Hello, Richard Jeffrey here. When I joined JRB about five years ago, a lot of my SBA buddies were confused. Some thought I was just a 7(a) lender while others knew I was steeped in 504 loans. Truth be told, I’m both. I’ve been in SBA lending since George Washington went to the dentist, consulting with 7(a), 504 and conventional lenders to make them the best business lenders around. So when JRB asked me to write their 7(a) eBulletins in addition to their 504, I said, “Absolutely!” This gives me a chance to share my stories and my more than 30 years’ experience in every facet of SBA lending with a whole new JRB group. My stories: You’ll get used to them! R.JI was sitting around talking shop with a bunch of SBA lenders a few nights ago. Since it was after hours, we were relaxing over adult beverages. Naturally, it didn’t take long before somebody asked “Why does SBA make it so difficult to refinance a loan?” How it went:

WAYNE. SBA sure makes it hard, But I guess they’re not supposed to make it easy. Maybe they figure it this way: SBA’s purpose is to make credit available to America’s small business. But if a business is looking to refinance a loan, credit was already available without SBA.

ME. Agreed. Very logical. The business already has a loan so it got credit elsewhere. So, why is it hanging out in the SBA loan application line, taking up space from small businesses that need SBA?

MARIA. Maybe their credit terms aren’t reasonable, like if the current loan has a balloon payment. SBA says balloons aren’t reasonable because they can have the borrower make a sizable payment despite years of timely payments.

WAYNE. Here’s a thought: If the borrower can’t afford to make payment when the balloon payment comes due, refinancing the loan with an SBA loan might just transfer the risk of a potential loss from a creditor to SBA. There must be reasonable assurance that the current lender is not in a position to sustain a loss.

ME. So the borrower must have the ability to repay from business cash flow. Good ole ATR!

MARIA. ATR can come from projections supported by reasonable assumptions. But I suppose using projections to justify repayment on a refi seems kind of farfetched. I sure wouldn’t try it PLP. Yet the lender could show that the borrower doesn’t have ATR because their loan terms are unreasonable. So if the loan is refinanced, there is a reasonable chance of repayment.

WAYNE. Hold it. Red Flag Alert. That assumes all other conditions for a refi loan are in place. Like, the proceeds of the original loan were used for a purpose that would have been eligible for SBA financing at the time. And assuming that no proceeds were used for the owner’s salary or benefits. Getting the disbursement sheet from the original loan would help that.

ME. Knowing me, you know it’s Story Time. I once had a client who brought in shoeboxes full of receipts from a hardware store, all for purchases made on his personal credit card, He wanted me to refi his credit card debt.

I spread out all the receipts on my floor so I could identify how the funds were used. Finally, I remembered that SBA would allow him to certify that the funds were used for “eligible business purposes” and I had him sign a certification.

MARIA. Hey, what about when you get a loan request to refi multiple loans? You know how you must show that the new monthly payment is at least 10% less than the existing payment? Well, I have an applicant who wants to get one loan to refi a commercial real estate loan and a whole bunch of equipment loans. Do I have to show a 10% improvement on every single one of those loans?

WAYNE. Nope. If there’s a 10% savings on the total debt service, you’re good to go.

And so it went as the night rolled on until one of us reminded the rest that tomorrow was a work day. And our Ubers came to take us home. The upshot? Yes, debt refi is hard. I hope my late-night group chat helped clear the way.

Richard Jeffrey
Senior Associate