SBA 504 Refinance - 2022 Guidelines
The SBA 504 loan refinance program offers long term fixed rate financing for existing small business commercial properties. Below are the current guidelines.
Please note that as of August of 2021 SBA 7a loans can be refinanced with a SBA 504 loan at up to 90% loan to value and with up to $500K in cash out. There are numerous rules regarding eligibility but the program should allow a lot of businesses to convert floating rates into long term fixed rates and the 504 does not require outside collateral, so you should be able to get any outside collateral released if you qualify.
Here are the basic SBA 504 Refinance Rules as they apply to refinancing an existing SBA 7a loan.
- The current lender must put it in writing that they are "unwilling or unable" to modify the current terms/payment schedule. The existing 7a loan may be refinanced in whole or in part if the lender is willing to continue to hold some debt. This should not be a problem for most transactions as 7a lenders generlly will not be willing to modify your terms.
- The refinance must have a “substantial benefit” – typically meaning a minimum of 10% savings on the new payment amount that is attributed to the debt being refinanced. i.e. the program allows for the refinance of other debts and even some cash out for expenses, but there must be 10% savings on the portion of the existing debt that is being refinanced.
- The maximum loan to value is 90% of “eligible fixed asset value” if refinancing a with no cash out. (“Eligible fixed assets” are defined as “buildings or land, equipment, machinery constructed, improved or acquired by the small business for use in its business operations”).
- An “SBA Cash Out Refinance” it is permissible for certain “eligible business operating expenses” at a maximum LTV of 85%, but the cash out amount cannot exceed 20% of the value of the eligible fixed asset(s).
- Eligible business operating expenses can only include expenses that are not capital expenditures. Things like rent, salaries, inventory and utilities can be included in the cash out as long as they were incurred (but not paid) prior to the date of the borrower’s application for the refinance. However, you can also include expenses that will be due within 18 months of the application date.
- Business debts that were incurred with a business credit card or a business line of credit can be considered as eligible business expenses, but the SBA requires that the lender verify that the credit card or line of credit is in the name of the small business and they will ask you to certify that any debt to be refinanced was strictly used for business-related purposes.
Additionally, if you currently have a 504 loan and you are looking to refinance your first mortgage AND you have a multi-purpose property you may be eligible to refinance the first into a very low 25 year fixed rate and you may be able to take some cash out. Please contact us at 1-800-414-5285 for details as we will be updating this page shortly.
SBA 504 Refinance guidelines prior to August of 2021:
- Single purpose or special use properties such as hotels, assisted living, etc are eligible up to 90% LTV even though they would typically require more equity to be eligible for a 504. Other properties such as golf courses or bowling centers may also qualify for 90%.
- 75% of the original debt had to be used to finance real estate and up to 25% of the debt to be refinanced could have been used for other business uses.
- Debt to be refinanced must be in place at least two years from application date.
- Business must have been in operation for two years prior to application date (and cannot have had a full or partial ownership change).
- Max LTV is 90% if the refi includes real estate and equipment debt. If refi includes cash out for “eligible operating expenses,” the max LTV is 75% with business operating expenses not to exceed 25%.
- The loan to be refinanced must be current for the last 12 months.
- You cannot refi an SBA 7a, 504, USDA or any other government loan*
Please contact us at 1-800-414-5285
Other Refinance Options (including 100% Loan to Value)
In addition to the 504 refinance program there are at least a few ways for businesses to refinance with an SBA guaranteed loan.
- Click here for information about a 100% "plus" financing program for a refinance or refinance with expansion or or construction/expansion.
- Click here for general info about the SBA 7a program - a very flexible program for both real estate and non-real estate debt. It is available with a 25 year amortization if the largest percentage of the use of proceeds will go towards financing commercial real estate.
- Refinance only your existing first mortgage and "re-subordinate" your existing 504 2nd mortgage. This is a largely overlooked option for those needing to refinance and given the current low rate environment it could make a lot of sense for a lot of businesses.
