From SCORE Richmond by Doug Carleton:
With interest rates continuing to fall, if you have existing business debt it may be worth looking to see whether it might be eligible to refinance with an SBA loan in order to lower your monthly payments. SBA loans were created with longer amortizations than banks were normally comfortable with in order to enhance business cash flows because of the lower monthly payments associated with longer amortizations. Another key benefit is that interest rates allowable under the SBA loan program are capped. So the interest rate on any SBA 7(a) loan (by far the largest SBA loan program) over $50,000 cannot exceed 2 ¾% over prime. Since interest rates have been dropping you may have debt that was obtained earlier when rates were higher. So even though they may not have been thought to be that high at the time, with rates where they are now and expected to go still lower you may still be able to lower your monthly payments.
To refinance existing debt there are certain conditions that have to be met. One of the prime requirements is that a new loan must provide the borrower with a “substantial benefit” demonstrated by the payment amount being at least 10% lower than the existing loan. Some of the other important requirements are:
- A demand or balloon maturity feature in the existing note or the current maturity is not appropriate to the original purpose
- The existing debt being refinanced is on a revolving line or a credit card
- Interest rate exceeds SBA’s maximum
- Loan is over-collateralized
- Line of credit lender is unwilling to renew
There are other considerations but these are some of the most important. If you think that you might be able to benefit from an SBA refinance go talk to your banker or an SBA lender and find out. It could be well worth the effort.