What the New SBA 504 Refinancing Rules Mean for You

Businesses have long been able to benefit from loans guaranteed through the U.S. Small Business Administration (SBA). These government-backed loans help fund startups or business growth at low interest rates and with more relaxed terms than their conventional counterparts. The SBA 504 loan, in particular, is an ideal choice for businesses looking to fund or refinance major real estate or equipment purchases. Now, with changes to the SBA’s 504 refinancing rules that went into effect last year, even more business owners stand to benefit from a 504 refinance. These rule changes expand the types of debt that small businesses can refinance with a 504 loan, and they’re worth a look for any owner hoping to free up capital or fund new projects right now. Here’s a look at the updates to the SBA’s 504 refinance program and what they could mean for your business.

What Is an SBA 504 Refinance?

The SBA/CDC 504 Loan Program has been in place for decades, but it only expanded to permanently offer refinancing options in 2016. The program is a partnership between the SBA and Certified Development Companies (CDCs) — local nonprofit organizations focused on community development. The primary aim of 504 loans is to provide “long-term, fixed-rate financing for major assets, such as land and buildings.” An SBA 504 refinance is structured as follows:

• A private lender finances 50% of the project cost.
• The CDC funds 40% through a second mortgage.
• The business owner contributes at least 10% equity toward the project.

When the SBA began allowing businesses to refinance through the program, it only applied to for-profit businesses with debt that was at least two years old and originally used to purchase 504-eligible assets such as land, improvements, long-term machinery and equipment, or new facility construction. Borrowers also had to be current on all payments for the previous 12 months. However, last year’s rule changes have relaxed these requirements.

How Have SBA 504 Refinancing Rules Changed?

The SBA’s rule changes have altered quite a few aspects of the 504 refinance program, but here are the four most significant ones for small business owners:

• You can now refinance debts that are at least six months old, rather than two years as under the old rules.
• The new rules allow you to refinance up to 100% of your existing debt, compared to only 50% before.
• Businesses can still qualify even if they’re not current on all payments for the loan they hope to refinance for the previous 12 months.
• Other government debt, such as SBA 7(a) loans or existing 504 loans, is now eligible for refinancing under the program.

So, what does this mean for your business? The 504 program now allows you to refinance more debts than before with more generous terms. This may open the door to funding new projects or improving your current rates and loan terms to better position your business for growth.

Who Is Eligible for an SBA 504 Refinance?

Apart from these changes, the same general eligibility requirements are in place for SBA 504 loans. To qualify, you must be a for-profit company doing business in the U.S., be in operation for at least two years, and have a tangible net worth of less than $15 million along with an average net income of less than $5 million after taxes for the previous two years. You also must be able to demonstrate that you don’t have funding available from other sources. The SBA will also look at the history and character of your business. Are you able to repay the debt? Have you historically demonstrated the ability to do so? Do you have the management expertise to succeed? Is your business plan realistic? Does your business abide by the law? You’ll need to be prepared to demonstrate evidence for these points when you apply for a refinance.

Is an SBA 504 Refinance Right for You?

With these rule changes, SBA 504 refinancing has become a more attractive option for many businesses. These loans offer below-market, fixed interest rates and long repayment terms of 10-25 years, all with a low 10% owner equity requirement. And, now that you can refinance existing government loans for eligible assets, you might find a 504 even more appealing. For instance, if you have an SBA 7(a) loan, you’re dealing with an adjustable rate that typically ranges between 5% and 8%. If you can refinance that into a 504 loan with a fixed rate as low as 3%, it could save you thousands in interest each month. SBA 504 loans can cover up to $5.5 million for the purchase of land, machinery, equipment, land and leasehold improvements, or constructing or renovating facilities. They also allow you to use up to 20% of the appraised property value for certain operating expenses (your loan can’t exceed 85% of the appraised value in this case). In other words, an SBA 504 refinance might allow you to refinance such projects and free up valuable working capital for business operations.

How To Apply for Your Refinance

The first step in applying for a 504 loan refinance is to find a local CDC that can set up your loan. Use the SBA’s search tool to find one near you. Once you find a CDC, you’ll need to fill out a 504 loan application and provide all necessary documentation. This might include the existing deed and mortgage agreement on real estate you’re hoping to refinance, historical payment transcripts for your existing loan, and documentation of your business operating expenses and other financials. Wondering if a 504 loan refinance might be right for your business? Fountainhead can help you get started. We’re a non-bank, direct commercial lender with expertise in SBA lending. We can connect you with the right CDC and get you set up for a refinance in no time. Reach out today to learn more.