Is debt refinancing with SBA an easy do? Yes. And no. Using simple prudent lending practices, some common sense, and information from SBA’s SOPs, it’s not difficult.

First things first. One quick answer: Refinancing past due debt or debt where another creditor is in a position to sustain a loss isn’t eligible for SBA financing.

How often do we see these situations in our line of work? OFTEN. So does that mean never-ever or just never-sometimes? It’s possible that SBA could make the loan in some circumstances. But it shouldn’t be a PLP decision. It’s worth a try to submit the application GP with full disclosure and full documentation of the situation.

Here’s a simple scenario. Let’s say the prospective borrower has a conventional line of credit that matured 30 days ago and is past due. Is the borrower eligible for SBA financing? Could be. If the current lender provides a maturity extension allowing time to find new financing and the borrower makes payment during that time, then there’s no risk of loss.

A more complicated scenario. In this case, the borrower has a conventional loan of $500,000, that has strict DSCR covenants with another lender. That loan is also cross-defaulted with several other conventional term loans. At annual review the $500,000 loan does not meet the DSCR covenants and the lender calls in all their loans because they’re in “Default.”

Can you refinance?  Yes, under these conditions: The borrower meets all other SBA eligibility requirements; has a DSCR of 1.15:1, and the SBA lender is willing to proceed. If conditions are met, this deal is worth submitting to SBA for LGPC review and determination of eligibility of the “Default” status.

Full disclosure of this situation and support documentation, including notes, transcripts, and even a letter from the current lender regarding the default would help support the position that while loans are in default, the borrower is not in payment default.

At JRB, refinance is an area where we often see repairs and denials of the guaranty in our liquidation work. Lenders forget to dot their I’s and cross their T’s. SBA SOP 50 10 5 (J) includes a list of eligibility items. (See Subpart B, Chapter 2; V; Eligible Use of Loan Proceeds, 3. pg. 125)

Our recommendation. If you’re in a debt refi situation, review these eligibility items thoroughly. Addressing them will go a long way toward assessing the eligibility of debt for refinance. Willing to try? Incorporating – and addressing — these items in your credit analysis and credit memo will demonstrate the transparency of your analysis in a liquidation situation.

And what do we always say? Document, Document, Document. Gather your Notes, Use of Proceeds documents and Transcripts. Review them closely to ensure same borrower, eligible use of proceeds and current status.

Refinancing with an SBA loan can be easy when you set up your analysis, credit memo and processes to include the items SBA wants to see to support eligibility. And when in doubt — reach out. We’re here!

Rebecca Mendoza
Senior Associate