Good Morning
Good Morning

SBA’s popular 504 refinancing program is back

The U.S. Small Business Administration's 504 Debt Refinancing

The U.S. Small Business Administration's 504 Debt Refinancing Program provides long-term, low fixed-rate loans. Credit: iStock

A once-popular SBA loan program that allows small businesses to refinance eligible existing debt such as commercial mortgages and certain business expenses has been resurrected and made permanent.

The U.S. Small Business Administration’s 504 Debt Refinancing Program, originally a temporary measure under the Small Business Jobs Act of 2010, provides long-term, low fixed-rate loans.

With the return of the program, small businesses will have access to another $7.5 billion in funding, in addition to the up to $7.5 billion the SBA is authorized to approve under the regular 504 Loan Program.

“It gives small businesses an attractive option for refinancing debt,” says Ann Marie Mehlum, the SBA’s associate administrator of capital access. “This will allow them to refinance in a way that might be very helpful to their cash flow.”

The fact the interest rate is fixed for up to 20 years on real estate and equipment is one of the program’s biggest benefits, notes Pat MacKrell, president and CEO of Albany-based New York Business Development Corp. and The 504 Company, which both have offices in Melville.

The 504 Company is one of the certified development companies [CDCs] authorized by the SBA to provide the 504 Loan Program throughout New York, Pennsylvania and New Jersey.

“You’re talking about fixing a rate for 20 years,” he notes. “It’s not unheard of, but that’s not generally available in the conventional banking environment.”

Over the past few years, many commercial property owners with a mortgage carrying a balloon payment due at the end of the loan’s term have had to refinance because they don’t have the funds to satisfy that large balloon payment, explains Walter Reid, a business adviser with the Small Business Development Center at Farmingdale State College, which provides free assistance to small businesses.

The reinstatement of this program opens up another means to refinance that debt at a potentially lower rate, which is particularly helpful for those with adjustable rate loans, he notes.

Rates are currently as low as 4.32 percent, says Jim Conroy, senior vice president at The 504 Company.

Small businesses can apply through a CDC, says Linda Reilly, chief of the 504 Loan Program at the SBA. “The borrower should do their research and select which CDC they want to work with.”

The applicant also needs a lending partner. The CDC and a lender combine to finance up to 90 percent of the value of the refinanced project, according to MacKrell.

“The applicant would have to show an ability to pay back the loan based on historical earnings,” notes Reid.

Historically, the 504 Loan Program has been used for financing new expansion projects, says Conroy. But with the 504 Refinancing Program, the business doesn’t need to be expanding to be eligible for the loan, which can be used to refinance various debt, including multiple mortgages, he notes.

“It increases the uses of the proceeds of the loan to make more businesses eligible for the 504,” adds Reid.

Anticipated 504 Refinancing loan volumes are expected to account for 25 percent of the overall 504 program or $2 billion annually, says Reilly, noting the SBA began accepting applications on June 24.

Locally, when the program was active from 2010 through September 2012, it accounted for an uptick of about 10 percent of The 504 Company’s loan activity, says MacKrell, who anticipates similar results this time around.

Anthony Page, owner of Massapequa Park-based Sleepworks of Long Island, was a recipient of one of those loans back then, working with Wells Fargo Bank and The 504 Company.

The two institutions partnered in a $1.043 million refinancing deal that allowed Page to pay off $750,000 in high-interest debt and fund $293,000 in equipment and property upgrades.

“They gave me a better rate and allowed me to free up capital to expand,” says Page, who will be opening a third location in November in Patchogue.

Fast Fact:

From October 1, 2010, to September 30, 2012, the SBA was authorized to temporarily allow refinancing without expansion under the 504 loan program. A total of 2,731 small businesses applied for loans totaling $2.5 billion.

Source: SBA

More news