Refinancing Business Debt With A Bank Loan
Refinancing or consolidating through a bank is the most preferable of all the commercial financing options, being that banks have the lowest rates and longest terms of all business lenders. Most banks offer both fixes rate and rates adjusted to prime. A common reason for refinancing of business debt is to avoid a balloon payment
- Bank refinancing rates: 5-10%
- Bank refinancing terms: 1-10 years
Sba 504 Refinance Loan Program For Business Expansion
The 504 loan program allows a refinance and expansion as long as the debt to be refinanced does not exceed 50 percent of the projected expansion cost. .
For example, if you currently owe $1,000,000 on your commercial building your expansion cost would have to be $2,000,000 to qualify for a 504 refinance.
Please note that if you have more than 1 location the following provision in the new rules could help you.
*The debt being refinanced does not need to be for assets at the same location or for the same type of property as the project being financed as long as the operation at the other location has the same NAICS code as the operation at the Project location.
Essentially, this means that if your business has multiple locations – perhaps a warehouse and retail stores – and you were looking to expand one of them, you could use the 504 to pay off the debt on one property and expand the other.
Of course, if you have more equity in your property – 30% or more – you may qualify for a conventional commercial refinance, so please get in touch if you would like to look at your options.
More Refinance Information
You can visit our SBA 504 Program page if you would like more information regarding 504 loan requirements, qualifying, loan structure, eligible properties, etc.
SBA Alternatives – Small Business Capital
Asset-based programs available include:
When You Can Refinance Debt With An Sba 7 Loan
If you currently have an SBA loan:
- You need more funds, but your lender has declined your application for a new loan.
- You took out a new loan, but your lender wonât modify the terms of your SBA loan to accommodate the new debt.
If you currently have a non-SBA loan:
- You plan to use your loan for a purpose that is approved by the SBA, per their official 7 guidelines.
- An SBA loan payment amount would be at least 10% less than payments on your current loan.
- You can provide written justification that your current loan is on unreasonable terms, such as:
- Your existing debt is on a line of credit or credit card.
- Your loan is over-collateralized.
- Your interest rate exceeds the SBAâs maximum.
Ultimately, understanding whether you can qualify for refinancing with an SBA loan can be a complex task. So, your best course of action is to talk to your lender or loan specialist, as they can navigate those complexities for you.
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Apply To Refinance Your Small Business Loans
When you have your goals aligned and have vetted potential lenders, its time to apply.
Applying for a small business loan can be as simple as uploading documents to online lending platforms and filling out some basic information. Or it can involve weeks of exchanges and documentation submissions with conventional lenders.
Either way, heres a general outline of the process:
Step 1: Give the Lender Your Information;
How much information and documentation a lender will need will be based on the lender and what refinancing youre seeking.
Step 2: Wait for Approval
Your lender will evaluate your application. Theyll review your time in business, annual revenue, cash flow, credit score and the documentation youve provided. Sometimes, youll need to submit more financial information so they can come to a decision.
Step 3: Get Approved
The lender will notify you of their decision. If youre approved, your loan specialist will provide you with the terms of your financing offer. At this point, weigh whether the rates, fees and term lengths match with your refinancing goals.
Step 4: Finalize Refinancing;
If you agree and sign a lenders refinancing contract, your new lender will pay off your existing loan. Youll then start making payments to your new lender for the loan amount they refinanced on your behalf.
What Is The Sba 504 Refinance Loan Program
An SBA 504 loan can be used to refinance debt previously incurred for commercial real estate and fixed-asset projects at below-market rates. With the SBA 504 refinance loan program, you can not only refinance debt but also cash out up to 20% of the value of the property for working capital needs. You can refinance up to 100% of eligible expenses for a prior fixed-asset project at below-market rates with a term of up to 25 years. A 504 refinance loan is unique because it always needs to be combined with a bank loan. Heres how a typical 504 refinance loan works:
- A bank refinances 50% of project costs with a traditional loan
- Pursuit refinances up to 50% of project costs using the 504 loan program
- An as is fair market value appraisal will need to demonstrate over 10% equity in the property with the proposed financing.
If you have a bank on hand for the first mortgage, well work with them to incorporate 504 into your debt refinance plan. If you dont, we can point you towards a bank thats familiar with the 504 refinance loan program.
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Refinance Of Existing Government Guaranteed Debt Is Eligible Under Certain Conditions
- An existing 504 loan if both the Third-Party Loan and the 504 loan are being refinanced or the Third-Party Loan has been paid in full.
- For an existing 7 loan, the CDC must verify in writing that the present lender is either unwilling or unable to modify the current payment schedule.;
- In the case of same institution debt, if the Third-Party lender or the CDC affiliate is the 7 lender, the loan will be eligible for 504 refinancing only if the lender is unable to modify the terms of the existing loan because a secondary market investor will not agree to modified terms.;
- The new project must reduce the payment amount by 10%.
