SBA 504 Debt Refinancing Program

Small Businesses Can Refinance Commercial Mortgage and Other Business Debt Under the SBA 504 Loan Program.

Small business owners can lighten their monthly debt payments and access equity trapped in commercial real estate holdings by refinancing conventional real estate loans through the SBA’s 504 Debt Refinancing Program with or without expansion.

Under the program available through Florida First Capital/First Capital Finance, small businesses can take advantage of below-market, fixed interest rate refinancing with repayment terms up to 25 years for up to 90% of the appraised value of commercial real estate property.

Loans made under the 504 Debt Refinancing Program are 504 loans and are subject to all applicable SBA 504 Loan Program requirements.

504 Overview and Eligibility

504 Debt Refinancing WITHOUT Expansion

504 loan proceeds are to be used to refinance qualified debt with no money going toward expansion.
For borrowers that refinance only long-term fixed asset debt (no cash out), the maximum LTV is 90% of the fair market value of the eligible fixed asset(s).
Eligible fixed assets include land, buildings, machinery and equipment that were acquired, constructed or improved by a small business for use in its business operations.
Borrowers can also refinance eligible business operating expenses (cash-out option), however a maximum 85% LTV applies and the business operating expenses portion of the project may not exceed 20% of the value of the eligible fixed asset(s) securing the qualified debt.
Eligible business operating expenses include any other expenses of the business that are not capital expenditures (e.g., salaries, rent, utilities, inventory, etc.) that were incurred but not paid prior to the date of the refinance application or that will become due for payment within 18 months after the date of application.
Debt is not included as an eligible business expense, except debt that was incurred with a credit card or a business line of credit may be included if the credit card or business line of credit is issued in the name of the small business and the applicant certifies that the debt being refinanced was incurred exclusively for business related purposes.

504 Debt Refinancing WITH Expansion

Debt refinancing with expansion is a strong option for small business owners looking to grow and expand their operations and reduce commercial debt at the same time.

The maximum LTV is 90% of the fair market value of the eligible fixed asset(s) (no cash-out option).
A project involves expansion if it includes the acquisition, construction or improvement of land, building or equipment for use by the borrower.
Any amount of existing qualified debt that does not exceed 100% of the cost of the expansion may be refinanced.
The debt being refinanced will be added to the expansion cost to establish the total project costs.

Refinance of Existing Government Guaranteed Debt

SBA 504 refinance projects with or without expansion may include federally-guaranteed debt under the following conditions:
For an existing 504 loan, either both the third party loan (1st mortgage) and the SBA 504 loan (2nd mortgage) must be refinanced, or the third party loan must be paid in full.
For an existing 7(a) loan, the Certified Development Company must verify in writing that the present lender is either unwilling or unable to modify the current payment schedule. The existing 7(a) loan may be refinanced in whole or in part.
In the case of same institution debt, if the third party lender or the Certified Development Company affiliate is the 7(a) lender, the loan will be eligible for 504 refinancing only if the lender is unable to modify the terms of the existing loan because a secondary market investor will not agree to modified terms.
The refinancing of any federally-guaranteed debt must provide a “substantial benefit” to the borrower – minimum 10% savings on the new installment amount attributable to the debt being refinanced.

Qualification Criteria

At least 85% of the original loan was used to acquire, construct or improve fixed assets.
The borrower must have been in business for 2 years prior to submission of the refinance application and been in operation for all of the 2-year period ending on the date of application, as evidenced by the financial statements submitted at the time of application. If the ownership of the borrower has changed during this 2-year period, Florida First Capital/First Capital Finance will determine whether the borrower is considered a new business based on the following: “new business is a business that is 2 years old or less at the time the loan is approved. A business that is more than 2 years old at the time the loan is approved may be considered a new business if it is a change of ownership that will result in new, unproven ownership/management and increased debt unrelated to business operations.”
The qualified debt was incurred not less than 6 months prior to the date of the application and has been secured by eligible fixed asset(s) for at least 6 months.
An independent appraisal of the fair market value of the project assets and any additional assets offered as additional collateral must be provided. Appraisals are not required at time of application, but are required prior to closing and must be dated no earlier than 1 year prior to the date the application was approved by the SBA.

Loan Structure/Down Payment Schedule

Total of first and second mortgages on refinance deals will be up to 90% (85% max LTV on no expansion cash-out deals); the structure will vary depending upon the transaction. Contact a Florida First Capital/First Capital Finance Loan Expert for a sample deal structure.
In addition to a cash contribution, the borrower’s down payment can be satisfied by its equity in the eligible fixed asset (the 504 project).