Due to the new Small Business Jobs Act, there is a two year window to refinance business debt, such as commercial mortgages, equipment loans, lines, etc with an SBA 504 loan. This refinance eligibility is independent of the usually required job creation goals with the 504 program. This enables 504 loans to be used for refinancing of qualified existing debt without the normally need to prove business expansion.
In other words, for the first time every, commercial borrowers can refinance existing business debt with long term fixed rate financing. Total loan amounts can now go up to $12 million. All in all, this is outstanding news for the industry, as virtually all involved, including borrowers and bankers have been asking the Feds for this for years.
Here are the qualifying perimeters of this provision.
- Debt was incurred more than 2 years ago.
- Debt is not subject to a guarantee by a Federal agency (i.e. you cannot refinance an existing SBA 7(a) loan that you may have).
- Debt was used to acquire a 504 eligible fixed asset(s) (i.e. your existing debt must have been secured by an asset that the SBA deems as eligible)
- Debt is collateralized by a 504 eligible fixed asset(s).
- Borrower has been current on all payments for at least a year. However, most banks will require that there has been no lates in the last 5 years (or longer).
- Amount of financing (both the bank and SBA loans) is not more than 90% of the value of the collateral, otherwise additional collateral may be required to cover the deficiency (i.e. the max loan to value is approximately 90%. However, most banks will likely lower this to 80%).
- Borrower has been in operation for all of the 2-year period ending on the date of the loan.
- Financing may include the refinance of qualified debt plus payment of business expenses.
- Must include a specific description of the expenses for the additional financing. Borrowers will often have to create a “Debt Schedule.”
- Must include an itemized list of the amount of each expense. May not be used for non-business purposes. Business credit cards and or personal credit cards will likely remain very difficult to refinance as borrowers will have to provide receipts for individual item, thus documenting its use.
These recent changes to the SBA 504 loan program are huge. It will likely help many businesses that have had the door of commercial mortgage financing shut on them for over three years now. For example, borrowers that have loan amounts over $2 million with loan to values over 60% are a perfect example. These borrowers have had virtually no finance options as conventional financing has been so difficult to get done. Further, borrowers with special purpose properties like gas stations, hotels, car washes, etc have had virtually no options. Now, due to the recent changes these borrowers should have many more lending option via the SBA 504 loan program.