Impact of additional payments on SBA loans

November 06, 2023

by an investor from Columbia University - Columbia Business School in Seattle, WA, USA

I plan to finance my acquisition through SBA 7a loan.

Given that there seems to be no prepayment penalty for SBA loans, I plan to make additional payments at the end of each year to lower my debt service. Let's say I make $50K additional payment at the end of each year.

How will this change my monthly payment in the following years? Do the lenders recast the remaining balance with 10 year amortization schedule again, or recast using the remaining years (so 9 year amortization if lump sum payment is made at the end of first year)? Also, if the rate has come down by the end of the first year, I assume they use the new, lower rate to recast the payments?

Lastly, in terms of LTV, at what point will I be able to refinance the remaining balance with conventional loan to remove PG?

Would be good to hear from the lenders here how this works.

Thanks!

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

^redacted‌. Thank you for including me. You are getting a lot of different answers to the question. The reason for that is the SBA provides flexibility to the lenders in how they handle adjustments in payments and interest rates. You can have the interest rate adjust as often as monthly all the way up to 5 years on a variable rate loan. The SBA recommends the Bank re-amortize the loan with each adjustment in the interest rate. However, some lenders only re-amortize the loan quarterly or annually. If you make a principal pay down on your loan, the loan should automatically re-amortize based on the current interest rate, remaining balance and remaining term at the next adjustment date. You will want to check your loan documents on when that next adjustment date is. You can alway ask your lender to re-amortize the loan sooner, and they may or may not want to do so.

The problem with making early payments on your SBA loan is that with each adjustment period for your lender, the loan will re-amortize over the remaining term. So your payments will go down, but you will not necessarily get ahead of the maturity date unless you continue to pay a higher amount each month.

Also, one other thing to be aware of. If you have a term or 15 years or greater, you will have a prepayment penalty of 5% in Year 1, 3% in Year 2, and 1% in Year 3. Typically any prepayment of 20% or more of the principal balance in a year the Bank will trigger the penalty on that portion of the prepayment. Also, on any SBA 7A loan, even those less than 15 years, and even once the prepayment penalty is gone on a longer-term loan, if you prepay 20% or more of the loan without providing notice to the Bank in advance, the Bank will charge you 21 days of interest on the amount prepaid. So if you are planning to prepay the loan be sure to notify the Bank in advance so you do not pay the extra interest. This interest will be charged on payoff letter as well if you do not request the payoff letter 21 days or more prior to the payoff date.

I hope this information helps. If you have additional question you can reach me here or directly at redacted

Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

Drawing from my banking days experience, you'll need to notify the bank that you are making additional principal payments. This is especially true if the lender has sold the SBA loan to an investor. The bank may or may not reamortize the loan. Rate changes will reduce the accrued interest but, again, the bank may or may not reamortize the loan. Regarding refinancing to a conventional loan, again, that depends upon the lender's decision regarding collateral value and all the other factors (cash flow, timely payments, your credit score, business financial performance, etc.).

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