On September 8, 2021, SBA issued Policy Notice 5000-814473 (the “Notice”) outlining situations when 7(a) loan proceeds may be used to refinance a short-term loan originally made with the intent to be refinanced with a subsequent SBA-guaranteed loan. Prior to issuance of the Notice, lenders could only refinance a short-term obligation that was created with the intent of refinancing it with a 7(a) loan in limited circumstances (generally, bridge loans made to borrowers after the issuance of the SBA Authorization, but prior to disbursement).

In addition to the previously permissible “bridge loans” or “interim advances” (loans made after the issuance of the SBA Authorization), SBA is now accommodating additional circumstances where a lender may refinance short-term loans to borrowers made with the intent to refinance those same short-term debts with future SBA loan proceeds (short-term loans made prior to the lender obtaining SBA loan guaranty approval and the issuance of the SBA Authorization, or “interim loans”). The Notice sets forth the additional requirements that must be met, in addition to the prior debt refinancing requirements, for a lender to refinance an interim loan.

The first additional requirement listed in the Notice requires the lender to “demonstrate the necessity for the interim loan” – the lender must show a bona fide business reason for providing the interim loan to the borrower for the benefit of the borrower and not solely for the benefit of the lender. Examples of a valid business reason for making an interim loan listed in the Notice include “potential loss of the acquisition of the property being acquired due to an approaching deadline or significant delays in obtaining documentation necessary to complete the SBA loan application.”

While the first example cited by SBA is an obvious example of a valid business reason, the second example (delays in obtaining loan application documentation) may prove to be an interesting basis for extending interim loans to borrowers. In the current situation brought on by COVID, many borrowers and lenders are still experiencing delays in obtaining loan application documents and the delays may continue to be significant for some time, depending on location. In these cases, lenders make interim loans at their risk until the SBA application requirements can be met so careful documentation of the interim loan file will be necessary to ensure the valid business reason for the interim loan is properly reflected.

In addition to the valid business reason for the interim loan, SBA also requires the lender to meet interest rate requirements, allows a short-term maturity (12 months or less), applies SBA fee requirements to the interim loan, and aggregates the fees for the interim loan and the SBA loan in determining the maximum allowable fee. Additionally, the interim loan must be current and paying as agreed to be eligible for refinancing by the SBA loan. Lender must also take the same collateral in the same lien position(s) and the same guaranties for the SBA loan as the interim loan unless the SBA loan is fully secured. Separate requirements exist for refinancing existing short-term export lines of credit in the case of Export Working Capital Program loans.

While the provisions of the Notice provide more circumstances for lenders to refinance short-term interim loans made to borrower with the intention of refinancing those debts with a future SBA loan, the new permissible situations for using interim loans come with additional requirements for lenders to meet.