Can You Refinance With an SBA Loan?

It’s possible to refinance an existing small-business loan, or multiple loans, with an SBA 7(a) or 504 loan. You may even be able to refinance an SBA loan with another SBA loan.

While refinancing with an SBA loan can be a savvy move, fees, prepayment penalties and a longer repayment period may eat away at potential savings.

Refinancing existing business debt with an SBA 7(a) loan or SBA 504 loan loan is a bit different than with a conventional loan.

Not only do you have to meet the underwriting requirements set by individual lenders that issue SBA loans, you’ll also have to meet the U.S. Small Business Administration’s various eligibility criteria, plus additional requirements since you’re using the loan to refinance debt.

• Prove you need financing by exhausting non-SBA loan options and showing a clear business purpose for the borrowed funds.

• Sign a personal guarantee. This applies to anyone with a 20% or greater stake in the business.

• Have a personal credit score of around 650 or higher.

• Show a history of strong business financials and have two or more years in business under your belt. 

In addition to the above requirements, there’ll be more hoops you’ll have to jump through before you can use an SBA loan for refinancing.

While it’s best to work with individual SBA lenders for guidance on everything you might need to qualify based on your unique situation, the SBA provides the following guidelines.

SBA 7(a) loans are the SBA’s most popular and versatile loan program. Here are the minimum requirements you’ll likely have to meet to refinance using an SBA 7(a) loan:

• You must show a history of timely payments over the past 12 months on the original debt being refinanced.

• If you’re refinancing an installment loan, your new loan payment must be at least 10% less than what you’re currently paying on the original loan.

You can also use an SBA 504 loan to refinance debt. SBA 504 loans are used for major business expenses, such as commercial real estate or equipment that’s meant to last for 10 years or longer.

The SBA offers guidelines for both “debt refinancing with expansion” and “debt refinancing without expansion.” The word, “expansion,” here means that you’ll get extra money to expand your business beyond what you’ll need to refinance. Think of it like a cash out refinance.

SBA 504 debt refinancing requirements without expansion:

• At least 75% of the original debt being refinanced must have originally been used to pay for one or more eligible long-term business assets, such as land, buildings or machines and equipment.

• The original debt must be at least six months old.

• The new loan must have a loan-to-value ratio of 90% or less.

SBA 504 debt refinancing requirements with expansion:

• The new loan must have better terms or a lower interest rate than the original debt.

• The new loan payment must be less than your original installment payment(s) after factoring in prepayment penalties and other fees.

• The amount used to refinance can’t be more than the amount used to expand your business.

• At least 75% of the original debt being refinanced must have originally been used to pay for one or more eligible long-term business assets, such as land, buildings or machines and equipment.

• You must show a history of timely payments over the past 12 months on the original debt being refinanced.

• The new loan must have a loan-to-value ratio of 90% or less.

You may be able to refinance an existing SBA loan with another SBA loan, but doing so will be tricky. That’s because you’ll need to justify the need to refinance the original SBA loan, which probably already has highly competitive terms.

You may also be restricted by the type of SBA loan you can use to refinance. For example, if you originally took out an SBA 7(a) loan to finance working capital, you won’t be able to refinance that debt using an SBA 504 loan, since 504 loans can only be used for long-term, fixed business assets.

That’s why it’s usually easier to refinance a current SBA loan using a 7(a) loan, since it’s more versatile and has more flexible eligibility criteria. You can also refinance an SBA loan with a conventional small-business loan, but it’ll probably be tough to find a new loan with better terms and interest rate.

Deciding whether or not to refinance existing business debt using an SBA loan is similar to figuring out whether or not to refinance using a traditional small-business loan. The only major exception is that you’ll likely have a tougher time qualifying for an SBA loan than a conventional one.

So if you have bad credit and your business isn’t doing well, consider refinancing business debt with other types of loans.

Otherwise, you may want to explore refinancing with an SBA loan if:

• You can save money. Refinancing can often lower your monthly payments or overall cost of your debt if the new loan has a lower interest rate or a longer repayment period than the debt you’re trying to refinance. SBA 7(a) and 504 loans both have relatively low interest rates and repayment terms that can reach 10 years or longer.

• You’ve leveled up your business credentials. SBA loans are notoriously hard to qualify for. They often require strong business credentials and a good credit score. Often, business owners take out loans or other debt with less-than-ideal terms when they’re just starting out and don’t have many financing options available. If this describes you, and you’ve since improved your business revenue, cash flow or your personal credit score, then refinancing with an SBA loan may be a good next move.