Expectations ran high a year ago as the lending community awaited SBA’s release of the rules governing the temporary 504 refinance program. These great expectations escalated to a fever pitch only to come crashing down like the end of a sugar high.
When the guidelines were released, the stiff requirements sent many lenders into a vegetative state. The 504 refinance program was nearly dead on arrival.
Business owners were steered toward other loan products for refinancing instead. But with floating rates and balloon payments common among lenders, small businesses were eager for a fully amortizing, fixed rate option. The promise of the 504 refinance program could not go unfulfilled.
Pressure from banks, trade groups, and the CDCs (Certified Development Companies) who represent the SBA in the 504 loan transactions resulted in revisions to the program both in April and October of 2011. By late spring of last year, the program began gaining momentum. In the fall the floodgates opened. Small businesses began hurrying to restructure their debt and free up capital. Lenders started racing to obtain loan approvals and take advantage of this program that ends on September 27, 2012.
In an unprecedented move, the SBA permits the 504 refinance program to provide cash out to borrowers. The cash must be used for eligible business expenses currently due but unpaid or due within 18 months of the loan application date.
EXAMPLE: Commercial real estate valued at $2 million. Debt payoff is $1.2 million. Financing is available up to 90% of the loan to value, equal to $1.8 million. After the debt payoff, the borrower could get up to $600,000 in cash out for eligible business expenses.
There are less than eight months remaining for the refinance program. The entire lending community is holding up a collective megaphone. Now is the time to refinance. Now is the time to cash out equity in commercial real estate. Now is the time to get up to 90% loan to value.
With time running out, understanding the eligibility requirements for the 504 refinancing program is key:
- A business must have been in operation for at least two years.
- The debt to refinance must be for owner-occupied real estate and have been incurred no less than two years prior to the date of application and substantially all of the proceeds (85% or more) used for 504-eligible business expenses.
- Payments on that debt must be current for the last 12 months.
In a period of deflated hopes and unkept promises, the 504 refinance is one option that is available and working for small businesses. The SBA got this one right, even if it took a couple of tries first.
With an upcoming election and possible administration changes, the future is uncertain for more ground-breaking legislation that fosters small business lending. Lenders and business owners alike should seize the opportunity presented by the SBA’s 504 refinance program.