SBA 504 Refinancing: New Rules and Key Benefits for Small Businesses
A recent Forbes Magazine article, “With Rates Dropping, the SBA is Relaxing Its Refinancing Rules for Small Businesses,” highlights significant changes to the SBA 504 Refinancing program. Here are some key points from the article:
Key Changes to the SBA 504 Loan Program Listed in Forbes:
- Eased Refinancing Rules: The SBA has made it easier for businesses to refinance debt and take advantage of lower rates.
- Streamlined Process: Changes in November expanded the types of loans eligible for refinancing.
- Increased Loan-to-Value Ratio: The ratio has been raised from 85% to 90%, allowing businesses to borrow more.
- Removed Cap on Eligible Business Expenses: The 20% cap has been eliminated, providing more access to working capital.
- Lowered Fixed Asset Requirement: The requirement has been reduced from 85% to 75%, making it easier to qualify.
- Removed Lower Payment Rule: The 10% lower payment rule for refinancing has been eliminated.
- Expanded Debt Types: More types of debt can now be included in refinancing without needing to use proceeds for business expansion.
These changes are timely, as interest rate cuts could help businesses lower their cost of capital. Businesses that have taken out loans over the last two years will benefit from refinancing and achieving lower financing costs.
Advantages of SBA 504 Refinancing
- Low, Fixed Interest Rates: The 504 loan offers historically low, fixed interest rates.
- Long Loan Terms: Terms can extend up to 25 years.
- High Refinancing Value: Refinance up to 90% of the appraised property value (if no cash-out).
- Access to Cash: Use the building's value for salaries, rent, inventory, utilities, and payables.
- Flexible Cash-Out Options: Refinance up to 85% of the appraised property value for eligible business expenses.
- Equity as Down Payment: The borrower's equity in the collateral often fulfills the down payment requirement.
- Payment Stability: Enjoy stable payments and protection from balloon payments.
- Loan Consolidation: Consolidate multiple loans into one.
- High Loan Limits: Up to $5 million for the SBA portion of the loan, with no limit on overall project size.
- Lender Flexibility: Keep your lender or get matched with one of the SBA's lending partners.
- Economic Aid Act Benefits: Fee eliminations and payment subsidies are available for refinance loans approved by September 30, 2021 (subject to availability), offering substantial savings.
How Does SBA 504 Refinancing Work?
A 504 refinance loan is structured similarly to the standard 504 loan, offering low, fixed rates on 20- or 25-year terms that are fully amortized. A commercial bank provides the first mortgage, and the SBA (through WBD) provides the second mortgage. Typically, the small business's contribution is as low as 10%, often covered by the property's equity. If not, cash or other assets can be used.
You can refinance up to 90% of the current appraised value of the property. If refinancing includes eligible business expenses, the maximum proportion is 85%. Another option is cashing out up to 20% of the building’s value for business expenses, such as operating costs, employee wages, and inventory.
Cash Out for Working Capital
The SBA 504 Loan Program offers business owners the opportunity to secure below-market, fixed interest rates, amortized over 25 years, for up to 90% of the appraised value of commercial real estate property. Loans are administered by a Certified Development Company (CDC) like WBD and granted in conjunction with a conventional lender (usually a bank). This setup means the borrower's equity injection is typically much lower than traditional business loans, helping keep more cash in the business rather than tied up in real estate. Existing equity in the collateral often fulfills the down payment requirement.
504 Loans: A Powerful Tool for Strengthening and Growing Your Business
Refinancing your commercial mortgage with an SBA 504 loan can help free up trapped capital and lower monthly payments due to the low, long-term, fixed interest rate. An SBA 504 loan can also be used to:
- Purchase land or buildings
- Construct, upgrade, or renovate buildings
- Purchase equipment with a service life of ten years or more
Despite their power, SBA 504 loans remain under-utilized because many small business owners are unaware of this financing option. In FY2020, 504 loans helped fuel $5.8 billion in new capital investments for 7,000 businesses throughout the U.S.
