Yes. You can absolutely refinance an SBA loan in spite of what you might have read before you found this blog ;).
You can even refinance an SBA loan with another SBA loan due to a recent rule change that allows lenders to refinance an SBA 7a loan with an SBA 504 loan. This could make sense for your business if you are trying to refinance away from an adjustable/floating rate 7a loan to lock in a long term fixed rate with a 504 or to get a release of collateral, since the 7a frequently requires a lien on other real estate and the 504 does not.
Refinance SBA Loan to Conventional
The answer to “can you refinance an SBA loan” is yes, but the follow up question is: “refinance to what?”
And that answer for some small business owners 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.
Commercial Real Estate Refinance
When considering the refinance of an SBA commercial real estate loan – either 504 of 7a – 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 that is a bit of a rarity.
Business Loan Refinance
If you are refinancing a 7a “business” loan that was used for a business purchase, a startup, a business recapitalization or a partner buyout, then it is still possible to get a conventional loan, but maybe not as easy as if you were financing real estate, since with real estate the lender has collateral.
That being said, there are good lenders for most transactions where a business has a been around a least a few years, has good cash flow and solid guarantors.
If you have a successful “professional practice” it could be relatively easy to get very good terms when refinancing an SBA loan. All of the following types of businesses/practices are preferred types of borrowers for some conventional lenders:
- Medical practices
- Dental practices
- Veterinary practices
- Ophthalmologist practices
Additionally, the following are also targeted by some of these lenders:
- Physical Therapy practices
- Optometry practices
- Chiropractic practices
- Nurse Practioner-led practices
- Psychiatriac and Counseling practices
100% financing is available for all of the above depending on the borrower’s cash flow, credit, etc. and most lenders who cater to these types of businesses will also refinance other business or practice debt and some offer additional banking services like lines of credit, remote deposit, etc.
Can You Refinance An SBA 7a Loan?
Again, “yes,” absolutely.
In fact, most borrowers who get an SBA 7a loan refinance them way before the end of the loan term since 7a loans have a either a very short prepayment penalty or, in the case of a loan with a term of less than 15 years, no prepayment penalty at all.
SBA 7a loans for commercial real estate typically have a 25 year term and amortization and a prepayment penalty of just 3 years (and the penalty is only 1% in the 3rd year), so if you have 15% to 20% equity after just 2 years it might make sense to refinance, especially if you have a floating rate SBA 7a loan that is currently very high due to the escalating Prime Rate. (Most SBA 7a loans are priced somewhere between Prime + )% and Prime + 3%).
It seems crazy to say, but many small business owners have SBA 7a loan rates in the range of 9% to 11%, so if you have one of these loans and you have good enough cash flow, it probably makes good sense to look at a refinance given that many conventional and 504 rates could be 3 to 5% below that.
Even if conventional or 504 rates drift up somewhat, it might still be worth refinancing to at least lock in a better rate for a minimum of 5 years. (Conventional lenders prefer to fix rates for 5 years, although 7 and 10 year fixed are certainly available and can actually be better at times depending on whehter or not the yield curve is inverted or not).
SBA 7a to SBA 504?
There are a few reasons to consider a refinance of a 7a with a 504.
- You may only need 10% equity to be able to refinance with the 504.
- SBA loans are generally easier to qualify for than a conventional or bank loan – especially during recessionary times – and some lenders are okay with imperfect credit, “uneven” financials, etc.
- The 504 program is a 2 loan structure and first mortgages are also usually fixed for 5 to 10 years and the 2nd mortgage is fixed for 20 or 25 years.
- The new SBA 504 refinance guidelines allow for some “cash-out” for business expenses.
- You only need to have had the 7a loan for 6 months to be eligible.
Important: A few caveats to refinance a 7a loan with a 504:
- You must have been in business for at least 2 years, so newer businesses of less than 2 years are not eligible.
- At least 85% of the proceeds of the loan to be refinanced must be 504-eligible, meaning the loan must have been used for “hard assets” typically defined as land, buildings, machinery or equipment. This is because with the exception of the limited amount of the “cash out” that the new SBA 504 refinance provision now allows, the 504 (unike the 7a), can only be used to finance fixed (or hard) assets.
- The new loan must provide a “substantial benefit,” meaning that the new refinanced amount must save the borrower at least 10% vs. what they are currently paying on the eligible amount. Also, the “eligible amount” can include prepayment penalties, financing costs and closing costs.
- The current 7a lender must be unable or unwilling to modify your current loan.
Can You Refinance An SBA 504 Loan?
You can even refinance just your SBA 504 first mortgage.
If you currently have a 504 loan, then you already know that it is a 2 loan structure with a 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 between 5 and 10 years) and “re-subordinate” your low rate 504 2nd mortgage.
Consider the Prepayment Penalty
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.
The 7a is the most common SBA commercial real estate loan. It has a 25 year term and amortization and 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 drops year over year for the first 10 years of the loan. It is longer because the 504 2nd mortgage 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.
The penalty on a 504 is not as bad as it sounds, primarily because the 504 is at most 40% of the financed amount.
For more info: SBA 504 Prepayment Penalty
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