March 2, 2016

Best Practices: SBA Requirements for Debt Refinancing

by Katie O'Brien

When SBA lenders use loan proceeds to refinance existing debt, there are various requirements that must be met for the loan to be eligible. SOP 50 10 5 (H), Subpart B, Chapter 2, Paragraph IV. E sets forth these requirements. Not only is it imperative to make sure the debt being refinanced is eligible for SBA financing, but it is also important to provide an explanation in the credit memorandum as to why the debt is eligible. In order to alleviate any opportunity for the SBA to question the eligibility of the loan, provide a clear explanation of the debt’s eligibility in the loan file and provide copies of the notes/financing agreements/credit card statements being refinanced as well as a copy of the security documents related to the debt. Provide SBA with a clear roadmap so there is no question that the debt is eligible for refinancing.

SBA requires lenders to include an explanation in their credit memorandum as to why the debt was incurred, whether over-obligated or imprudent borrowing necessitated a major restructuring of the debt, whether the debt is on reasonable terms, whether the proposed loan will improve the financial condition of the business, whether the refinancing includes payments to creditors that are in a position to sustain a loss, whether SBA is likely to sustain the same loss and what percentage of the total loan the proposed refinancing constitutes. However, lenders do not always include an explanation in their credit memorandums or elsewhere in the file that explains why the debt being refinanced is eligible for SBA financing. In order to be eligible, the debt must fit into one of the following categories:

  • Debt that has a demand note or balloon payment;
  • Debt with an interest rate that exceeds the SBA maximum interest rate for the same type of loan (based on size, term and processing method);
  • Credit card obligations used for business-related purposes;
  • Debt that is over-collateralized based on SBA’s collateral requirements;
  • Revolving lines of credit where the original lender is unwilling to renew the line or the borrower is restructuring its financing to obtain better terms (i.e. lower interest rate and longer term);
  • Debt with a maturity that was not appropriate for the purpose of the financing; or
  • Debt used to finance a change of ownership (but see the SOP for further requirements)

If the debt being refinanced does not fit into any of the above categories, SBA includes a catch-all category for “debt that is not identified above but the Lender believes no longer meets the needs” of the business. However, if a lender is relying on this category to justify the eligibility of the debt being refinanced, the loan application must be submitted through standard processing.

With the exception of balloon notes, credit card obligations and revolving credit obligations, the lender must also be able to show that the new debt will provide at least a 10% savings in the monthly payment to the borrower. In addition to the above requirements, lenders can only refinance debt that would have been eligible for SBA financing at the time the loan was originally made unless the condition making the loan ineligible no longer exists. This requirement can now be met if the lender can show that the debt is included in the Borrower’s tax returns for the last two tax years and the Borrower provides a certification that the debt was incurred exclusively for eligible business purposes. The SOP contains additional requirements related to debt refinancing when the debt being refinanced involves a change of ownership, an SBA-guaranteed loan, the lender’s own debt or an SBA 504 loan.

Because all of these requirements relate to eligibility, it is critical that lenders get the analysis correct and clearly document their files to show that the debt being refinanced is eligible for SBA financing.

For more information regarding SBA debt refinancing requirements, please contact Katie at (267) 470-1207 or email her at