- The refinancing of any federally-guaranteed debt provides a substantial benefit to the borrower after eligible business expenses, prepayment penalties, financing fees, and other financing costs are accounted for.;
- In calculating the percentage reduction in the new installment payment, prepayment penalties, financing fees, and other financing costs, must be added to the amount being refinanced, but not eligible business expenses.
Sba Loan Vs Conventional Loan: Which Is Best
If youre at the beginning of your search and considering an SBA loan versus conventional loan for your small business, youll want to explore both options before making a final decision.
Consider the stage of your business and its credit history and financial outlook to help determine which option is best. Also, when comparing lenders, calculate the cost of a business loan to see which is the most affordable.
Keep in mind that just as no two conventional loan lenders are the same, neither are SBA lenders. And since youll need to exhaust your financing options to be eligible for SBA loans, exploring conventional business loans can be a helpful first step. Whichever direction you take, its a good idea to shop around and choose a lender that understands your business goals and needs.
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Business Debt Refinancing If The Original Loan Wasnt From The Sba
One possible scenario is if another lender and not the SBA issued your current loan. Your chances of using an SBA loan to refinance increase if your current loan terms are more burdensome than those you could have received with a 7 loan. In this scenario, you could qualify if you fall into any one of the following buckets:;
- The proceeds of your existing loan are being directed to meet the SBAs 7 guidelines.;
- The amount of an SBA loan payment amount would fall at least 10% below the current loan payment threshold.;
- Submit evidence that the terms of your existing business loan are unattainable for you. For example,;
- The existing business debt to be refinanced isnt structured as a loan at all but instead is drawn on via a line of credit or credit card.;
- The value of your collateral used to secure the financing exceeds the amount of the loan.;
- The interest rate attached to the current loan surpasses that of the capped rate allowed by the SBA.
- A demand or balloon payment in the initial loan or the current maturity is no longer relevant for the original purpose of the financing.;;
- The lender behind the original line of credit wont renew.;
- The original debt was directed toward a change of ownership in which the financing has performed for two years.;
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Chilcott: Refinancing With Sba 504 Loans Can Keep Small Companies In Business
This reprinted column by;Kurt Chilcott, CEO and president of CDC Small Business Finance, originally appeared in;the Scotsman Guide;in the fall.;
It has been roughly a decade since the last serious economic downturn gripped our nation. Back then, commercial mortgage brokers had to scramble to find and close deals. The ones who made it to the other side of that deep recession are now challenged to succeed amidst an unprecedented crisis created by the COVID-19 pandemic. But how will they make it this time? Brokers bring various skills to bear in helping small-business clients grow and create jobs, including knowledge of their markets and industries, relationship building and personal tenacity. But its fair to suggest that those with a solid knowledge of the available financing tools will remain a step ahead of their peers as the economy begins to recover. One of the more versatile and yet underused financing tools is the 504 refinance program from the U.S. Small Business Administration , which can be used to rid a small business of costly private debt and generate positive cash flow.
What If Ive Tapped My Equity Can I Still Qualify For An Sba 504 Refi
During the life of your conventional commercial real estate loan, you may have tapped your equity to access working capital, which is a common practice among business owners.
If thats your case, you may still qualify for a refinance through the SBA 504 program. SBA 504 lenders like CDC Small Business Finance consider the bookend decision of your loan from its original acquisition purchase being eligible to its current appraisal value versus loan cost not exceeding 85% to 90%.
As long as you meet the program requirements, then you will likely qualify for an SBA 504 loan.
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How To Apply For An Sba Loan
The first step to applying for an SBA loan is visiting SBA.gov and filling out the SBA Lender Match form. The form takes about five minutes to complete and asks applicants to describe their businesses and their needs.
Within two days, the applicant will receive an email with a list of lenders theyve been matched with. The business can then contact the private lenders individually to compare rates, terms and other details before making a decision. Once a business decides on the SBA-approved lender they want to move forward with, theyll submit an application directly with the lender.
Is The 504 Refinance Loan Program Right For Me
If youre looking to refinance an owner-occupied commercial real estate or another type of fixed asset purchase, you may be a candidate for the 504 refinance loan program. Get started online and well reach out to talk individually about your financing needs and determine if 504 is right for you.;
Recent changes to the 504 Refinance Program now make it eligible to refinance a loan even if it is an existing SBA 7 or 504 loan. In general, the following is required to be eligible:
- Debt must have been incurred for an owner-occupied commercial real estate, land, or equipment purchase or a renovation
- Debt was incurred more than 6 months ago
- Your business must be in operation for 2 or more years;
The SBA 504 refinance loan program is versatile and can be used to refinance a variety of fixed-asset expenses, such as:
- Owner-occupied commercial real estate, such as an office, manufacturing facility, or storefront
- Land purchase
- Heavy machinery or equipment purchase
You can also cash out up to 20% of the property value and use the funds to pay off credit cards, pay down payables or create cash to pay for future operating expenses. Other business expenses, such as salaries, rent, utilities and inventory can be included in the same loan. Your lender can help you understand if your expenses are eligible.
