Many business owner and other professionals in the commercial mortgage industry are surprised to learn that the SBA does allow refinances through the SBA 7a loan program and their rate does not have to float.
In terms of what situations qualify for the refinance, it boils down to taking borrowers out of a difficult situation. For example, if the borrower is in a hard money loan they’ll qualify. Or a borrower facing a ballooning or having a rate at or 2% of market will fit as well. The general rule of thumb is that if the borrower saves 20%on their monthly payment by the refinance, they qualify, but still have to meet the rest of the underwriting guidelines. Which, because the SBA guarantees 75% of the loan for the lender, the underwriting rules are reduced relative to other commercial mortgages.
One of the biggest benefits of refinancing through the 7a is that you can go up to 90% loan to value – 90%… Most of the industry is currently at 70-75% on general purpose/ 60% on special purpose and in a declining property value environment, where many deals are getting canceled due to lower than expected value, this is a huge benefit.
Another major benefit is that there are a handful of SBA lenders that will go down to mid 500 credit score and a few that will go to 500, assuming that the rest of the borrowers situation is ok.
The floating rate and guarantee fee have historically been the biggest negative of the program. The rate that most borrowers see is PRIME + 1-2.75% and floats, adjusting once per quarter. The guarantee fee is 2.75% of the guaranteed portion of the loan (75% of the actually loan balance), which is received at close, taken out of the proceeds.
HOWEVER, it pays not to assume that all SBA 7a loan programs/lenders are the same. We represent 2 banks that are currently offering 5 year fixed 7a loans AND they absorb the guarantee fee themselves. So the borrower gets the benefit of the 90% financing and “loosened” underwriting guidelines plus has a 5 year fixed rate mortgage, at prime plus 1-2%. Again, fixed for 5 years, and amortized over 25 years.
Cash out refinances are doable under the 7a program but come with more loan scrutiny. The most important concept here for the borrower to understand is that all cash out proceeds must go towards business expenses. No personal debt consolidation allowed, for example. Further all cash out proceeds will be controlled by the bank and they will directly pay off any debt that is being rolled into the loan.
Despite all the issues currently going on in the capital markets, the SBA 7a program is still viable and offers business owners a solid option to refinance their current debt into lower rates and thus lower monthly payments.