Can SBA Loans Be Refinanced?
Opening and running a business today takes a lot of money. While you’ll occasionally hear success stories from so-called self-made individuals who launched a thriving business, you’ll rarely hear about the family members and friends who gave them working capital to get started. The Small Business Administration (SBA) provides entrepreneurs with an easier way to build a business because it offers loan security. Once you have a loan, you may have the opportunity to refinance it later. Learn about SBA loans, how they work, and whether you can refinance one in the future.
What Is an SBA Loan?
SBA loans are a funding source for those who meet the following requirements:
- Borrowers must have a legal and registered for-profit business.
- The business must have a physical location in the United States.
- When you apply for a loan, you must have a good credit score and a favorable credit history.
- You must request a loan you cannot obtain from another source.
The SBA works with various lenders and agrees to back or guarantee the loan if the borrower defaults. This makes the borrower a less risky prospect and increases the chance that they will get the loan they need to start their business.
SBA Loan Types
The SBA’s primary loan program is the 7(a) program, which includes multiple loan formats. Each 7(a) loan has different limits that range from $500,000 to $5 million. Loans of $50,000 or more require collateral, but smaller loans do not.
A Standard 7(a) loan is available for those who need more than $500,000. The SBA will guarantee up to 75% of this type of loan. In addition, 7(a) Small loans are available for business owners who need no more than $500,000. Other options include SBA Express, Export Express, Export Working Capital, and International Trade loans.
Disaster assistance loans are also available through the SBA. These loans go to business owners facing financial problems due to a natural disaster, such as a hurricane or wildfire. Here are a few ways the SBA can offer assistance in these situations:
- Physical damage loans to replace material assets, such as a building or damaged goods
- Mitigation assistance to help business owners make changes to prevent future damage
- Economic injury disaster loans, which cover the operating expenses of a small business owner
Loans vs. Grants
In addition to loans, the SBA can help business owners apply for other financing options, such as grants. Unlike loans that require the borrower to pay back the full amount plus applicable interest, someone who receives a grant does not need to pay it back.
During the COVID-19 pandemic, the SBA awarded funds to business owners who lost money. The Paycheck Protection Program (PPP) was one of these options. More than 11 million business owners received PPP funds, and the government forgave more than $760 billion of those loans.
Benefits of SBA Loans
One of the most attractive benefits of SBA loans is their lower interest rates and fees. The loan’s interest rate and the annual percentage rate (APR) refer to the money you pay in addition to the amount you borrow. The SBA usually caps the APR to keep lenders from taking advantage of borrowers. With one of these loans, your APR should never rise above 15%. Other lenders, especially those who only operate online, can have much higher APR rates of 50% or more.
The SBA has a guarantee fee that borrowers must pay in one of two ways. Some lenders will take the fee off the amount they give you, which reduces the size of your loan. Others add it to your total loan, which increases the amount you pay in the future. SBA loans have a guarantee fee of 0.25% to 3.75%. For a $50,000 SBA loan, you will never pay a guarantee fee of more than $1,875. The fees other lenders charge can climb to 10% or higher.
In many cases, SBA loans offer longer repayment terms than other loan types. SBA loan terms range from 10 years for equipment and working capital loans to 25 years for real estate loans. Other lenders may demand you pay off the loan in as little as three to five years.
Downsides of SBA Loans
SBA loans are tough to secure compared to other business loan programs. The SBA will review your credit score and financial history to determine if you are a worthy borrower. If your credit history is less than favorable, talk to a financial advisor to learn how to improve your standing before applying for an SBA loan.
SBA loans take a long time to get into borrowers’ hands. While PPP loans went out within weeks, most programs take three months or longer to release funds.
