The rules for the 504 loan just got changed and it now will allow you to refinance your SBA 7A loan into an SBA 504 loan-this was not allowed up till now unless you were doing a lot of additional construction. THIS IS BIG NEWS….Most SBA 7A rates on properties are adjustable in the 5-6% range. The current Blended SBA 504 Rates are in the 3’s FIXED.This is a HUGE difference. Now the 504 is real estate-based, business-only loans can not be refinanced into 504. If you or anyone you know owns their real estate that houses their business, and they are on the SBA 7A program, they will save thousands!
On a million-dollar loan, the savings would be almost $1500 a month. That is a monster for a small business. If your business runs 10% net profit margins that means you would have to do $15,000 a month in sales to pay that extra $1500. A true game-changer for a business. Like any government deal, there are rules, which I am outlining below:
1. Loan Applicant must have been in operation for all of the 2- year period ending on the date of application, as evidenced by financial statements. No Start-Ups/New Businesses less than 2 years old.
2. The 504 Project must include a Qualified Debt, defined as follows:
- At least 85% of the proceeds of the debt must have been used for 504 eligible purposes (eligible fixed assets). If the most recent debt is the result of a refinance; eligibility is based on the original loan proceeds, when the fixed assets were acquired or constructed.
- The debt being refinanced was incurred for the benefit of the small business seeking refinancing
- The debt being refinanced was incurred not less than 6-months before the application date. Prior to 7/29/21, the requirement was 2 years. The existing debt must be at least 6 months old with no extensions/refinancing in the last 6 months.
- The debt is secured by the Eligible Fixed Assets – the land, buildings, machinery, and equipment that was acquired, constructed, or improved.
3. Qualified Debt can NOW INCLUDE Debt Guaranteed by a Federal Agency such as SBA 7(a), SBA 504, and USDA B&I loans.
When refinancing Federally-guaranteed debt:
- “Substantial benefit” is required. Substantial benefit means that the portion of the new installment amount attributable to the debt being refinanced, inclusive of prepayment penalties, financing fees, and other financing costs included in the request, must be at least 10% less than the existing installment amount. Cash-out for Eligible Business Expenses included in the project will not need to be included in the calculation.
- The CDC must verify in writing that the present lender is either unwilling or unable to modify the current payment schedule. If the lender is requesting to refinance its own debt; the loan will be eligible for 504 refinancing only if the lender is unable to modify the terms of the existing loan because a secondary market investor will not agree to modify the terms.
- Prepayment penalties are eligible costs in the 504 refinance budget.
- If an existing 504 is being refinanced, the Third Party Loan (1st mortgage loan) must be refinanced as well.
4. The prior rule that the Loan Applicant had to be current on all payments for the past 12 months, has been removed from the regulations. However, CDCs must still use prudent lending standards and explain any history of delinquency in their credit analysis. Lenders cannot shift potential losses from themselves to the SBA.
5. An SBA 504 refinance project must meet job creation goals. This may be done through Job Retention (full-time equivalent employees x $75,000 =/> SBA 504 Gross Debenture), or by meeting a Community Development or Public Policy Goal. The above is pretty much saying a 10% reduction in payment and a letter from the current lender saying they are unwilling to do the refinance and we can make it happen.
As with ALL commercial loans, I can help you navigate the process and help figure out if this benefits you. It costs nothing to run the deal by me and see if I can help. My goal is to help people, and it is FREE, so why not give me a call for ALL your business and commercial real estate loan needs. Call me today 512-358-1511