As published in Scotsman Guide's Commercial Edition, March 2012.
This past October, the Small Business Administration (SBA) announced its final round of changes to the SBA 504 loan-refinance program. This included several key provisions that opened up the program to a broader range of small businesses and finally made it possible for small- business owners to include legitimate business expenses in the refinancing, amounting to a cash-out or working-capital provision.
This is great news for small-business owners and commercial mortgage brokers, but the program remains a temporary one. Unless action is taken by Congress, the SBA 504 loan-refinance program will expire on Sept. 27. Here’s what you need to know to help your clients take advantage of this program before the window of opportunity closes.
The SBA 504 loan-refinance program was established as part of the Small Business Jobs and Credit Act of 2010. This temporary program was given a life of two years, and $7.5 billion was set aside for 504 refinances in fiscal year 2011. Unfortunately, regulations as to how the program would be administered weren’t released for nearly five months. The first applications were accepted in February 2011.
This first round of regulations made 504 refinancing available only to small- business owners who had a mortgage up for renewal on or before Dec. 31, 2012. After some slow-going and high rejection rates, the SBA lifted that restriction and the final rules were announced this past October. This final roll-out of changes addressed borrowers’ ability to include business expenses in the refinance — essentially the cash-out provision that was mentioned in the original legislation.
Because of delays and a sluggish start to the program, just $270 million of the allotted $7.5 billion (about 3 percent) was used for SBA 504 loan refinancing in fiscal year 2011.
Another $7.5 billion was allotted for fiscal year 2012, and there are high hopes that a greater percentage of these funds will be used. The economy is showing signs of life, and more business owners will turn to SBA lending as they find that conventional lending hasn’t quite thawed yet. Two new rules in the last round of changes to the 504 loan-refinance program also may make this a record year for SBA lending.
The cash-out provision makes it possible for business owners to include in the refinancing what the SBA calls “legitimate business expenses” — salaries, rent, utilities, inventory, paying down payables, and other business obligations. Commercial mortgage brokers must point out to business owners that if they have embedded equity in their commercial real estate, they can now tap that equity and pull out working capital, which is in short supply from conventional lending sources.
Borrowers with loan deferments and/or loan modifications are now eligible for refinancing, as long as they are current — no past-dues of more than 30 days in the past year — on those modified terms.
Now that we have the final regulations regarding 504 refinancing and the major restrictions have been eliminated, this year certainly may see a significant increase in these loans.
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