Refinance Existing Debt and Provide Working Capital for a Limited Time
In response to the difficult U.S. economy and banking crisis, the Small Business Administration has temporarily expanded its 504 Loan Program. This allows qualifying Small Business Owners to refinance existing commercial real estate debt and obtain cash for eligible working capital expenses.
The unprecedented and limited-time expansion of the SBA 504 loan program to include refinancing of commercial real estate debt regardless of loan maturity dates, and to obtain working capital, allows Small Business Owners to take advantage of equity in their real estate. Locking in long term financing at good rates can reduce both current and future cash flow needs, and the program can be especially helpful for business owners seeking to protect existing jobs, and add new ones.
How does an SBA 504 loan work?
The 504 Refinancing Program is separate from the “regular” 504 loan program, but they are quite similar.
An SBA “504” loan is a form of partnership between a Small Business Owner, the U.S. Small Business Administration, and a “third-party” lender like ReProp Financial or a bank. Its purpose is to assist Small Business Owners by providing up to 90% financing on commercial real estate that is fully or partially occupied by the Small Business Owner.
The financing is structured with two separate loans secured by the commercial real estate:
- One loan is made by the third-party lender, and is in 1st lien position. The interest rate is determined by the lender. ReProp is offering rates that range between 7.00% and 9.50% depending on the property type and the Borrower’s credit.
- A second loan is made by the SBA, and is in 2nd position. Some fees and costs can be financed with this loan, which is the “504” portion. The interest rate is fixed for the term of the loan, and is generally lower than commercial rates. As of December 2011, the rate was 4.94%.
- The Small Business Owner must have at least 10% equity in the property after the financing is in place.
- The combined loan fee for both loans is generally around 2.75%.
What can be refinanced? Commercial real estate debt, as long as it is not already guaranteed by the U.S. government.
What working capital expenses are eligible?
Expenses can be incurred before the application date OR will be incurred within 18 months of the application date.
Eligible expenses include:
- Inventory (even expansion inventory)
- Rental costs (machinery, equipment, etc.)
- Business lines of credit – the line of credit may be fully or partially paid down, and there is no requirement to pay the line off.
Are there any limitations?
- Payments on the debt being refinanced must have been current for the last year – no more than 30 days past due. The loan can have been modified, including having deferred payments.
- The Small Business must have been operating for the past two years.
- A new appraisal must be obtained, but the Small Business Owner can apply and receive approval subject to a satisfactory appraisal value.
- The final date for loan applications to be complete and submitted to the SBA for approval is September 27, 2012. The SBA and development companies that process the applications recommend getting applications in as quickly as possible. Only $7.5 billion is available, and the need is great.
How do you know that you qualify?
In addition to the limitations listed above, here’s a checklist that will give you a good idea:
You will occupy at least 51% of the building you are going to buy.
You have good credit – this means no recent bankruptcy, no defaulted federal loans (including student loans), and no repossessions. The SBA will review any explanations of poor credit, and will approve a loan if there are good reasons for the poor credit, especially if good credit has since been reestablished.
Your financial records show that you have the ability to make the proposed loan payments.
You have at least 10% equity in your property, based on today’s values. (For those who are familiar with permanent SBA 504 financing, please note that there is no additional equity requirement for special purpose properties.)
Your business is eligible for an SBA loan. A list of businesses that the SBA has determined to be ineligible is attached.
What should I be considering when I look at refinancing?
Prepayment periods. The SBA’s prepayment period expires after 10 years, meaning you can pay the loan off after 10 years with no penalty. ReProp Financial will structure its prepayment period to meet your business needs – if you believe you’ll be in a position to refinance ReProp’s loan with a conventional bank, we’ll make sure our prepayment period allows you to do so.
Time. It will generally take about 45 to 60 days to obtain a SBA loan. The process will go more smoothly if you have good records, and work with your lender to provide all the necessary information up front. Given the temporary nature of this program, application should be made as soon as possible.
Existing Loan Contracts. If you have prepayment penalties on existing loans, you should consider the financial impact, and make sure that any penalty is part of the amount you plan to refinance.
What Should You Do Next?
Contact Susan Diehl McCarthy at 707.444.7703 to confirm your business eligibility, and go through the process in more detail. We make the application process as smooth as possible, and will keep in touch with you every step of the way.
Business Types Ineligible for SBA Financing:
- Real estate investment firms, where real estate is held for investment – rented or leased to another).
- Businesses involved in speculative activities, where profits come from fluctuations in price rather than the normal course of business (like commodities futures).
- Rare coin and stamp dealers.
- Lenders – banks, finance companies, factors, leasing companies, insurance companies (not agents).
- Pyramid sales plans.
- Illegal activities, such as selling drug paraphernalia.
- Gambling activities, including casinos and racetracks. However, an eligible business can operate within those arenas, so long as no more than 1/3 of their gross annual income comes from the sale of lottery tickets.
- Charitable, religious, or other nonprofit, government-owned organizations, consumer and marketing cooperatives, churches, and organizations promoting religious objectives.
- Businesses where any principal is currently incarcerated, on parole, on probation, or defendant in a criminal proceeding. Loans MAY be made when the principal was previously incarcerated, on parole, on probation, or defendant in a criminal proceeding – applications are reviewed on a case-by-case basis.
Businesses that MAY beIneligible for SBA Financing:
- Franchises where the franchiser retains such power to control operations that the franchisee’s right to profit from efforts commensurate with ownership are limited.
- Recreational facilities and clubs which are not open to the general public, or in membership-only situations, where membership is not selectively denied to any particular group.
- Farms and agricultural businesses ARE eligible, but should first explore Farm Service Agency financing.
- Fishing vessels ARE eligible, but owners seeking to financing construction or reconditioning of vessels with cargo capacity of 5 tons or more must first request financing from the National Marine Fisheries Service.
- Convalescent and nursing homes are eligible if they are licensed by a government agency and provide more than room and board.
- Legal aliens are eligible but the type of resident status must be assessed in determining risk related to continuity of the business.