Debt Refinance - SBA Rules

So can we get cash out of our properties to pay off debt? Seems like this is the most popular question we get every day. And of course I will have to answer to the client it depends? So rather than just leave you with that answer I will attempt to shed some light on the question.

To get money back for a loan that is going to be approved by the SBA all debt will have to be 100% business related. In addition to be 100% business related it will all have to be documented, as well as traced from where it was borrowed from to what it was used to pay for.

As of the new SBA SOP in October of 2009 debt refinance of a seller carry back note cannot be effectuated until the note is older than two years. So the borrower, i.e. the new owner of the business cannot refinance the seller carry back note as a debt refinance for at least two years. In addition the payments for all two years must be totally current. As for other debt keep reading.

Credit card debt which is usually a much higher interest rate can be refinanced if the debt was a business debt. The SBA lenders want to see that the money was actually used in the business for purchasing tenant improvements, equipment, inventory anything that can be turned back into future company profits. On the other hand debt that was used for other purposes is much harder to refinance through an SBA refinance.

For example if the money was used for salaries rather than equipment it may be much harder to get the money back through a refinance.

So before you ask for a debt refinance as part of working capital for a small business loan make sure you can properly document the need as well as the past expense. The other requirement for debt refinance for SBA loans is that the SBA can only take out a loan that is more expensive then the new SBA loan proposed. Not only must there be a substantial savings between the two loans, the terms of the SBA loan also must be better.

Just know that it’s getting harder and harder to establish the refinance of an existing loan with a new SBA loans.

In my opinion it’s better to refinance a non-SBA loan with cash or cash equivalent and then apply for an in increase or a new SBA loan that has nothing to do with a debt refinance but a request for expansion capital etc. The request will most likely be approved if it’s for a growing company with strong financials; this most likely will not work for a start up operation.

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