May 6, 2015

Best Practices: Clarifications to SBA’s Debt Refinance Requirements

by Ethan W. Smith

On May 4, 2015, the SBA released version H of SOP 50 10 5. The issuance of this new SOP was announced by the Agency in SBA Information Notice 5000-1340 and is effective for all loan applications received after May 1, 2015. Of particular interest to 7a lenders are the clarifications to the SBA’s requirements for debt refinancing. Highlights of the clarifications to the debt refinance requirements include the following:

  • SBA has clarified that debt that was not eligible for SBA financing at the time it was originally made, may be refinanced with an SBA loan if the condition that would have made the loan ineligible no longer exists.
  • The interest expense for the debt to be refinanced must be reported on the borrower’s business tax returns.
  • If the debt that is being refinanced was the first extension of credit to the borrower, then the lender must document that the proceeds from the original loan were used for the applicant and were not used for any ineligible purpose.
  • If the debt being refinanced was itself a refinance of debt, in whole or in part, then the interest expense associated with the debt must be reported on the borrower’s business tax return for at least the last two full tax cycles and the borrower must certify that the proceeds of the original loan were used exclusively for the applicant and were not used for any ineligible purpose. This would appear to preclude refinancing a debt that has already been refinanced at least once, but has not seasoned for at least two years from the date that the original debt was incurred.
  • Business credit card debt may be refinanced if the lender confirms that the card is issued to the business and obtains a certification from the borrower that all charges on the account were for business related purposes. Any personal charges must be identified and deducted from the balance being refinanced.
  • Personal credit card debt that was incurred for business purposes if the requirements for refinancing business credit card debt are met and the lender obtains copies of the credit card statements and receipts for any business expenses over $250.
These clarifications to the debt refinancing requirements should help lenders know what the Agency’s specific requirements are for proving that debt was eligible for SBA financing at the time it was incurred and how to deal with the practical problem of documenting eligibility for loans that may have been refinanced multiple times. Additionally, these changes clearly identify which documents the SBA expects lenders to examine when making their eligibility determination for debt to be refinanced. SBA lenders should make sure that they begin following these guidelines immediately to avoid risking their guaranty.

For more information regarding the SBA’s clarification to its guidelines for debt refinancing, please contact Ethan at 267-470-1186 or at