Yes. Actually, you can refinance an SBA loan.
In fact, as of 2021 you can even refinance an SBA loan with another SBA loan as there was a recent rule change to allow lenders to use the SBA 504 program to refinance an SBA 7a loan. This could be especially helpful if you are trying to lock in a long term fixed rate or get a release of collateral.
Consider the Prepayment Penalty When Refinancing
If you are looking to refinance an SBA loan that you currently have then it is good to know whether or not your current loan has a prepayment penalty. Most borrowers with an existing SBA loan have a 7a.
7a loans of less than 15 years are primarily used for the following:
- purchasing a business
- lease-hold/tenant improvements
- refinancing business debts
- buying expensive equipment
- starting a business or buying out a partner
And 7a loans of less than 15 years DO NOT have a prepayment penalty, so if you have a 7a with a term of less than 15 years there is no penalty to refinance.
7a loans of longer than 15 years, which are the most common SBA commercial real estate loan, have a prepayment penalty of just 3 years. The penalty is what is considered a “three year declining penalty” or “step down” because the penalty for paying off the loan early (or paying down more than 25% of the principal in any of the first 3 years) is either 5, 3 or 1% depending on whether your pay it off or down in years 1, 2 or 3. It is actually a very simple and reasonable penalty compared to many types of commercial loans that frequently have penalties that last 5 to 10 years and at higher percentages.
SBA 504 Loan Prepayment Penalty
The 504 loan has an unusual 2 loan structure where the first mortgage frequently has at least a 5 year prepayment penalty and the 2nd mortage has a 10 year “declining” penalty that declines year over year for the first 10 years of the loan. It is longer because the 504 is a low rate, below market 25 year fixed rate and the investors who “own” the loan are counting on an income stream for at least 10 years and want to discourage borrowers from paying it off early.
More info: SBA 504 Prepayment Penalty
Refinance SBA Loan to Conventional
So the answer to the “can you refinance an SBA loan” is yes, but the the follow up question is: “refinance to what?”
And that answer for many owners of small businesses is a “conventional” loan. A conventional loan is generally any loan that is not an SBA loan (or some other type of government guaranteed loan) and most commercial banks and lenders offer them.
When considering the refinance of an SBA commercial real estate loan, most lenders will want to see that you have “enough” equity (aside from having good cash flow, good credit, etc.). How much is enough is up to the lender but as a general rule, most banks and conventional lenders will want you to have at least 20% equity in your property, but there are very definitely some lenders who will do it with less.
We have one lender we work with whose standard loan to value is 85% for owner occupied business property and there are others that will offer that as well. Some lenders (if they really like your business and you bank with them) will even get more creative and allow you to refinance with just 10% equity, but generally speaking this is a bit of a rarity.
Can You Refinance Just Your 504 First Mortgage?
If you currently have a 504 loan, then you already know that it is a 2 loan structure with a very low rate 2nd mortgage that rarely needs to be refinanced. However, many borrowers are unaware that you are allowed to refinance the first mortage (which for most business owners is fixed for some period of time less than 10 years) and “re-subordinate” your low rate 504 2nd mortgage.
Please get in touch if you have questions about refinancing an SBA loan with an SBA loan or an SBA loan with a conventional loan:
jking (at) green commercial capital (dot) com