The Small Business Administration’s (SBA) 504 loan’s cash out refinance rates are currently at historical lows. The SBA 504 Refinance Program provides a unique opportunity to lower monthly costs and access cash trapped in equity for business owners with commercial debt. With cash out refinance rates at a record low, currently 2.59% on a 25-year fixed term as of June 2020, now is the most opportune time to take advantage of the program.
Today’s environment has been detrimental to so many of our nation’s small businesses. Businesses are in desperate need of cash. While the loans and grants available to businesses that were adversely impacted by the coronavirus are nice – they are also highly coveted and will not be enough to help many of our businesses survive these unprecedented times.
One unique way for small business owners to access cash is to refinance commercial debt. By utilizing the SBA 504 Refinance Program, business owners can obtain up to 20 percent of their appraised property’s value in cash. This cash can be used on qualified business expenses, which include salaries, rent, utilities, and inventory. Business owners can refinance up to 85 percent of the appraised value when cash is taken out. Without cash out, business owners can refinance up to 90 percent of the appraised value.
Six months debt forgiveness
In addition to today’s historically low cash out refinance rates, another compelling reason to act now is the opportunity for debt forgiveness under the CARES Act. The SBA is currently covering the first six months of debt payments for existing and new 504 loans that fund by the September 16th, 2020 debenture sale. Loans that are approved by mid-July will generally fund by September.
Consolidate multiple loans and gain a below-market rate, fixed for 25 years
After refinancing with an SBA 504 loan, business owners can enjoy fixed occupancy costs and a repayment period of up to 25 years, with no balloon payments. With stable and predictable operating costs, business owners can accurately budget for years ahead. Another perk of the 504 Refinance Program, business owners can consolidate multiple loans.
SBA 504 Refinance Loan Program Details
How it works
A 504 refinance loan is unique because it is combined with a conventional bank loan. Here’s how a typical 504 refinance loan looks:
- A bank refinances 50% of project costs with a conventional loan
- A CDC (such as TMC Financing) refinances up to 40% of project costs using a 504 loan
- The small business owner contributes at least 10% equity
Small business owners can use their own bank of choice for the first mortgage. If preferred, TMC can help find a bank that’s familiar with the 504 refinance loan program that would offer the best loan terms for the particular project. An appraisal will be required before funding to demonstrate equity in the property with the proposed financing.
To be eligible for cash out refinance with the SBA 504 Program:
- The business and existing loan must be at least two years old. * The borrower must have owned the business during those two years.
- At least 85 percent of the original loan must have been used for a 504 eligible asset, such as owner-occupied real estate, land, construction, or equipment. Working capital debt is not eligible.
- The borrower must be current on all payments for at least the last 12 months prior to the refinance application.
- Loan(s) must not be subject to a federal agency guarantee. Existing SBA 504 or 7(a) loans are not eligible.
Is the SBA 504 Refinance Program right for you?
Refinancing existing debt makes sense for a number of reasons. It gives you the ability to:
- Get out from under balloon payments
- Get out from under high interest rate loans
- Lock in below market rates, fixed for 25 years
- Access cash trapped in equity
For small business owners with commercial debt, the SBA 504 Program is the most advantageous way to refinance. It provides an easy solution to potentially save thousands on monthly occupancy costs and provides an opportunity to access cash trapped in equity.
With cash out refinance rates at their all-time lows, plus additional savings under the CARES Act, now is the most opportune time to take advantage of the SBA 504 Refinancing Program.
If you’re interested in learning more about SBA 504 refinancing options, your local Certified Development Company can help get you started. If you’re located in California or Nevada, contact one of our loan experts for a consultation or to get started with a prequalification.