- If you are planning either an expansion or an upgrade to your building or real estate it may be possible to refinance your existing loan while financing a new expansion or renovation with a new 504 loan.As an example, let's say you own a hotel and you have the following scenario:- owe $1 million
- your loan is coming due
- you do not have enough equity to refinance with a conventional loan
- you also want to renovate the property at a cost of $500,000A refinance could be accomplished by refinancing both the existing mortgage and half the cost of the renovation into a new first mortgage while simultaneously getting a 504 2nd mortgage to cover the rest, so you end up with the following scenario:New first mortgage: $1.25 million (existing first mortgage plus 50% of the cost of the renovation)
New 504 second mortgage: $175,000It might also be possible to finance the expansion/renovation outside of the current financing with a new 2nd mortgage from your lender and a 504 mortgage in a 3rd position.
- Lastly, there is a little known 504 guideline that allows a business to refinance it's real estate and equipment debt when undergoing a large expansion.
SBA 504 Refinance Rules For "Business Expansion"
How SBA defines "Expansion":
“Any Project that involves the acquisition, construction or improvement of land, building or equipment for use by the small business applicant."
How SBA determines eligibility:
"If the Project involves expansion of a small business applicant, any amount of existing indebtedness that does not exceed 50% of the cost of the expansion may be refinanced."
SBA to "regular language" translation:
Essentially, you need to be spending $2 for every $1 that you would refinance.
Notice: It does NOT say that you need to borrow twice as much as you currently owe. It says that you can refinance debt equal to 50% of the cost of the expansion.
Furthermore, the guidelines state that you can refinance debt at a different location as long as it is part of the same business. This is where it can be extremely useful.
Let's say you currently own a car wash and owe $1 million on it and you would like to refinance to a lower rate and longer term...AND you are looking at purchasing another car wash for $2 million. Well, the permanent refinance guideline states that you can refinance the existing debt and borrow money for the new wash as long as the amount of debt to be refinanced is half of the cost of the expansion (not half of the new amount borrowed)...so you could purchase the new car wash with as little as 15 to 20% down while refinancing your existing property to more reasonable terms.
Keep in mind, if you are concerned about running out of SBA Eligibility, you might be able to make the new project "Green/Energy Efficient" and effectively create additional eligibility. (See our Green 504 page here for more info).
Car washes are just one example of an industry that could use this program - medical practices, dentists opening a new location, self storage businesses, funeral homes, day cares, assisted living facilities and many others are eligible.
You can even use this guideline to refinance an EXISTING 504 second mortgage that is at a higher rate.
There are some additional caveats including making sure that at least 85% of debt to be refinanced would have been eligible for a 504 originally and the new payments for the refinanced amount need to be at least 10% lower than current payments, so please contact us for more complete information and to make sure there isn't any fine print that might make your project ineligible.
Cash Out Refinance - Guidelines
Eligible Business Operating Expenses include the following:
- (Unpaid) Business Credit Card Debt
- Expenses that will be incurred by business within 18 months of application
- Improvements that do not increase a building's footprint
- Paying down a Line of Credit
- Utility Bills
- Wages and Salaries
Eligible Business Expenses are those "incurred and unpaid" at the time of application or those that "will be due for payment" within 18 months of application.
504 Refinance Rules
(Some of this has changed, will be updating shortly)
- SBA 504 Refinancing is now available to all SBA-eligible businesses.
- Both the business and the commercial mortgage debt to be refinanced must be at least 2 years old. (The business expenses noted above that are part of the new cash out provision are treated differently).
- 85% of the ORIGINAL debt must have been used to finance eligible 504 assets (commercial real estate, heavy equipment, machinery, closing costs). 15% of the refinance amount could have been for other business purposes - working capital, inventory, etc. In other words, as long as 85% of the original commercial loan was used to purchase commercial property or equipment for the business then the current financing is eligible to be paid off.
- The loan to be refinanced must be current (not more than 30 days past due) during the last 12 months. Loans that have been modified (including interest only modifications) or had deferments are eligible.
- Business owners must have a minimum of 10% equity that can be equity in the real estate/building being financed or in other eligible collateral including any other 504 eligible asset, residences, other commercial property and equipment.
