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SBA Announces Major Changes Expanding the SBA 504 Debt Refinance Program Rules

May 9, 2018

The SBA has announced major changes expanding the ability for businesses to refinance using the SBA-504 program effective on application received starting June 4, 2018. The changes are intended to allow more businesses who are facing balloons or rate adjustments to take advantage of the SBA-504’s current low fixed interest rates. Perhaps the best rule change is SBA relaxed the rules on eligible debt that can be refinanced to now allow notes that are less than two years old to be refinanced if they were simply a renewal of a previously ballooned note.


A summary of the rule changes to SBA-504 debt refinance is as follows:

  • Ballooned notes less than 2 years old can now be refinanced. SBA is revising the criterion to allow certain loans refinanced within the two years prior to the date of application to be eligible as the same “indebtedness” if the effect of the refinancing was to extend the maturity date without advancing any additional proceeds. Previously, the note had to be two years old.
  • The maximum LTV on a 504 debt refinance project remains 90%. When the project involves a limited or single purpose building or structure, the maximum loan to value will be 85%. If the borrower is using the loan to get cash out to pay eligible business expenses, that cash out is limited to 20% and an 85% LTV.
  • SBA expanded cash out uses to include minor building improvement expenses as well as credit card debt if it was incurred for business purposes.
  • When the project has significant equity of greater than 20%, the SBA will now allow the project debt to be split equally between the participating lender and the SBA, allowing the borrower to maximize the amount of debt they can refinance and fix the rate on under the 504 program.
  • SBA revised the period which a 504 debt refinance loan must be disbursed from six months to nine months to give the bank and borrower more flexibility.
  • The borrowers will have the choice of a 10, 20, or 25 year fixed rate on the 504 second mortgage on 504 debt refinance projects. The bank term must be at least 10 years for the 20 or 25 year loans or at least 7 for the 10 year option.
  • Unfortunately, the one change SBA could not make is the SBA-504 program still cannot be used to refinance any other federal debt, including SBA 7(a) loans. That prohibition against refinancing other federal debt was in the legislation passed by Congress authorizing the SBA-504 debt refinance program in 2016 and, as a result, would require legislation to change. SBA and the 504 industry continue to discuss possible legislation with Congress as many SBA 7(a) loans are adjusting to rates two or more percent rates higher than current 504 rates and many borrowers would like to refinance their debt from their adjustable rate 7(a) loan to a lower fixed rate of 504 loan…especially with further rate hikes expected.

SBA’s action to ease regulations for the SBA-504 debt refinance program is to be commended. SBA’s action demonstrates their understanding that current and projected rising interest rates compared with the current low SBA-504 fixed rates present a unique opportunity for small businesses. The SBA 504 effective rate for April was 5.03% fixed for twenty years, inclusive of the associated fees. SBA also is now offering all borrowers the option of a 25 year fixed rate on the 504 second mortgage in addition to the standard 20 year fixed rate that has been offered for many years. The effective rates are expected to be around 30 basis points higher on the 25 year fixed rate option when that first pool sells in the next few months. If you have not used the SBA program to finance land, building, and equipment for businesses, we urge you to give it a try. The typical 504 loan structure works where a bank funds 50% of a project in a first mortgage position, SBA-504 funds 40% at a below-market, twenty year fixed interest rate on a second mortgage, and the business puts down 10% (a higher down payment is required for start-ups or limited use facilities).