Debt Refinancing with SBA

One of the many benefits of SBA lending is the ability to refinance debt, including existing commercial loans at your bank. We often see debt refinancing as a component of an SBA loan, where the borrower is trying to expand their business or restructure debt to improve cash flow. Because commercial real estate debt can be financed over 25 years (and up to 10 years for business loans), refinancing existing debt into an SBA loan can often improve a borrower’s cash flow.

To illustrate how this works, suppose you have an existing bank client that has a $1,000,000 line of credit that is fully extended. Then consider that the business needs more capital to continue to grow but the bank isn’t comfortable increasing a conventional line. One option would be to refinance the existing line into a 10-year SBA term loan. This would reduce the bank’s risk with a 75% SBA guarantee and would allow you to extend the borrower a new $350,000 express line of credit, which has a 50% SBA guarantee.

In this situation the bank has lowered its risk on the original $1,000,000 line to $250,000 of unguaranteed exposure on the SBA term loan and $175,000 on the express line. In this scenario the bank has supported the clients cash flow needs, but also reduced its risk from $1,000,000 to $425,000. In addition, the bank can likely sell the 75% guaranteed portion of the $1,000,000 term loan for around a $75,000 premium.

There are many ways to continue to serve your customers in today’s market while reducing risk to your institution. Providing solutions through SBA loans is a mutually beneficial way to improve liquidity for you and your customers.  

Article by: Brian Carlson