Major banks from across the nation recently reported that on all major categories of commercial loans, their standards for lending are now tighter than they have been since 2005. This is an important signal for the real estate market as a whole, but practically, it means big changes for small businesses around the US in need of capital. Luckily, there are still ways for entrepreneurs to continue to grow their businesses, including through the Small Business Administration (SBA).
Last year, Congress doubled the SBA’s lending authorization, giving them the ability to approve $7.5 Billion in loans through their 504 Refinancing Program. As of June, the SBA began accepting refinance applications from business owners with conventional commercial property mortgages. The loans allow them to tap into low fixed rates on the SBA’s government-guaranteed loans in order to refinance eligible fixed assets and business expenses.
If you’re a small business owner interested in the SBA 504 Refinancing Program, here are a few things you need to know:
You cannot refinance SBA or USDA loans.
The SBA 504 Refinance Program is not designed for refinancing existing government-guaranteed loans, like SBA or USDA loans. Loans that are eligible include conventional loans like a bank loan or commercial mortgage-backed securities (CMBS).
In fact, certain CMBS borrowers should consider SBA 504.
According to Trepp LLC, nearly 10% of all CMBS loans maturing in the next 12 months will be eligible for SBA 504 refinance. If your maturing CMBS debt meets certain criteria about asset types and loan amounts, you can use SBA 504. This includes hotel and self-storage facility loans under $15 Million.
You can refinance up to 90% loan-to-value and 75% on cash-out loans with SBA 504.
Through a special partnership with the SBA-authorized nonprofit, Certified Development Company (CDC), borrowers can leverage up to 90% of their commercial property’s value to pay off qualifying debt. In short, the SBA lender provides a loan of up to 50% of the value of the property, and CDC funds a second government-guaranteed loan up to 40%. If you’re looking for cash-out to cover eligible business operating expenses like inventory, rent, salaries, or utilities, you can include that in the refinance, but your loan-to-value is lowered to a 75% maximum.
You must be past the two-year mark.
For your loan to be eligible for SBA 504 refinance, you must have had it for at least two years prior to the date of application and you must prove that you operated your business for that entire period. Unfortunately, if your business changed ownership within that time, even if it was just a partial change, then the SBA considers it a new business, which disqualifies the debt under the program rules.
You must be current on all payments from the last year.
For SBA 504 refinance, you must show proof of no late payments on the commercial loan being refinanced. This period must cover the last 12 months from the date of application, during which time no payment was more than 30 days past due.
You should work with an experienced lender.
During the recession, many banks and lenders exited the SBA 504 secondary market, leaving only a handful of experienced lenders to address an in-demand program. It’s important to find one of these lenders, both for your sake and for the sake of the program. For the SBA 504 Refinancing Program to remain available, it must operate without need for tax subsidy. Only experienced lenders who are able to make good deals will be able to keep the program self sustaining and supported solely by SBA fees.