Can an SBA loan refinance an equipment loan?
Short answer
Yes, if it clears Appendix 14. SOP 50 10 8.1 lists debt whose maturity did not fit its purpose, like a 3-year loan on equipment with a 15-year life (App. 14, Para. A.1.f). The new payment must be at least 10% less than the existing installment amounts in aggregate.
Yes. Equipment debt can be refinanced if it clears Appendix 14 of SOP 50 10 8.1. Paragraph A.1.f lists debt with a maturity that was not appropriate for its purpose. SBA's example is a 3-year term loan on equipment with a 15-year useful life.
What the new term can be
Equipment, fixtures or furniture can run 10 years, or up to 15 years if the IRS asset class useful life supports it (App. 17, Para. A.2). The general rule is the shortest appropriate term based on the use of proceeds and the borrower's ability to repay.
Tests that apply
Equipment loans are not excepted from the payment test unless they are demand notes or balloon debt. The new payment must be at least 10% less than the existing installment amounts in aggregate. The debt must be current for at least the last 12 months or the life of the loan, whichever is less.
Collateral
The new loan must generally carry at least the same collateralProperty a lender can take and sell if a loan is not repaid. and lien priority (App. 19, Para. A). On a Standard 7(a), the lender must take a first lien on assets it refinances (App. 19, Para. B.1). If the value assigned to fixed assets exceeds net book value, the lender must get an independent appraisal (App. 19, Para. A).
Leases
Appendix 14 names leases among the documents a lender keeps, but it does not say which leases qualify. The 504 rule is clearer. Capital leases may be eligible, and an operating lease is not (Sec. C, Ch. 1, Para. C.11).
504 projects
A 504 refinance can include equipment debt if the Qualified Debt or expansion rules are met. An appraisal is required when used equipment is being refinanced (Sec. C, Ch. 1, Para. E.2.b).
Sources
- SOP 50 10 8.1, App. 14, Para. A, General Requirements, Para. A.1.f and Ten Percent Improvement to Installment Payment Amount (p. 355)
- SOP 50 10 8.1, App. 17, Para. A.2, Loan Maturity Requirements (p. 390)
- SOP 50 10 8.1, App. 19, Para. A, General Requirements, Refinance transactions and valuation of fixed assets (p. 404)
- SOP 50 10 8.1, App. 19, Para. B.1, Standard 7(a) Loans (Para. B begins p. 408)
- SOP 50 10 8.1, Sec. C, Ch. 1, Paras. C.10 and C.11 (Para. C begins p. 226)
- SOP 50 10 8.1, Sec. C, Ch. 1, Para. E.2.b, Appraisals (Para. E begins p. 242)
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