The SBA 504 refinance loan program is administered by Pursuit CDC
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What Is An Sba Loan
The SBA is a government agency that partners with SBA-approved private lenders to offer a variety of loans for businesses that cant get conventional loans. Depending on the type of loan you get, the SBA eliminates a percentage of the risk banks take on when funding young businesses.
One SBA loan option is the 7 loan program. As the SBAs most popular loan program, 7 helps businesses finance startup costs, buy equipment and inventory, buy or expand existing businesses or obtain working capital.
Who its best for: SBA loans are best for new businesses that are in the U.S. and havent been in operation long enough to build strong credit histories.
Sba Loan Refinance Criteria
The SBA offers attractive financing opportunities to business owners. Its 7 program is the hottest one going. But they also have a rather narrow set of criteria that you must meet to access the capital. Not to mention, the hurdles you must clear to qualify. Nevertheless, if you make the cut to refinance business debt, it could free up more cash flow for your business for the foreseeable future.;
In its review of its loan guaranty programs, the SBA states that the proceeds from 7 loans can be used to refinance business debt for compelling reasons. But what does that mean exactly? Whether or not youll be able to use an SBA loan to refinance with the agency is an incredibly nuanced framework. So, well go through specific scenarios to make it understandable.;
You can refinance business debt with the same lender that issued the original financing if you can prove youve got no unexplainable lapses in payment over the past 36 months. If youve already got an SBA loan, the agency frowns on getting another one to refinance, though there are some exceptions. For instance, if your financing requires greater flexibility than is currently allowed and the existing lender wont bend.;
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Debt Refinancing Can Offer Lower Rates
Taking out a second loan to pay off your first one might make sense if, say, that second loan comes with a lower interest rate.
All of a sudden, debt refinancing can make your business debt more affordable.
Weâll talk more about this later on, but depending on when youâre able to refinance business debt, you could be paying substantially less interest on the principalâwhich is the amount you borrowed from a lender. In other words, debt refinancing can lower your overall rate. Youâre borrowing for less.
And there are especially expensive loan productsâlike merchant cash advancesâthat are great choices to refinance into more affordable kinds of debt. The option to refinance business debt gives you the chance to limit the damage that pricey short-term borrowing can do to your bank account or cash flow.
What Is A Good Interest Rate On A Business Loan
Theres no one answer for what a good interest rate on a business loan is, and a good interest rate for you might be different than a good interest rate for another business owner who has different qualifications and needs.
That said, SBA loans often have very low, competitive interest rates . Right now, SBA 7 rates range from 6.25% to 8.5%.
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Using The Sba 7 Loan To Refinance Debt
;The SBA 7 loan is an excellent tool for improving your business’s financial standing. Business owners can use the SBA 7 loan to get better terms on existing debts or business mortgages.
Most businesses have some debt, but if your loan terms are unreasonable and you can no longer meet the terms or afford the payments, youre faced with the need to refinance the debt. The SBA 7 loan program helps small business owners refinance existing debt into loans with lower payments and/or longer terms in certain situations. If youve been struggling to get the funding you need, the SBA 7 loan program;might be right for your business.
Refinancing Debt With An Sba Loan
As a small business owner, youâre always on the lookout for ways to save moneyâand a popular way to free up your cash flow is to refinance your outstanding debt with a business loan with more manageable terms. You might be aware that SBA 7 loans have some of the lowest rates and most generous payback periods on the market. This begs the question: Can you refinance debt with an SBA loan?
The short answer to this question is that you can refinance debt with an SBA 7 loan. But the most accurate answer is that it depends on your situation.
If youâre looking to refinance an existing SBA loan with another SBA loan, then that answer changes to no. For the most part, the government tends to prefer to help those business owners who havenât yet secured SBA loans find financing, rather than to cut down rates on existing SBA loans. That said, the agency might consider your case if it falls under a few extenuating circumstances.
And even though itâs difficult to refinance an existing SBA loan, you can refinance other existing debt with a new SBA loan. Of course, youâll still need to qualify for refinancing, according to the SBAâs 7 standards.
In the infographic below, we break down under which circumstances you can refinance a loan with an SBA loan, whether that outstanding debt is with the SBA itself or another lender.
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