Vijay Yadlapati, National Association of Realtors® Associate
Commercial Policy Representative
Temporary SBA 504 Refinancing Program
Provides Capital for Small Businesses
Recognizing the dilemma faced by small businesses as a result
of the contraction in the credit markets, the Small Business
Administration (SBA) has temporarily modified its 504 Program to
allow the refinancing of existing debt and the use of the equity in the
property for long-term working capital needs.
Small businesses have historically had limited access to long-term financing at attractive interest rates. As a result, many elected
to finance long-term projects or long-lived assets with short-term
balloons in anticipation the lender would renew the balance at
maturity on similar terms. The recent financial crisis and economic
downturn caused many businesses to scramble as their commercial
mortgages matured, but their renewal was not assured. Additionally,
such short-term financing often creates havoc in budgeting, planning for long-term growth and effectively allocating scarce financial resources. This new SBA refinance program is designed to meet
the long term financial needs of small businesses.
This program enables small business owners to refinance existing
debt with a long term loan. If property owners have more than 10
percent equity in their property, these individuals can also borrow
against that equity for their working capital needs. SBA 504 loans
are funded by the sale of 10-year and 20-year bonds guaranteed by
the SBA. Thus, this type of loan has an interest rate that is generally
lower than market. Recent interest rates have been as low as 5.04
percent for a 20-year SBA 504 refinancing loans.
A small business must have been in existence at least two years
before the loan application is received by the SBA. It must be for-profit and have a tangible net worth of less than $15 million and an
after tax profit of less than $5 million for the previous two years.
The small business must currently occupy at least 51 percent of
the existing commercial real estate to be refinanced, and the property must have been acquired at least two years ago with debt. In
addition, borrowers must demonstrate that the loan is current and
that they have not made any payments more than 30 days after the
due date under original or modified bank terms for the past twelve
months. Such modifications of terms must have been entered into
prior to October 12, 2011.
Loans under this temporary 504 refinance program are structured
like traditional 504 loans. With a traditional 504 loan, a bank provides up to 50 percent of the project cost and holds the first lien
position. A Certified Development Company (CDC) provides up to
40 percent of the project cost and takes a secondary position to the
bank loan. The small business borrower must provide equity of as
little as 10 percent. The amount of the bank loan must be at least as
much as the 504 loan.
While there is no limit on project size, the 504 loan is limited
to $5 million maximum for the majority of refinance projects just
as with the regular 504 program. The upper loan limit increases to
$5.5 million for eligible manufacturing projects and projects that
incorporate energy saving technologies.
The project structure is based on the current appraised value of
the collateral, and up to 90 percent of this value may be refinanced.