Summer may feel like the perfect time to kick back and relax, but it turns out that conditions are also near-perfect for refinancing. Interest rates are holding steady and, according to the Fed, they’re unlikely to change dramatically anytime soon. Plus, changes that the SBA has made to the 504 refinancing program over the past year are providing more eligibility, more flexibility and fewer limits.
What Has Changed with SBA 504 Refinancing Rules
- Increased loan-to-value (LTV) ratio to 90%
- Elimination of the 20% cap on eligible business expenses
- Alignment of the “substantially all” standard at 75% for refinancing with expansion
- Elimination of the 10% substantial benefit test on refinancing government debt
- Inclusion of “other secured debt” as eligible business expenses
For lenders, these changes remove some restrictions to help borrowers and provide more opportunities to tap into the equity in their assets.
For borrowers, refinancing can give you more ways to adjust your debt, lower your payments and free up cash to invest in your future.
Here’s a handy breakdown of the changes:
SBA 504 Refinance Program: Key Changes
Change |
Benefits to Borrowers & Lenders |
| LTV Increased to 90% (No Expansion)
Now allowed up to 90% LTV |
Lower equity requirement for borrower, better leverage, improved cash flow. Favorable bank position (still 50% LTV) & expands eligible borrower pool
|
| Cap on Eligible Business Expenses (EBEs) Removed
No cap, subject to 90% LTV |
Borrower can refinance more cash out for business expenses (payroll & utilities), improves borrower liquidity and financial health, enhances bank credit quality
|
| “Substantially All” Threshold Defined at 75%
For refinance with or without expansion
|
More loans qualify for refinance (loans with mixed-use purposes) |
| 10% Substantial Benefit Test Removed (Government Debt)
Test eliminated for refi of SBA or government debt
|
More 7(a) or 504 loans may qualify, variable-rate loans can be refinanced to retain clients in safer structure |
| “Other Secured Debt” as Eligible Business Expense
Certain secured, non-fixed-asset debt allowed
|
Borrowers can consolidate more debt types, encourages holistic refinancing, helps clean up borrower balance sheets |
What is an SBA 504 Loan?
The SBA 504 loan offers a fixed-rate and long-term financing. These loans are great for applicants whose business model will benefit their community directly, either by providing jobs or bringing needed services to an underserved area. For many small businesses, it is beneficial because this is money and capital that may not be accessible through traditional loans.
Total projects can be over $12 million and even larger for manufacturers.
- The SBA’s portion of the project, however, is capped at $5 million (or $5.5 million for manufacturers).
- Nonetheless you can see that even though the “S” in SBA stands for “small,” this loan program can fund some large sized projects!
Less money out of pocket.
- The SBA 504 loan does require equity from the borrower, but it can be as little as 10 percent.
- Less money put into the building or equipment purchase means more money on the company’s balance sheet or on the owner’s personal financial statement.
- Businesses that are start-up in nature or properties that are special purpose require greater equity.
Interest rates fixed for the life of the loan!
- The term and rate of the loan is either 10, 20 years or 25 years. (It depends on the project.)
Depending on the appraised value:
- No further collateral beyond the subject property or equipment is required.
- Many fees and costs can be wrapped into the total project.
To see if your business is eligible and learn more, contact Seedcopa Relationship Manager Marie Shires at mshires@seedcopa.com or 610.458.5700.