- Existing "government backed" loans cannot be refinanced using the new program. (i.e. existing 504, SBA 7a or USDA loans), but it may be possible to get an additional 504 loan for an expansion. (Please contact us at 1-800-414-5285 for info on how to do this).
- Single purpose or special use buildings (hotels, mini storage facilities, etc) are eligible up to 90% ltv even though they would typically require more equity to get SBA financing.
- An appraisal (dated within 6 months) is required. (Typically this means a new appraisal).
- Low loan to value loans are NOW eligible since the current debt will be refinanced "50/50" by the lender and SBA.
- 504 refinance rates for the 2nd mortgage piece can be approx 5 to 30 basis points higher than "regular" 504 rates.
- Refinances of larger loans for businesses with few employees will need to meet one of SBA's Public Policy or Community Development Goals in order to qualify, however, this should be possible for most businesses.
Please see Public Policy and Community Development info below re: qualifying a business with few employees.
SBA Public Policy and Community Development Goals
The SBA 504 loan program is (technically) a "Jobs Creation" or "Jobs Retention" program, but businesses that meet Public Policy or Community Development Goals are exempt from the "jobs requirements" and most businesses should be able to meet one of the goals.
The following types of businesses should be exempt from the Jobs Requirement:
- Businesses that "improve, diversify or stabilize a local economy." (Most businesses can meet this test).
- Minority owned (51% or more) and operated businesses. A minority is defined as most NON caucasians including borrowers of Hispanic and Asian origin.* (See below for full list)
- Woman owned (51% or more) and operated businesses
- Veteran owned (51% or more and especially service disabled) and operated businesses
- Loans to businesses in communities affected by a military base closure (typically within commuting distance)
- Loans to businesses in "Enterprise Zones"
- Businesses that reduce their Energy consumption by 10%
- Businesses in rural (possibly semi-rural) areas
- Businesses that "stimulate other business development"
- Businesses that "bring new income into a community"
- Manufacturing firms in the North American Industry Classification System (NAICS) Sectors 31 to 33
- Businesses in Labor Surplus Areas as defined by the Department of Labor
If a business cannot meet one of these goals than they will have to create or retain the equivalent of 1 full-time job per $65,000 of 504 second mortgage.
*SBA Eligible Minority List:
- Black Americans
- Hispanic Americans
- Persons with origins from India, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or Nepal
- Japanese Americans
- Chinese Americans (including Hong Kong)
- Persons from Laos, Cambodia (Kampuchea), The Philippines
- Native Americans (American Indians, Eskimos, Aleuts, or Native Hawaiians)
- Asian Pacific Americans (persons with origins from Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, U.S. Trust Territory of the Pacific Islands (Republic of Palau) and The Republic of the Marshall Islands, Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands,
- Persons from Guam, Samoa, Macao, Fiji, Tonga, Kiribati, Tuvalu, or Nauru) and members of other groups designated from time to time by SBA.
Being born in a country does not, by itself, suffice to make the birth country an individual's country of origin for purposes of being included within a designated group.
Primary Benefits of Refinancing with an SBA Loan
- SBA Loans are some of the only loans available to some businesses because of the government guarantee.
- SBA Loans have minimal equity requirements.
- SBA Loans typically do not have balloon payments.
- Both the 504 and the 7a offer long term amortizations for commercial real estate and "long life" equipment.
- 504 loans have a "below market" 20 or 25 year fixed rate second mortgage.
SBA 7a Refinance
The SBA 7a Loan program can be a good alternative to the 504 and it can be used to refinance loans of up to $5 million (and in some cases higher) AND it can be used for many other business purposes including working capital, business debt consolidation, tenant improvements, etc.
Please visit the SBA 7a loan page for more information.
"A-" SBA 504 Program
An "A-" SBA 504 refinance is available for those businesses who had a a few bad years but have come back to profitability.
Good candidates for the program have been in business for numerous years - perhaps lost money in a few years back - but now have at least one tax return showing a return to profitability.
Click here for more info: SBA A Minus Loan Program or call us at: 1-800-414-5285
The Small Business Jobs Act of 2010 Made The Following Changes to SBA Loan Programs:
- Significant increase in the Size Standards for SBA eligible businesses which will allow much larger businesses to qualify for SBA financing and refinancing. A business can now have a (tangible) net worth of $15 million and a 2-year average (net) income of $5 million.
