refinance sba loans

Refinance SBA Loan: How to Refinance with Confidence

Ezra Cabrera | June 3, 2024


    Are you feeling overwhelmed by the terms of your current Small Business Administration (SBA) loan?

    Refinancing your SBA loan can be a smart move to improve your financial situation and gain more control over your business’ cash flow. You can lower interest rates, adjust repayment schedules, and take better control of your business’ finances.

    Whether you’re considering refinancing or just curious about your options, this guide gives you the knowledge and tools to make a smart decision.

    Can You Refinance an SBA Loan?

    Yes. Refinancing an SBA loan isn’t common, but it’s possible in certain situations. There are two ways to refinance your SBA loan:

    • Refinance an SBA Loan with an SBA Loan

      One option is to refinance your existing SBA loan with another SBA loan. You can approach your current lender or shop for a different one that’s willing to offer refinancing. Keep in mind that most lenders prefer to refinance loans that are closer to their maturity date (loans that are close to being paid off). Additionally, your current SBA lender typically gets the right of first refusal.

    • Refinance an SBA Loan with a Traditional Loan

      Refinancing your SBA loan with a traditional business loan provides more flexibility. You can explore various lenders and potentially find better interest rates or terms.

      However, consider any prepayment penalties attached to your current SBA loans. These penalties can affect the overall cost of refinancing, so it’s essential to factor them into your decision. The upside is that all SBA lending partners adhere to the guidelines set by the Small Business Administration, which includes regulations regarding prepayment penalties. This means that despite potential penalties, you can still enjoy the security and support the SBA loan program provides.

    Your SBA Loan Refinancing Options

    The Small Business Administration can refinance two types of SBA loans: the SBA 7(a) loan and the 504 loan.

    • SBA 7(a) Loan

      SBA 7(a) loans are popular among small business owners for their versatility. They can help with various business needs like buying equipment, covering day-to-day expenses, or refinancing business debt. SBA 7 (a) loans also offer favorable terms, such as longer repayment periods and lower down payments, making them an attractive financing option for small business owners. While the SBA guarantees a portion of the loan, you’re still responsible for repaying the loan in full to the bank or online lender.

    • SBA 504 Loan

      An SBA 504 loan is specifically designed to help small businesses invest in long-term assets, like real estate or major equipment purchases. These loans are structured through a partnership between a Certified Development Company (CDC), a lender, and the small business owner.

      Here’s how it works: The CDC provides a portion of the financing, usually around 40% of the total project cost, while the lender covers the 50%. The small business owner contributes the remaining 10% as a down payment. This financing structure allows you to access funding for large investments while minimizing the capital you need to contribute upfront.

    The Requirements for Refinancing SBA Loans

    You need to meet certain criteria before you can refinance your SBA loan. Typically, here are the requirements for refinancing with an SBA 7(a) loan:

    • A credit score above 690 has the best probability of approval

    • No bankruptcies in the past three years

    • No outstanding federal debt

    • Down payment

    • A clean criminal record or clear explanation for any misdemeanors

    • For franchisees, you need to pay the franchise fee before the loan is funded

    Additionally, the business benefiting from the refinanced business debt must generally meet the following criteria:

    These requirements ensure that the loan qualifies for SBA support. If it doesn’t meet these criteria, you’ll need to explore other avenues for restructuring your debt.

    Why Should You Refinance SBA Loans?

    Here are several reasons why refinancing might be a good idea for your business:

    • Lower Interest Rate

      The goal of refinancing business loans is to get an even better deal on your loan. With a lower interest rate, you’ll pay less over time, leaving you with more money in your pocket each month.

    • Better Terms

      Getting better terms on your loan might mean extending the time you have to pay it back or switching from a variable to a fixed interest rate, which will make it easier for you to plan and manage your finances.

    • Improve Cash Flow

      With lower monthly loan payments or a longer repayment period, refinancing can improve your cash flow. This means you’ll have more money to invest in your business or cover other expenses.

    • Consolidate Existing Business Debt

      Refinancing allows you to combine multiple loans into one, simplifying your loan payments and potentially lowering your overall interest costs so you can streamline your finances for better organization and savings.

    • Access Equity

      If your company has grown in value, refinancing can help you tap into that equity and use it to take your business to the next level, like expansion or improvements, to fuel its growth and success.

    The Bottom Line

    Refinancing your SBA loan can be a strategic move to improve your business’s financial health and position it for future success. Whether it’s securing lower interest rates, adjusting repayment terms, or accessing equity for growth opportunities, refinancing offers numerous benefits that can help drive your business forward.

    By carefully considering your options, you can make informed decisions that support your long-term goals. So, if you’re looking to optimize your business’s financial situation and gain more control over your cash flow, refinancing your SBA loan could be the right choice for you.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.