by Jean Miller | Accounting News, Business Growth, News, Newsletter, Small Business
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.
by Stephen Reed | Accounting News, Business Growth, News, Uncategorized
The Small Business Administration (SBA) recently changed the rules that apply to both the 7(a) and 504 loan programs. The goal is to streamline the loan application process, broaden the amount and variety of lenders, and relax regulations in order to reach more small businesses, particularly those in underserved communities. Below we’ll go over the recent changes to SBA loan programs.
SBA Loan Programs
The SBA is a lender of two small business loans. The most popular loan is the 7(a) loan, which can be used for real estate, equipment, acquisitions, and other working capital. It has a maximum borrowing limit of $5 million. The 504 loan is the other loan program offered by the SBA, and it is generally used for real estate or land loans, with fixed interest rates and maturity up to 25 years. It has a maximum borrowing limit of $5.5 million.
Expanding Approved Lenders
Prior to the Covid-era Paycheck Protection Program (PPP), the SBA had limited the number of approved SBA lenders to a select handful. This limit was lifted considerably with the PPP program, and the new rules do away with a cap on the number of approved lenders altogether. The goal is to increase the number of loans distributed and reduce the timeline of loan applications.
New Criteria
The SBA is simplifying the evaluation process for borrowers by removing some criteria. Previously, multiple factors were considered when assessing potential borrowers, including the character and reputation of the applicant, experience and depth of management, projected cash flow and future prospects, invested equity, and value of collateral. However, the new rules look at only the applicant’s credit report, cash flow, and equity or collateral. Removing “character and reputation” from the list of criteria helps to eliminate any individual bias in the loan process.
The new rules also allow borrowers to use 7(a) loan proceeds to fund partial changes in the ownership of the business. In the past, a 7(a) loan could only be used to fund a full change in ownership. This move grants borrowers more flexibility to restructure the business.
Finally, the SBA is implementing new technology to figure borrower eligibility. This should help curtail the burden on SBA lenders and simplify the process in order to boost lending.
New Determining Authority
When a small business 7(a) and 504 loan application or modification request is denied, either the Director of the Office of Financial Assistance or the Director’s designee(s) are authorized to make the final decision on reconsideration. Previously, only the Director of the Office of Financial Assistance had this authority. This change is to help enact fair and timely loan reconsiderations.
No More “Credit Elsewhere” Test
Finally, the “credit elsewhere analysis” that was a required component of the SBA loan process is reduced to a “check the box” with no need for corresponding paperwork. This was a step in the process that proved all other possible sources of funding had been exhausted, justifying the need to obtain SBA financing.