- Significant increase in the size of the 504 second mortgage to $5 million ($5.5. million for energy efficient/ green loans and small manufacturers) which will make much larger refinance transactions possible.
- SBA 7a loans are now be available up to $5 million. (The 7a program also allows a refinance).
- Temporary extension of the SBA fee waivers that were initially part of the Recovery Act.
- Temporary extension of the 90% guaranty for SBA 7a loans.
- Creation of a $30 billion Small Business Lending Fund to give community banks more capital to lend.
New Higher SBA Loan Limits
A new higher 504 loan limit of $5.5MM was also included in the legislation. This limit now allows even larger projects (possibly as high as $15 to $20MM) to be financed through the program.
SBA Jobs Bill News for HR 5297
The SBA 504 Loan Blog - also provides up to date information about HR 5297 and it's impact on SBA lending.
Conventional Commercial Mortgage Refinance (non SBA)
Conventional loans are available for properties with more equity - typically at 20 to 40%. Feel free to call us at 1-800-414-5285 to see if you qualify for a conventional commercial mortgage refinance.
SBA 504 Refinance Loan Program for Business Expansion
The 504 loan program allows a refinance and expansion as long as the debt to be refinanced does not exceed 50 percent of the projected expansion cost. (In other words, it needs to be a large expansion because the current debt cannot be more than 1/2 of what you are spending on the expansion).
For example, if you currently owe $1,000,000 on your commercial building your expansion cost would have to be $2,000,000 to qualify for a 504 refinance.
Please note that if you have more than 1 location the following provision in the new rules could help you.
*The debt being refinanced does not need to be for assets at the same location or for the same type of property as the project being financed as long as the operation at the other location has the same NAICS code as the operation at the Project location.
Essentially, this means that if your business has multiple locations - perhaps a warehouse and retail stores - and you were looking to expand one of them, you could use the 504 to pay off the debt on one property and expand the other.
Of course, if you have more equity in your property - 30% or more - you may qualify for a conventional commercial refinance, so please get in touch if you would like to look at your options.
- The debt being refinanced must have been incurred to acquire land, construct a building or to purchase equipment and the assets acquired need to be eligible for financing under the 504 program.
- Existing debt must be collateralized by fixed assets.
- Existing debt was incurred for the benefit of the small business.
- Refinance must provide a substantial benefit to the borrower. “Substantial Benefit” is defined as the portion of the new installment amount attributable to the debt being refinanced and must be at least 10 percent less than the existing installment amount.
- The borrower must be current on all payments due on the existing debt for not less than 1 year preceding the date of the refinance.
- Costs essential to the refinance, such as prepayment penalties, financing fees or other refinancing costs, required by the original terms of the debt instrument, may be included in the debt refinance portion of a Project.
- SBA 504 Loan Fees apply
- The SBA 504 maximum project costs can go as high as $20 million+ if you have a manufacturing facility or if you Go Green.
- Refinancing enables you to take advantage of record low SBA 504 rates.
More Refinance Information
You can visit our SBA 504 Program page if you would like more information regarding 504 loan requirements, qualifying, loan structure, eligible properties, etc.
SBA Alternatives - Small Business Capital
Small Business Administration lending programs are currently the best available financing for most small and mid-sized businesses and there is a lot of hope that the current bill will pass, but there will still be those who are ineligible for SBA financing.
These business owners may be eligible for "Asset-Based Lending" programs, which have proven to be a good alternative to SBA loans and could provide working capital for various business needs.
Asset-based programs available include:
- Accounts Receivable Financing
- Equipment Leasing
- Purchase Order Financing
- Contract Monetization for Service and Financial Contracts
- Merchant Credit Card Advance Lending
Some of these programs are available for A thru D credit, so please contact us at 1-800-414-5285 if you want to explore your options.
Other Non-SBA programs worth looking into include:
- Construction Project Financing
- Tenant Improvement Financing
You can call us toll free at 1-800-414-5285