In a bold attempt to further energize the economic recovery, the federal government through the SBA 504 Loan Program has modified its debt refinance program to help small businesses facing imposing balloon payments.

Imagine a scenario where you have a small business in a building you purchased in 2001 for $1 million, and for which you have a loan of $850,000.

The property has gone up in value, and is now worth $1.5 million. You have inventory of $100,000 that needs to be paid, and a new order that needs an additional $100,000 for inventory. You would love to tap into the equity in the building to pay off that old inventory, fund the new, and lower your interest rate on the original loan. Your commercial bank has told you that your credit is great, and your cash flow is good, but that it will only loan 65% of the market value of the property. That’s only $975,000. You need $1,050,000. What can you do?

You call a Certified Development Company (CDC) and apply for an SBA 504 loan. CDCs are conduits for commercial banks and their borrowers to access Small Business Administration-guaranteed financing.

Mark Stebbins and Fernando Alvarez of California’s CDC Small Business Finance commented on the recently revised SBA 504 Debt Refinance loan program. Regulations were made substantially less restrictive Oct. 12, 2011.

“We think there are many commercial property owners who can benefit from this program, who have been shut out of refinancing programs in the past,” Stebbins said.

The SBA rules previously required that borrower’s provide historical records showing that each and every refinance of their commercial property resulted in at least 85% of the proceeds going towards the acquisition and or improvement of the real estate. That restriction is gone, replaced by the requirement that only the original loan satisfied the requirement that 85% of the loan proceeds were used for the acquisition and or improvement of the real estate. In addition, if the original purpose in acquiring the real estate was for investment purposes, but now the property is at least 51% owner occupied, the refinance of the original and all subsequent debt would be eligible.

Another huge obstacle that has been removed is the requirement that the commercial bank no longer has to finance 50% of the property’s value. That’s huge. CDC Small Business Finance’s Fernando Alvarez explained: “Under the recently revised 504 debt refinance program, the commercial bank and the SBA lender can each loan the same amount, as long as that isn’t more than 90% of the property’s value.”

A 90% LTV (loan-to-value) is an advantage to a commercial property owner, in and of itself. But the critical point is that the commercial bank doesn’t have to loan the first 50% LTV anymore.

Imagine if the owner in the scenario above wanted to refinance a total debt of $1,050,000. Under the old rules, the SBA 504 loan required the bank to loan the first $750,000 (50% of the value of the property). The SBA could then loan the difference for an additional $300,000. The old rules did not allow for cash out to cover inventory or any other business purpose.

Under the new rules, the commercial bank can lend the same amount as the SBA, not the first 50% of LTV. That means the commercial bank loan would only have to be $525,000 instead of $750,000 thereby saving the business owner increased interest expense for the additional $225,000 . The interest savings is derived from the SBA taking an equal share of the loan at rates historically below current commercial rates.

In the last couple of years of very depressing economic news, the changes to the SBA 504 debt refinance program is certainly a breath of fresh air and a step in the right direction.

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