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Small business owners are often searching for different opportunities to save money. One way to increase cash flow is to refinance outstanding debt with a loan with more favorable terms.  Therefore, many small business owners utilize the Small Business Administration’s (SBA) loan programs for refinancing.  The SBA 504 loan allows borrowers to secure below-market, fixed interest rates, amortized over 25 years, for up to 90% of the appraised value of commercial real estate property. These are some of the most affordable terms on the market. This then leads to the question: can you refinance an SBA loan with another SBA loan?

The short answer – refinancing of an existing Small Business Administration loan with another SBA loan is generally not allowed.  The government aims to help those businesses who have not yet benefited from SBA financing rather than lower rates of existing SBA loans.  However, what many people do not know, is that in certain situations borrowers may be able to refinance their SBA 7(A) loan with an SBA 504 loan through the 504 Refinance with Expansion program. 

When is the SBA 504 Refi with Expansion Appropriate?

The 504 Refi with Expansion is a valuable tool for small business owners who have existing debt on their property and are in need of a major renovation or expansion. The new 504 project can include all new costs, in addition to existing debt.

For example: A business owner owes $750,000 on their building and they want to do $1,500,000 worth of improvements.

Assuming the “as completed” value is at least $2,500,000, without any additional injections from the owner, the financing could look like this:

  • $1,250,000 new 1st mortgage
  • $1,000,000 new SBA 2nd mortgage

The bank is in a comfortable 50% LTV and the client gets a below market, 25-year fixed rate from the SBA.

504 Refinance with Expansion Success Story

A Southern California manufacturing company, Dean Distributors, originally purchased their building in San Bernardino CA, with an SBA 7a loan. Unfortunately, the cost of the building improvements required to meet the standards of an FDA approved manufacturing facility far exceeded the original budget, as well as the maximum loan amount under the 7a loan program. The business owners were in jeopardy of losing their building and absorbing a huge financial loss.

Jennifer Davis, an SBA 504 expert at TMC Financing, was able to help this small business utilize the SBA 504 Refinance with Expansion Program to refinance their existing 7a loan.  Ultimately, this manufacture was able to then take advantage of a long term, below-market, fixed rate 504 loan AND fund the improvements as well as the new equipment!  Read More

Requirements and Eligibility

The SBA may consider refinancing an SBA 7a loan with a 504 loan if the project meets the following program requirements:

  • The business must be for-profit and privately held
  • Property must 51% owner occupied
  • Typically, existing debt that does not exceed 50% of the cost of expansion may be refinanced, however if you have more debt, it is possible to still structure the project to meet 504 requirements
  • Improvement request must be for subject location

Talk to an SBA Loan Expert

If you have any questions about whether you can qualify for refinancing with an SBA loan, it is best to contact a Certified Development Company (CDC) like TMC Financing. A CDC is a nonprofit organization built to support economic development within its community through the SBA’s 504 loan program. CDCs guide business owners through the entire loan process and can work through various scenarios with you.  Bottom line is don’t rule yourself out, a CDC can help find the right opportunity that works for your business.

About TMC Financing

TMC Financing is one of the nation’s top-ranking CDCs and a Premier Certified Lender with the SBA. If you are thinking about buying your own commercial property, talk to one of our local 504 loan experts about refinancing your business mortgage. Regardless of where you are in the process—TMC Financing can help guide you through the next steps and help you with the pre-qualification process.  Contact us today!