Refinancing SBA loan to take out Seller Financing

April 14, 2021

by a searcher from Georgetown University - The McDonough School of Business in Houston, TX, USA

Is it common to refinance SBA loans, with a new SBA loan to take out Seller Financing? In particular I'm wondering about the pluses and minuses of utilizing a refi after additional equity has been made and performance has been proven to take out Seller Financing that would otherwise be on standby for the life of the loan. Interested in all thoughts, but lenders in particular.

1 Like

16 Replies

331 Views

Replies

Reply by a lender
from University of Missouri in St. Louis, MO, USA

Ben, a couple of points: 1. you can refinance seller debts after 24 monthly payments have been made, and there is an "unreasonable" repayment. In most instances this is a balloon. 2. you wouldn't need or want to refinance the SBA loan on top of the seller note refinance since you would pay the guaranty fee (this year exclude) on the full loan. Instead you would refinance the seller note with a new, separate SBA loan. 3. There wouldn't be an ability to refinance a seller note on full standby, nor should a bank consider that. The only way I would think you would consider that is if they took a big reduction in principal. Since this wouldn't be an unreasonable term it wouldn't be eligible. Most of the time when we look at refinance a seller note it is from the structure we used to accomodate the original acquisition. For instance, the seller wants the money in year 3 and you want 10 years. Accomodation is a 3 year Interest only loan that balloons after three years. Since you would have made 24 monthly payments, and there is a balloon, this would be eligible for a 2nd SBA loan to refinance the seller note.

Reply by a lender
from California State University, Sacramento in Seattle, WA, USA

adding onto the comments from all above and James Stolt. If you have the SN on full standby to meet SBA equity requirements then not eligible for REFI. And your next thought might be, 'well let's just refi the whole thing conventionally' which is generally VERY difficult without significant principle paydown and/or EBITDA growth. Things to keep in mind: The deal probably worked well because of the longer SBA amortization and covenant lite appeal. To refi into a conventional loan for the Sr debt and the Seller note will change the amortization to a 5 year or 7 year term which impacts cashflow coverage. And the introduction of covenants might not jive with the original SBA economics of the deal.

+14 more replies.

Join the discussion