Small Business Administration (SBA) Expands 504 Loans to Refinances, Giving Greater Financing Options to Local Businesses

June 6, 2011

The United States Small Business Administration (SBA) recently took a step toward helping small businesses refinance their commercial loans. Many loans to small businesses have balloon payments where a large portion of the amount borrowed becomes due at the end of the loan. Usually these loans are refinanced so the balloon payment is never made but, in light of the Great Recession, these options may be limited or unavailable to small businesses. I saw an article in the Central Penn Business Journal that local economic development corporations (EDCs) were pushing the opportunity to refinance under the SBA 504 lending program, which historically was only available to new purchases of property and equipment. Under the new program, however, eligible small businesses will have the benefits described below of the 504 program to refinance existing loans.

The unique advantage of SBA 504 loans is that borrowers have increased access to financing from banks due to the low loan-to-value ratio and lien priority offered to the bank by the SBA. The way 504 loans work is that the total amount of funding required from a bank is 50% of the needed project cost and the remaining 50% is split between the EDC (40%) and the borrower (10%). Under the new program, however, the borrower’s 10% contribution may come from equity in the property due to principal payments made over the course of the existing loan. The SBA guarantees the EDC loan and allows the bank to have first lien priority on the secured property or equipment in addition to a low 50% loan-to-value ratio. 

Ordinarily a bank would require anywhere from a 75-80% loan-to-value ratio on the secured property, meaning if the land was worth $1,000,000, the bank would loan a maximum of $750,000. The distinct advantage of the 504 program is that the borrower could receive $900,000 to refinance an existing loan if the collateral is worth $1,000,000, as opposed to $750,000. Due to depressed property values caused by the recession, this is a significant amount that may be the difference between being able to pay off an existing loan and not being able to do so. This also means the borrower may be able to obtain financing through the program when it otherwise could not get it directly from the bank and generally at a competitive rate from the bank and EDC. Also, the EDC will generally have a great deal of due diligence already performed when it approves the loan, such as appraisals and environmental reports.

In order to qualify, the borrower must demonstrate need, such as a looming balloon payment or inability to receive credit elsewhere, and that it is current on its payments.   As with all SBA loans, the borrower must also be "small" as defined by the SBA regulations. The SBA hopes to allow these small businesses to refinance their loans, which they likely anticipated doing when they got them, but may not be able to otherwise do.

This program ends on September 27, 2012. The Lancaster EDC is located at 100 South Queen Street, Lancaster, PA 17608-1558, (717) 397-4046. To receive more information visit the SBA website’s page on the 504 Loan Refinancing Program.