If you run a business on a stack of maxed-out cards and a credit line you draw on just to make payroll, at some point you start daydreaming about one simple question: Could I roll all my business credit cards and lines of credit into a single SBA 7(a) loan? Spoiler alert: The answer is yes. SBA 7(a) loans can refinance a variety of business debt, including credit cards and lines of credit. But only in certain situations, and the rules are strict. When it works, you’re effectively replacing all those smaller debts with one larger, unified loan. This means you’ll have a single payment to make each month, rather than having to juggle multiple payments.
Debt is part and parcel of doing business. Owners sometimes have to refinance their loans when the terms are unfair or the owner can no longer live up to the terms or can’t afford the payment. At certain times, the SBA’s 7(a) program gives small business owners the opportunity to consolidate their existing debt into loans with lower payments, extended terms, or a combination of both. If the debt or business does not qualify for SBA backing, the owner needs to pursue another option to restructure the debt.
The Small Business Administration offers the SBA 7(a) loan but doesn’t actually lend the money. That happens via banks, credit unions, or other private lenders. The SBA guarantees part of the loan, promising to reimburse the lender should the borrower fall short, which lessens the lender’s potential losses. The money can be put towards real estate, working capital, or equipment. The loan can also be used to refinance other debt. Because the lender first has to get approval to guarantee the loan from the SBA, the process for applying and the paperwork can be long. These loans have much better terms, however, than traditional small business loans, and are sometimes combined with counseling.
Unreasonable Terms
Not every debt can be rolled over into an SBA 7(a) loan. There’s some detailed requirements for getting such an approval. For example, you need to document to the lender that the existing loan has unreasonable terms (e.g., a maturity that has ballooned or one that doesn’t fit the loan’s original purpose, rate is above the SBA’s max, used on a Rev Line or Credit Card), that the underlying purpose was something that could be SBA financed (e.g., equipment, inventory, working capital, renovation, or acquisition), and that the refinance will significantly benefit the small business. The SBA does not want people refi’ing just for the sake of it. Notice that last item on the list of unreasonable terms. A balance on a revolving line or a credit card can count, which is exactly why cards and credit lines can end up in the same 7(a) loan. But it’s up to the approval of your lender, who would have to find your debt is on unreasonable terms, justify that it was used for a qualifying purpose, and prove that it will significantly benefit the business.
Business owners can refinance other business debt by rolling it into a new loan, but credit cards come with a special condition. Any business debt on your credit cards must have been incurred strictly for business purposes if you want to refinance it through an SBA loan. Personal items purchased on the card won’t make the cut. And even if the debt is for business, it should be able to be covered by the new loan somehow, or else you’ll need to secure it with collateral. You used the card “solely” to run the business, but how will you prove it?
Qualification Requirements Tend to Be Stricter
Is SBA 7(a) lending right for your company? The terms (interest rates, length of repayment, closing costs) are pretty favorable, but qualification requirements tend to be stricter than other commercial loan programs. So, we’re talking that you’ll need a minimum credit score of 690, no bankruptcies in the last 3 years, a 10% down payment, no current federal debt, and have no criminal history (or at least be prepared to explain any misdemeanor convictions you have). If you’re a franchisee, you’ll need to have paid the franchise fee up front (before receiving any of the loan proceeds). Your business must be a for-profit entity, be considered small according to size requirements, be based in the U.S., have invested equity, and you should have already exhausted other available funding sources.
Then there’s the personal guarantee. Everyone with at least 20 percent ownership of the business has to put their neck out on an SBA personal guarantee, and all their info gets put into the application. A spouse who has at least 5 percent has to sign too if they together own at least 20 percent, like say 15 and 5. But if the business is a sole proprietorship, you don’t get a separate personal guarantee, because you’ll be signing the note yourself as the borrower.
You have to fill out forms to get a loan; sure, that’s clear as mud. But what are we talking about here? The lender needs to know the type of your business, how large you are, how long you’ve been in business, where your business is located, and what industry you’re in. The lender also needs the name, address, and immigration status of the owner. The forms to expect include SBA Form 1919, SBA Form 912, SBA Form 413, and the financial statements of the business. Specifically, the application requires a balance sheet, a profit and loss statement, and income projections. Refinance applications require additional details of the loan being refinanced, such as the terms, remaining balance, and name of the original lender, plus documentation of the original loan use, as well as financial statements and projections indicating the advantage of refinancing. Applicants can receive assistance with the forms (e.g., lawyers, translators, etc.), but the lender is responsible for disclosing that help to the SBA.
Here’s a fictional example. A woman named Sarah owns a successful cafe in Bethesda, Maryland. After taking out several high-interest, short-term loans from different lenders to finance renovations at the cafe, including expanding seating and modernizing kitchen equipment, her monthly debt payment began to put a strain on her cash flow. Despite the business’s prosperity, the weight of her loans limited Sarah’s ability to invest in her business and pursue its continued growth. Sarah discovered the opportunity to consolidate her high-interest loans by refinancing them using an SBA 7(a) loan. She approached a local bank for a loan and, following a comprehensive application review, she was approved for a 10-year, $150,000 SBA 7(a) loan with a low fixed interest rate. Through the consolidation, Sarah merged her multiple high-interest loans into one loan with a longer repayment period, which immediately relieved her cash flow by providing her with lower monthly payments.
So, can business credit consolidation combine cards and credit lines? Yes, if the debt and the business both qualify, and for an owner who does, the advice is simple: consider a 7(a) loan if you have credit card or line of credit balances that are negatively impacting cash flow. But look back at that list of requirements: a credit score of at least 690, a 10% down payment, proof that you’ve exhausted other financing. If your cards are maxed out and you’ve been missing payments, you’re probably not there. That doesn’t mean the balances can’t be dealt with. It means the 7(a) isn’t the tool for it, and you’ll need another way to restructure the debt. It might be time to change course, and the sooner you look at your options, the more of them you’re likely to have.
