Getting an SBA Loan to Refinance or Consolidate Debt

If you’re a small business owner looking to lower your monthly payments or get a better interest rate, refinancing or consolidating your debt with an SBA loan may be a good option. SBA loans are backed by the government, so they often come with lower rates and more lenient eligibility requirements than traditional bank loans. This article will walk you through everything you need to know about using SBA loans for refinancing or consolidation.

What is an SBA loan?

SBA loans are offered through banks and credit unions, but the Small Business Administration guarantees a portion of the loan amount. This makes lenders more willing to approve applicants who might not otherwise qualify for a conventional business loan. The most common type of SBA loan is the 7(a) loan, which can be used for a variety of business purposes including refinancing debt. The max loan amount for a 7(a) loan is $5 million.

Benefits of refinancing with an SBA loan

There are several potential benefits to refinancing existing debt with an SBA loan:

• Lower monthly payments – You may be able to stretch out repayment terms to reduce your monthly burden.
• Lower interest rate – SBA loans often come with lower rates, saving you money over the life of the loan.
• Consolidate multiple loans – Combine all debts into one manageable payment.
• Access cash – If you qualify for a larger loan amount, you may be able to access extra working capital.
• Improve credit terms – Refinancing could help you ditch undesirable loan provisions.

Qualifying for an SBA refinance loan

To qualify for an SBA refinance loan, you’ll need:

• A for-profit business that’s been operating for at least 2 years
• Good personal credit (generally 680+ FICO score)
• Collateral to secure the loan, like business assets or personal real estate
• Ability to repay the new loan through business cash flow

Work with an SBA lender to assess the overall health of your business. They’ll want to see strong revenue and profits, as well as a low debt-to-income ratio.

Using an SBA loan for debt consolidation

In addition to refinancing with the same lender, SBA loans allow you to consolidate debts owed to multiple creditors into one loan with one monthly payment. This can greatly simplify managing cash flow and expenses.

Consolidating debt doesn’t directly improve your interest rate, but it makes managing payments easier. Work with your lender to see if consolidation would benefit your business. Be sure to discuss…

• Amount you need to pay off debts
• Collateral you can use to secure the consolidation loan
• Monthly payments you can afford
• Whether it’s better to refinance each debt separately

Steps to getting an SBA refinance or consolidation loan

If you think an SBA loan is right for your business, follow these steps:

1. Check your business credit scores and personal credit scores. Look for any errors on your reports and dispute them if needed.
2. Gather tax returns, financial statements, debts to be refinanced/consolidated, and other documents lenders will want to review.
3. Research SBA lenders in your area or online lenders that offer SBA loans. Compare interest rates and fees.
4. Complete the lender’s loan application and submit your documentation.
5. Be prepared to pledge collateral to secure the loan.
6. Work with the lender if they require any clarification or additional items.
7. Close the loan and use the proceeds to pay off existing debts.

Alternatives to SBA refinancing

If you don’t qualify for an SBA loan, here are a few other options to consider:

• Ask your current lender for better terms – See if they’ll modify your loan or refinance at a lower rate.
• Use earnings to pay down debts – Focus on paying down highest interest debts first.
• Get a loan from an online lender – They may have more flexible underwriting requirements.
• Use equity in real estate – Tap home equity via a HELOC or cash-out refinance.
• Try peer-to-peer lending – Borrow from a pool of investors via sites like LendingClub.

The bottom line

Refinancing or consolidating with an SBA loan can be a smart move for small business owners looking to reduce monthly payments, improve cash flow, or access capital. Take the time to assess your business finances and research lenders to find the best possible rates and terms. With careful planning, an SBA loan could provide the debt relief your business needs to thrive.