The SBA usually asks for a personal guarantee from you and others to secure your loan, which can be a barrier for some borrowers. Anyone who owns a minimum of 20% of the business must provide a personal guarantee. Those individuals can include:
- You and your spouse
- Trusts
- Trustees
- Business entities
How to Apply
To apply for an SBA loan, visit their website and create an account. This account allows you to pause the application and return to it later. You can also check your status after you submit the application and see if the SBA needs anything else to process it. The application asks questions about you, such as your name, home address, and Social Security number. You must also provide proof you own the business, a business license, and evidence that your business is registered in your state.
Some of the other required information for an SBA loan application includes:
- Financial records for your business, such as profit and loss statements
- Two years of tax filings for your business
- Records that show any other loan approvals or rejections you received
What Is Refinancing?
Refinancing a loan means replacing your original loan with one that has better terms. When you take out a business loan, you qualify for a set interest rate based on your credit. Refinancing your loan allows you to adjust the interest rate, monthly payments, or both. Many borrowers choose this option as their credit improves. If negative marks are removed from your credit report or your score increases by several points, consider refinancing your loan.
If you qualify for a lower interest rate, you save money on the amount you pay on your loan in the coming years. Refinancing can also extend the loan and give you more time to pay it back or reduce your monthly payments.
In some cases, refinancing can have negative impacts. For example, it can potentially lower your credit score. The credit bureaus may view your refinanced loan as a new loan, increasing your debt-to-credit ratio. If you opt for smaller monthly payments or extend your repayment terms, you also risk paying more in interest over time.
Refinancing an SBA Loan
Though refinancing an SBA loan isn’t usually possible, it is an option in some situations. Borrowers must go through many steps to obtain one of these loans, which includes proving they can afford to repay it. The SBA is even less likely to approve a refinance if you have a loan tied to collateral.
The SBA will often approve refinancing for borrowers with a business loan from another lender. If the lender states you need to work with the SBA, the SBA will allow you to refinance your loan through the agency. If you have a loan that is sold by the original lender and you are unhappy with the new lender, the SBA may also allow you to refinance. The SBA may guarantee the loan and approve refinancing it if you made on-time payments every month for the last three years and both you and the loan are in good standing.
The best time to contact the SBA about loan refinancing is when you have a business loan with less favorable terms than a 7(a) loan. You must show that the debt you incurred is not a typical form of debt. For example, if the loan came as a line of credit rather than a cash amount, it might increase your chances of being able to refinance. You can also show that the collateral you put up is worth significantly more than the amount you borrowed.
The SBA offers two additional scenarios in which they will offer refinancing. You might qualify if you obtain a loan from another lender that does not match the terms of your SBA loan. You might also be able to refinance if you show that your business needs more funds and that you applied for assistance from other lenders but did not receive a loan.
Reasons to Refinance a Business Loan
The most common reason to refinance a loan is that you now qualify for better terms than when you first applied. Small financial changes can have a big impact on your credit score, making you eligible for a lower interest rate.
Another reason to refinance your loan is a change in cash flow. For example, you may have a seasonal business where you generate more revenue during some seasons and less during others. As your cash flow drops and your business makes less money, you might have a difficult time making your monthly loan payments. You might find it beneficial to refinance to a loan program with lower monthly payments to help you meet your financial obligations.
If you need more cash on hand than you currently have, a debt consolidation loan might be a better alternative to refinancing your loan. A debt consolidation loan gives you a new loan that covers most or all of your debt. This loan type is often a good choice if you have multiple loans with different due dates and repayment terms. You might qualify for a loan with a lower interest rate and consolidate your debt into one convenient monthly payment.
Get Help With Your Next Business Loan
Getting your new business off the ground requires a lot of financial help. Not everyone is lucky enough to have friends or family members who can invest in their ideas, which is why there are so many business lenders out there. The Small Business Administration is just one of them. While it can take a lot of time to apply for and obtain an SBA loan, it may help you cover most or all of your expenses. At American Business Credit, we can help you apply for the business loans you need, get tips before you apply, and refinance your loan when needed. Contact American Business Credit today and watch your ideas take shape!
