I get this question constantly, usually from an owner who’s been carrying expensive debt for a while and assumed there was nothing to be done about it. Most of the time there is. The rules on SBA refinancing changed in late 2024, and they changed in the borrower’s favor.
Here’s what actually qualifies, what doesn’t, and how to tell which of the two programs fits your situation.
The debt I see most often
Almost every refinance conversation I have starts with one of these.
A balloon note coming due. Conventional commercial mortgages come with 5- to 10-year balloons. The owner has been making payments for years, the property has appreciated, and now the whole balance is due at once in a market where their bank may or may not want to renew.
High-rate bank paper. A term loan taken out when the business had less history behind it, priced accordingly, and never revisited.
Equipment notes. Short amortization, heavy monthly payment, financed at the dealer.
Credit card and line-of-credit balances. These start as a bridge and become permanent. I see owners carrying six figures on business credit cards at rates they’d never accept on a term loan.
Merchant cash advances. The worst of the group. Daily or weekly draws on the operating account, effective rates that don’t get disclosed cleanly, and no amortization to speak of.
If your debt is on that list, keep reading.
Two programs, two different jobs
The SBA has two refinance tools. They aren’t interchangeable, and picking the wrong one wastes weeks.
The SBA 7(a) is the general-purpose option. It can refinance business debt of almost any kind, including working capital debt, equipment notes, credit lines, and merchant cash advances. The lender has to be able to show that the new loan puts you in a better position than the old one. Depending on what’s being refinanced, that usually means demonstrating a meaningful improvement in the monthly payment.
The 7(a) is where I go when the debt isn’t tied to real estate, or when it’s spread across several different obligations that need to become one.
The SBA 504 is for owner-occupied commercial real estate and long-life fixed assets. If you own the building your business operates out of, this is almost always the stronger play. You get a long fixed rate on the CDC portion, full amortization, and no balloon at the end of it.
The 504 refinance is the part of this that most owners have never heard about. It deserves its own section.
What changed in the 504 refinance program
The SBA made a set of changes effective November 2024 that widened this program considerably. If you looked at a 504 refinance before then and it didn’t work, look again.
Loan-to-value went to 90% across the board. It used to be 90% for a straight refinance and 85% if you wanted cash out. Now it’s 90% either way.
The cash-out cap is gone. There used to be a hard ceiling on how much you could pull out for business expenses, capped at a percentage of the collateral value. That cap was removed. Cash out can now take the project all the way to 90% LTV.
The fixed-asset test got easier. The original debt used to need 85% of its proceeds tied to fixed assets to be considered qualified debt. That threshold dropped to 75%.
Balloon notes clear the benefit test automatically. You don’t have to prove a payment savings percentage if you’re refinancing a note with a balloon on it. The balloon itself is the justification.
“Other secured debt” counts as an eligible business expense. Certain other debt secured by the same asset can now be paid off with cash-out proceeds.
Put together, that’s a meaningfully different program than the one that existed in 2023.
What the cash-out can actually pay for
This is where owners get tripped up, because “cash out” doesn’t mean cash in your pocket.
Eligible business expenses are operating costs of the business. Salaries and wages. Rent. Utilities. Inventory. Expenses you’ve already incurred but haven’t paid, or that will come due within 18 months of your application. Business credit card and line-of-credit balances qualify, provided you can certify the funds were used for business purposes.
What it can’t do is fund a distribution to you personally, or pay off personal debt, or buy something unrelated to the business. The SBA is funding your operations, not your balance sheet.
The requirements that don’t bend
A few things are firm regardless of which program you’re using.
You have to occupy at least 51% of the building for a 504. If you own a property and lease all of it to third parties, this is the wrong program and the wrong conversation.
The debt has to have some age on it. For a 504 refinance without expansion, the qualified debt generally needs around six months of seasoning, which is a lot shorter than the two years the rule used to require.
You have to be current. Not “mostly current,” not “we had a rough stretch last spring.” Late payments in the recent past will need a written explanation at minimum, and depending on the pattern they can end the conversation.
And the SBA won’t let its guarantee be used to bail out a lender who’s about to take a loss. If your existing lender is in trouble on the loan, that’s a problem for the refinance, not a reason for it.
The one number that decides it
Everything above is eligibility. This is qualification.
Your debt service coverage ratio has to work. Most lenders want to see at least 1.25x, meaning the business generates $1.25 in available cash for every $1.00 of debt payment after the refinance closes.
Run it before you call anyone. Take your EBITDA, which is net income plus interest, depreciation, amortization, and any documented owner add-backs. Divide it by what your total annual debt payments will be under the new structure. If that number lands at 1.25 or above, you have a deal worth packaging.
Here’s the part people miss. A refinance usually improves your coverage ratio, because you’re stretching amortization and lowering the payment. A business that couldn’t support a 10-year note at 1.25x might comfortably support a 25-year one. That’s the whole point.
What this looks like on a real deal
[Illustrative — Hershel, swap in a real one if you’d like]
Say you own your building. It appraises at $2,000,000. You’ve got a commercial mortgage with $1,150,000 outstanding and a balloon due in 19 months. You’re also carrying $180,000 on a business line of credit and $95,000 on an equipment note.
At 90% LTV, the project can go up to $1,800,000. The mortgage gets refinanced. The line of credit qualifies as an eligible business expense. The equipment note may qualify as other secured debt depending on how it’s collateralized.
Three payments become one. The balloon disappears. The amortization stretches out to 25 years on the SBA portion at a fixed rate.
The monthly number drops, and so does the risk of your bank deciding in 19 months that they’ve had enough of your industry.
One timing note for anyone considering this
The SBA issued SOP 50 10 8.1 in August. It takes effect October 1, 2026, and it applies to applications that receive an SBA loan number on or after that date. Anything submitted and numbered through September 30 falls under the current rules.
Most of what changed is on the business acquisition side rather than refinancing, though there’s new flexibility around same-institution debt refinancing. Either way, if you’re on the fence about a refinance, the version of the rulebook your deal gets underwritten against depends on when your loan number is issued. That’s worth knowing before you decide to wait.
Rules like these get updated regularly. Confirm what applies on the day you apply rather than the day you read about it.
What to send me
If you want me to run the numbers, here’s the short list.
Three years of business tax returns. Your current year-to-date profit and loss statement and balance sheet. A debt schedule showing every obligation with the balance, rate, payment, and maturity date. If real estate is involved, the property address and whatever you know about current value.
I’ll run a full EBITDA analysis and tell you what the coverage ratio looks like under a refinance. There’s no cost for that and no obligation attached to it.
I’ve been packaging SBA loans since 1982. I’ll tell you if the deal works. I’ll also tell you if it doesn’t, which saves us both time.
Text me at (214) 726-9000 or email pierce.pavbank@gmail.com.
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