing and three years of current loan payments.
What Are the SBA Refinancing Requirements?
To refinance an SBA loan, you must first ensure that you still meet the original loan requirements. Refinancing your SBA loan also requires additional eligibility rules. They vary with each loan type, but the SBA 7(a) requirements are a common list you might need to adhere to. They include no bankruptcies in the last three years, no federal debt at the time, a minimum 690 credit score, and a minimum 10% down payment. Franchisees need to pay the franchise fee before the loan funds are released. Everyone must have a clean criminal history or be able to explain the misdemeanors on their record.
Businesses that are going to take advantage of refinanced debt must usually meet certain eligibility requirements. Your small business needs to be a for-profit organization, which must meet the definition of a small business. Your business must be based inside the United States, and your business must have invested equity but also exhausted any other potential financing options.
How Long Does SBA Loan Refinancing Take?
The processing times for initial SBA loans often takes 30 to 60 days, but it might take many months. Refinancing involves even more paperwork and eligibility standards, so it goes longer. Refinancing averages two to three months, but it may take up to six months in some circumstances. In addition to borrower eligibility for any SBA refinancing, you’ll need to collect all requisite information and be able to document your proof of income. SBA approval might take up to a week, due diligence can last two to three weeks, and closing takes another two weeks. However, there are other steps involved; delays can happen.
What Kinds of SBA Loan Refinancing Are Available?
If you qualify for SBA loan refinancing, you’ll likely have one of two choices. The first is the SBA 7(a) loan, and the second is the 504 loan.
7(a) Loans
SBA 7(a) loans are the primary program for business loans, and they offer loan guarantees to participating lenders helping small businesses that have particular requirements. These loans are useful for working capital, refinancing business debt, working capital, and changes in ownership. You can also use 7(a) loans to buy, improve, or refinance buildings and real estate, or you can buy supplies, equipment, fixtures, or furniture and cover installation costs. SBA 7(a) loans can also be applied as multipurpose loans for more than one of these efforts, and they can cover partial or complete ownership changes. Most 7(a) loans have a maximum ceiling of $5 million, but that only happens to businesses that qualify for that amount.
504 Loans
SBA 504 loans are another option. The applicable uses have some overlap with 7(a) loans, but they’re not identical. You can apply 504 loan funds towards promoting job creation and business growth by upgrading or buying major fixed assets. Specifically, you can upgrade or build facilities, streets, parking lots, and utilities. Other options include purchasing machinery, fixtures, furniture, equipment, real estate, and land. SBA 504 loans are also potential avenues to finance a change in business ownership or refinance existing debt. You can’t use a 504 loan to buy inventory, real estate investment, or working capital.
Reasons You Need Business Loans
If you’re not sure about whether or not you need a small business loan, then you should at least consider the many potential reasons to get one.
For starters, you can often use a small business loan to expand your operations when you’re profitable and have a rising cash flow. Second, loans help you buy inventory if you operate a product-based business that needs volume ahead of potential sales. Third, you may need to upgrade or replace outdated or ineffective equipment. Depending on what you’re allowed to do with your small business loan, you might need to infuse money into your cash flow to have more working capital. Also, you may need to finance hiring and training additional staff to grow your operations. Many small businesses face more than one of these needs at the same time.
Pros and Cons of Small Business Loans
As with anything, SBA loans have their pros and cons, and you need to know both to see which factors might impact you and by how much. The advantages start with approving businesses for loans that commercial lenders might not qualify them for. SBA guarantees assure lenders of getting some of the outstanding balance in the event of default. Lenders might extend longer repayment plans to lower your company’s cash flow strain, and capped interest rates help keep loans even more affordable. You can find loan amounts ranging from $500 to $5.5 million for all sorts of expenses, and resource centers are available to offer you guidance and business assistance.
Competitive rates are certainly something to take advantage of. Participating lenders must base their SBA loan rates on the prime rates with a markup rate called the spread. You should know that a loan’s interest rate isn’t the same as the annual percentage rate, also known as an APR. That includes the interest rate plus all the loan fees. APRs can be very different between non-SBA lenders and SBA partners.
Another benefit to SBA loans is the low fees involved. SBA loans typically have two fees. One is the upfront guarantee fee, based on the loan maturity and amount. The other is the yearly service fee, based on the guaranteed portion of any outstanding balance. These fees are reassessed annually, and veteran-owned businesses don’t pay upfront guarantees.
A third advantage to SBA loans is how they have longer terms available. That translates to you having more time to repay them. The immediate benefit is freeing up more cash flow for other business expenses and needs you have now. The length of the loan term varies based on how you intend to use the money you borrow. If you are financing equipment, inventory, or working capital, you can take out a loan for up to 10 years. On the other hand, you can finance real estate with a 25-year loan.
Finally, the SBA is often willing to finance larger loan amounts than many commercial outfits or private financial institutions might be willing to offer small businesses. The actual size will be based on your outfit’s qualifications and the kind of loan you aim for, but you might get up to $5 million under the 7a loan program.
There are some potential drawbacks that you need to be aware of. Down payments are often mandatory and range from 10% to 20%. You might also need to provide collateral. You will be personally liable for your SBA loan if your business defaults. The approval process could be faster, and low-credit applicants are often not approved.
When You Should Refinance a Small Business Loan … Or Not
Knowing when to refinance often involves creating a new loan to pay an older one. This is a chance to take advantage of better repayment terms, different monthly payments, and lower interest rates. Market rates might fall, your credit score could increase, or you may enjoy better profits and revenue. The driving factor in all these cases is simply saving more money over time. You might even change the very nature of your business loan. Switching a line of credit from a variable interest rate to a fixed rate can give your budget and future financial projections a measure of certainty.
There are also refinancing risks that you need to be aware of. If market rates increase, stick with your current loan rates until things change. Also, if your business revenue is failing or stagnant, new loan terms might be worse than your current ones. You might not even qualify if your individual credit score or business credit rating has declined over time.
Finance Through Us
American Business Credit offers services driven by years of industry knowledge and experience. Let us save you time. We know where to find the money you need and can show you the best ways to access it. In many situations, we help our clients tap into more funding than they’d ever find by themselves. Our robust network of lenders makes that possible. Start your future funding with our no-risk application that won’t hurt your credit score. Look over your options, and then collect your funds in as little as a week. Contact us right away to find ways to start or grow your business.
