Commercial Magazine

A Powerful Tool for Refinancing

A Small Business Administration program may be a game-changer for borrowers

By Kurt Chambliss

In the ever-evolving landscape of mortgage brokering, staying well-informed about the latest financial tools and programs can make all the difference. One such option that has gained significant momentum in recent years to refinance debt is the Small Business Administration’s (SBA) 504 program.

“For mortgage brokers, understanding the eligibility criteria and nuances of the program are essential to effectively guiding small-business owners through the process.”

The 504 loan program has been around for decades, but it expanded to permanently offer refinancing options in 2016. This powerful initiative offers small business owners an opportunity to refinance their existing debt, including SBA and non-SBA loans, into new SBA-backed loans, providing them a lifeline during challenging economic times. The refinance program has many benefits for small-business owners and may be a game-changer for mortgage brokers.

Understanding the program

The 504 refinance program has gained prominence during challenging economic periods, such as the COVID-19 pandemic and the subsequent economic uncertainties in 2023 and this year. The refinance mortgage is structured like the program’s traditional purchase loan. A lender, typically a bank, covers 50% of the cost through a first-lien mortgage.

Up to 40% is covered by a second mortgage from a certified development company (CDC), which is a nonprofit organization that is certified by the SBA and offers responsible and affordable financing to small businesses. The remaining balance of at least 10% comes from the business owner’s equity. For single-purpose facilities, the equity contribution is normally 15%.

A loan from the 504 program can be used to refinance existing loans if — and this is crucial — at least 75% of the original loan was used to acquire assets such as land, buildings or heavy equipment. This provides an opportunity for business owners to consolidate their existing debt while retaining ownership of vital assets. The loans offer a long-term repayment schedule, from 10 years to 25 years in length.

The program can also be used to refinance SBA 7(a) loans. With interest rates still high, many small business owners holding adjustable SBA 7(a) loans are now contemplating a shift towards more stability. An important aspect of this program is that owners can save money by refinancing their 7(a) loans. This is a new aspect of the program. This flexibility provides small-business owners with an opportunity to escape high-interest and variable 7(a) loans and opt for the more favorable fixed 504 loan, leading to considerable savings.

Variety of benefits

One of the most attractive features of the 504 refinance program is the significantly lower interest rates it offers. While the SBA’s 7(a) loan interest rates currently range from 9.5% to 11.5%, and conventional loans can be even higher, the 504 loan rate was between 6.39% (for a 25-year term) and 6.57% (for a 10-year term), as of early February 2024. This substantial reduction in interest rates can translate into large savings for qualified small-business owners.

These also are fixed rates, offering borrowers greater predictability in their monthly payments. This stability can be particularly beneficial in uncertain economic climates, as it allows for better financial planning. To qualify for the program when refinancing an SBA loan, the refinance must result in at least a 10% reduction in loan payments. This requirement ensures that small-business owners will experience tangible financial benefits from participating in the refinance program. By refinancing through the SBA program, business owners can avoid potential balloon payments on their existing loans. This reduces financial uncertainty and provides peace of mind.

The refinancing program offers other benefits, including access to cash trapped in equity. Your clients can access up to 20% of the appraised property’s value in cash and can use it towards qualified business expenses, not to exceed 85% combined loan-to-value. Cash can be used to pay salaries, rent, utilities, inventory or other business obligations.

Borrowers can use the program to help purchase property for their business. It provides an affordable way for a business to expand its operations — or switch from leasing to owning, ultimately leading to long-term cost savings and increased asset value.

Eligibility and considerations

For mortgage brokers, understanding the eligibility criteria and nuances of the program are essential to effectively guiding small-business owners through the process. As with a standard 504 loan, most small- to medium-sized businesses that operate for profit in the U.S. qualify for the program.

Among the program’s main considerations is a business’s operational history. Small businesses seeking to participate in the program must have operated for at least two years, ensuring a level of stability and commitment. Business owners should be at least six months out from their last loan disbursement to qualify for refinancing. This means even business owners that took out a 7(a) loan recently with a higher rate can refinance into a lower rate.

To ensure eligibility, it’s advisable for small-business owners to consult a CDC that specializes in handling 504 loans. These CDCs have expertise in program requirements and can guide applicants through the application process. It also is important to note that there may be prepayment penalties associated with paying off an SBA 7(a) loan. These penalties are often offset by the significant payment reductions offered by the refinance program.

Beacon of opportunity

The 504 refinance program emerges as a valuable financial tool that can deliver substantial benefits to both small-business owners and mortgage brokers. With its lower interest rates, fixed-rate loans, and the ability to refinance SBA 7(a) loans, this program presents a compelling opportunity for business owners to reduce their debt burden and enhance their financial stability. For mortgage brokers, embracing and understanding CDCs and how the 504 refinance system works can open new avenues for serving small-business clients. The program can provide borrowers with access to cost-effective financing options, and help them grow and expand. As this program continues to gain traction in the financial landscape, mortgage brokers who wholeheartedly embrace it stand to gain a competitive edge while assisting their clients in achieving their financial goals. In a world of financial complexity, the 504 refinance program stands as a beacon of opportunity for small-business owners and the brokers who guide them toward financial success. ●


  • Kurt Chambliss

    Kurt Chambliss is executive vice president of TMC Financing, a certified development company (CDC) that has provided real estate financing in Arizona, California, Nevada and Oregon for more than 40 years. TMC Financing offers commercial real estate buyers up to 90% financing by utilizing the U.S. Small Business Administration's CDC/504 loan program. TMC is the No. 1 CDC in the nation, providing more than $14 billion in financing for more than 7,000 businesses.

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