SBA’s New Refinance Rules: The Big Payoff

September 10, 2015

SBA’s New Refinance Rules: The Big Payoff

by Walter H. McLaughlin
Banner Bank
Senior Vice President/SBA Manager

Improving a borrower’s cash flow by refinancing eligible business debt has always been a pillar of the 7(a) program. Thanks to a rule change effective May 1, the pillars just got a little bit stronger.

Previously, the SBA had a strict interpretation for the original use of proceeds of a loan being refinanced. The 50 10 5 (G) was, in a word, definitive:

SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made.

No room for interpretation there. Even if the borrower had occupied a building for 20 years, if he originally financed it as a commercial rental property, the debt wouldn’t be eligible for an SBA refinance.

The beauty of a new version of the SOP every year is that rules that don’t really make much sense can be changed. The H version of the SOP did just that with the following verbiage:

SBA guaranteed loan proceeds may not be used to refinance debt originally used to finance a loan purpose that would have been ineligible for SBA financing at the time it was originally made unless the condition that would have made the loan ineligible no longer exists.

That’s much better and should open up new opportunities. Under our example, the underlying debt would be eligible to be refinanced — assuming it met the SBA’s other requirements — since the previous condition of the property once being non-owner occupied no longer exists.

And what are those other requirements?

• The existing loan(s) cannot be on reasonable terms.
• The debt must have been used (and documented accordingly) for eligible business purposes.
• The loan(s) must meet at least one of the eight purposes for refinance listed in the SOP.
• Payments cannot be made to creditors in a position to sustain a loss.
• Unless refinancing short-term or ballooning debt, a 10% reduction in monthly installment payments must be reached.

Of course, all loans greater than $350,000 must achieve a 1.15 debt service coverage ratio, either historical (after recasting payments) or projected. If you’re not familiar with the SBA’s approach to analyzing cash flow, consider signing up for the Calculating SBA Cash Flow Correctly webinar on September 29th by visiting https://colemanreport.com/calculating-sba-cash-flow-correctly.

With this change, the door to new business opportunities just opened a little bit wider. As W. Clement Stone once wrote, “Little hinges swing big doors.”