The Small Business Administration (SBA) recently announced significant changes to its 504 Loan Program. This program has traditionally been a vital resource for small businesses seeking long-term, fixed-rate financing, and earlier this month, the SBA introduced a rule change that could make it easier for small businesses to refinance existing debt. Here’s a closer look at the new rule and how it impacts small business owners looking to refinance through the SBA 504 Loan Program.
Key Changes to SBA 504 Debt Refinancing
The SBA’s new rule improves several components of the 504 Loan Program, particularly focusing on debt refinancing with expansion (meaning a business is growing and seeking funding) and without expansion (meaning a business is just restructuring existing debt). The goal of these changes is to make the program accessible to a wider range of small businesses.
Removal of the 50% Cap on Debt Refinance Without Expansion
Previously, the SBA 504 Loan Program levied a 50% cap on the amount of existing debt that could be refinanced without expansion. This limited small businesses from fully using the program to alleviate financial burdens. The new rule does away with the 50% cap, so small businesses can refinance a higher proportion of their debt, even if they are not planning to expand.
Loan-to-Value (LTV) Requirement Raised to 90%
Another significant update is the increase of the loan-to-value (LTV) ratio to 90% for debt refinancing without expansion, meaning businesses can now refinance up to 90% of their debt. This adjustment can alleviate financial stress for small business owners, making it easier to focus on maintaining the stability of their operations.
Alignment of the “Substantially All” Standard
The SBA has made the “substantially all” standard for 504 debt refinancing with expansion consistent with the standard for refinancing without expansion. Both types of refinancing now use a 75% threshold. This simplifies the criteria, expands access, and streamlines loan processing.
Inclusion of “Other Secured Debt”
The new rule allows for the inclusion of certain “other secured debt” in the refinancing process. This is a positive change allowing for further relief to small businesses that may have other forms of secured debt beyond traditional loans.
Revision of the Substantial Benefit Test
Lastly, the SBA has updated the substantial benefit test for 504 debt refinancing, both with and without expansion, when refinancing government-backed loans. The new test requires businesses to show a clear financial benefit, like lower monthly payments or better cash flow, to qualify for refinancing. This ensures that a refinance will actually help the business financially, regardless of whether it’s expanding.
These SBA rule changes outlined above could provide the financial relief many small businesses need, allowing them to consolidate debt, lower interest payments, and free up cash flow to focus on growth and sustainability.
