The COVID-19 pandemic has wreaked major disruption on small businesses and continues to threaten many with permanent closure. The Small Business Administration (SBA) was the first stop for businesses looking for critical capital through the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL).
Now as the nation shifts to reopening and rebuilding our economy, small businesses should consider a different SBA initiative, the 504 loan refinance program. Businesses can use it to restructure existing debt on their commercial real estate to access capital resources during this time of transition.
The SBA first launched the 504 refi as a pilot program in response to the Great Recession from 2010 to 2012. The pilot was so effective it became a permanent SBA lending option in 2016.
To participate, the business owner connects with their business banker and a certified development company (CDC), like SomerCor, to establish financing based on the appraised value of the business property. The structure of the program provides the business immediate cash flow benefits and unlocks capital resources in three ways:
Cash Out for Eligible Expenses
Small businesses have the option of using the refi to leverage built-up equity and take money out for eligible working capital expenses. The cash out piece ranges up to 20% of the appraised value of the commercial property. Allowed uses of these funds include operating expenses such as inventory, utilities, wages, business credit card debt, and paying down an operating line of credit.
Lowers Monthly Mortgage Payments
In addition to addressing immediate cash flow needs, the 504 refi increases the future amount of working capital available for reinvestment back into the business. The SBA portion of the loan, administered by a CDC, has a below-market fixed interest rate. The overall blended rate of the refinanced debt can significantly lower monthly mortgage payments.
Provides Loan Payment Predictability
The below-market interest rates associated with the SBA portion of the loan are locked over 20 or 25 years. Not only does this lower monthly mortgage payments, the fixed rate eliminates surprise balloon payments and allows for more accurate long-term planning. Additionally, the bank must provide a minimum maturity of 10 year on their portion of the loan.
The 504 refinance program is only available for debt from a commercial loan used to acquire commercial real estate. For a business to be eligible for the 504 refinance program, it must meet the following requirements:
•Debt to be refinanced must be at least two years old
•Property must be owner-occupied (at least 51% by the business)
•Borrower must be current on payments for existing mortgage for the most recent 12 months
•Government guaranteed loans are not eligible to be refinanced
The capital needs of small and mid-size businesses vary, especially in time of economic hardship. As we continue the fight against the COVID-19 health crisis and move to restart our economy, many industry sectors will experience radical change transforming business models, altering operations, and impacting revenue streams. Some businesses will need to expand rapidly to meet new demand, while others may need to shore up capital for expected lean years ahead. Either situation provides an opportunity to explore how the 504 refi can support your small business during this time of uncertainty.
•Manuel Flores is the president & CEO of SomerCor, a Small Business Administration Certified Development Company.