Can an SBA Loan be Paid Off Early?

Can an SBA loan be paid off early?

Thinking about paying off loans when you have the chance is a common idea. You might want to reduce business debt or confront your fear that there is the possibility that your business might go under. If you’re wondering if you can have an SBA loan be paid off early or refinanced, then the answer is a yes.

While the idea of being free from debt sooner might be appealing, there are factors to weigh before taking any actions. Avoid possibilities of hurting your small business by looking into the consequences of paying off your loans early.

What are the cons of paying off an SBA loan early?

1. Not having a regular cash flow

Once you pay off your debts in a lump sum, you might not have much left for yourself or your employees. Don’t find your reputation slipping fast by letting of the money you could have used for other causes for your business.

2. Less of a chance of having a financial fallback

During lean times, running a company free of debt is an excellent idea. Once you catch your business in a growing state, you will need an extra source of cash and lending is considered a proper source.

3. Lets you blow the chance to build a strong credit history

There’s nothing like a good credit history when you’re trying to obtain a loan. The credit bureaus look into factors like length of loans. It’s an essential thing for them to see if your application is creditworthy. Having a positive length of time with your SBA loan is something you should take advantage of.

What are the dangers if an SBA Loan is paid off early?

1. Early payoff fees

Yes. More fees are coming your way if you pay off your debt early. Lots of small business loan terms have a penalty for paying loans earlier than what’s expected. Before you say yes to any loan, you should make sure to read the terms and conditions of your individual contract.

2. Broken loan terms

Breaching the terms of any agreement in businesses is terrible. Again, before you agree to terms, make sure you can honor them.

3. Losing credit history building opportunity

Paying your small business loan over the life of your agreement is an excellent way to build a positive credit history. When you pay a loan on time, you can also help yourself rebuild your credit history if you have a bad one.

4. No more tax credits

There are certain tax advantages to your SBA loan.  You’re not paying tax for future purposes, but only the ones you make. If your SBA Loan is paid off early, you’ll lose tax credits in the future.

Is it possible to refinance debt with the SBA?

Refinancing loans guaranteed by the SBA is possible. It’s possible with the SBA 7(a) loan program. The basic requirements of refinancing it include the proper purpose of having it. The purpose of the original loan would have to have been SBA eligible.

The proposed loan should provide the borrower a substantial benefit demonstrated by the payment amount being at least 10% less than the existing loan. You also need a written justification for each loan. Additionally, it must also be explained why the current loan is not on reasonable terms.  Unreasonable loan terms may include the following:

1. The current maturity is not appropriate for the original purpose
2. The existing debt being refinanced is on a credit card or a revolving line
3. Interest rate exceeds the SBA’s maximum rate
4. Loan is over-collateralized
5. Unwillingness of the line of credit lender to renew
6. Debt was used for change of ownership

Refinancing of same financial institution debt is possible. Documentation that shows a 36-month payment history with no unjustified past dues (greater than 30 days) is needed. Generally, refinancing of an existing SBA loan isn’t allowed. However, there are considerations if the borrower has new financing needs that the current lender has refused or declined to modify the terms of the existing SBA loan to cater to the new loan.