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Refinancing 7(a) into a 504: A Comprehensive Guide

Refinancing a 7(a) into a 504 can be a smart financial move for businesses seeking better terms or additional funding. In this blog post, we will explore the basics of refinancing, scenarios where it’s beneficial, SBA requirements, necessary documents, and best practices for a seamless process.

The Basics

  • Borrowers can refinance an existing 7(a) loan into an SBA 504 loan.
  • This process may allow businesses to obtain cash out for eligible business expenses (EBE)
  • Debt must have been used to acquire eligible fixed assets, such as owner-occupied real estate and capital equipment.
  • The loan-to-value ratio (LTV) can reach up to 90% without cash out or 85% with cash out, which should not exceed 20% of the appraised value.

Eligible Business Expenses (EBE)

  • EBE includes accrued expenses like salaries, rent, utilities, and inventory that aren’t capital expenditures.
  • MWSBF assists borrowers in handling EBE when seeking cash out on their 7(a) refinance.

Scenarios Where a 7(a) Refinance is Useful

  • When a business cannot qualify conventionally due to LTV or other issues like weak cash flow or a risky industry.
  • If a borrower’s variable 7(a) loan was used to purchase their building, but now their rate and payments have continued to increase.
  • When a borrower with equity in their building wishes to pull cash out, but their institution isn’t comfortable with the request.
  • For institutions that hold outstanding 7(a) loans on their books and seek to improve their terms but can’t modify due to sold guarantees or investor restrictions.
  • 7(a) loans priced with selling the guaranteed portion in mind are often fully adjustable rates, potentially as high as Prime + 2.75%.

SBA Requirements

  • The loan must meet the “85/15 test,” with at least 85% of the original 7(a) loan proceeds used for 504 eligible purposes.
  • The current lender must be unwilling or unable to modify the loan terms, requiring written confirmation.
  • The refinance must substantially benefit the small business, demonstrated by a 10% improvement in the borrower’s monthly payment.
  • The business must comply with all terms of its existing SBA loan(s).
  • The loan must be at least 6 months old and secured by an eligible fixed asset during that period.
  • The business must have been operational for at least two years, and all original collateral and guarantors must be included in the new 504 loan, except in special cases.

Documents to Collect for 7(a) Refinancing

  • Full financial package, MWSBF application, and personal history forms.
  • Third-party reports include appraisals, environmental assessments, and used equipment appraisals.
  • Signed closing documents for the loan(s) to be paid off, copies of the final SBA authorization, and a 12-month prior payment history.
  • A payoff statement and the current lender’s unwilling and unable letter/email.

Best Practices for a Successful 7(a) Refinance

  • Involve an MWSBF loan officer early in the process to address any concerns and ensure smooth navigation.
  • Confirm that the existing loan meets the 85/15 test to qualify for refinancing.
  • Estimate the collateral value to assess the feasibility of the refinancing plan.
  • Create hypothetical sources and use a scenario to understand the refinance’s financial impact better.
  • Address any additional collateral or guarantor requirements early on to streamline the process.

Refinancing an existing 7(a) into a 504 loan can offer numerous benefits, including improved terms, additional cash for eligible expenses, and potential relief from high-interest rates. Contact an MWSBF loan officer to see if a 7(a) refinance suits you. 

Refinancing 7(a) into a 504: A Comprehensive Guide

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