New Rules for Debt Refinancing

With the release of SOP 50 10 5(B) last week, the U.S. Small Business Administration has amended its rules for the refinancing of debt under its flagship 7a loan program. The new rules relax some of the long-standing requirements for debt refinancing, while also providing clarification of the Agency's position on refinancing credit card debt and business acquisition debt.

Under the old rules, in order to refinance long-term debt, lenders were required to demonstrate at least 20% or greater improvement in the monthly debt service resulting from the refinance. This requirement has been relaxed and lenders need only demonstrate an improvement of 10%, which parallels the newly enacted provision for refinancing under the 504 program. This 10% improvement is required for all refinancing except for: (i) long term debt with a demand or balloon feature; (ii) credit card debt; and (iii) revolving lines of credit, for which no minimum improvement is required.

Debt that was incurred to finance a change of ownership may only be refinanced if a business valuation is performed that complies with the SBA's requirements. Additionally, if the business was acquired with seller take-back financing, this debt may only be refinanced if the seller-held debt has been in place for at least 24 months following the change of ownership and has been current for the past 24 months. SBA will only require a business valuation in this circumstance if a valuation has not been performed in the preceding 36 months.

The requirements for refinancing credit card debt have been clarified. If the credit card is in the business name, borrower must certify that all debt incurred on the card was exclusively for business purposes. If the Borrower cannot make this certification, lender must require the borrower to identify all personal expenses incurred on the account, and these amounts must be deducted from the balance before application for the SBA loan is submitted. If the card is not held in the business name, but is instead in the name of an individual, lender must: (i) require borrower to document each item claimed as a business debt; (ii) document the specific business purpose for each debt; and (iii) provide copies of the credit card statements and receipts for business expenditures in excess of $100. Borrower must certify that all loan proceeds will be used to refinance debt that was incurred exclusively for business purposes.

The newly released SOP 50 10 5(B) will go into effect October 1, 2009 and can be found here. For more information on the revised SOP, contact the author at 215-542-7070 or esmith@starfieldsmith.com.