Changes to the SBA 504 Refinance Program

Following the 2021 CARES Act – we knew changes were looming regarding that SBA 504 Refinance Program that would enable more small businesses to take advantage of the program. The changes are laid out below.

Source: NADCO Changes to 504 Debt Refi Programs Interim Final Rule July 30th, 2021

» 504 Debt Refinance with Expansion

  • Amount of existing indebtedness that may be refinanced as part of a 504 Project increased from not more than 50% to not more than 100% of the project costs of the expansion
  • Applicant must still be current on all payments due for 12 months preceding SBA application date

» 504 Debt Refinance without Expansion

  • Eliminates the condition that the program is only available when the 504 Loan Program is at zero subsidy
  • Eliminates the cap restricting CDCs from processing new refinance loans that exceed 50% of prior year dollar volume
  • Allows PCLP CDCs to use delegated authority to approve 504 debt refinance without expansion applications, except:
    • If the debt being refinanced is the existing debt of the CDC, or the TPL, or affiliates of either
    • If the CDC is requesting an exception to the “substantial benefits test” – 10% savings in payment on the amount of debt refinance
    • If the CDC is requesting a waiver of the requirement that the 504 eligible fixed assets collateralizing any debt to be refinanced also collateralize the 504 loan
  • Reinstatesan alternate job retention standard – all existing jobs measured on a full-time equivalent (FTE) basis can be counted as jobs retained by the refinancing project:
    • 1 job per $75,000 of 504 debenture amount for all applicants except small manufacturers
    • 1 job per $120,000 of 504 debenture amount for small manufacturers
    • If Project does not meet Job Creation/Retention, CDC can continue to use all available Policy Goals

» “Qualified Debt” Revised Definition

  1. Must meet the 85%/15% test – no change
    • Substantially all (85% or more) of the proceeds of the existing debt was used to acquire an Eligible Fixed Asset(s) and the remaining amount (15% or less) was incurred for the benefit of the small business seeking financing as measured by the “original loan”
  2. Was incurred not less than 6 months prior to SBA application date – changed from two years
  3. Was incurred for the benefit of the small business seeking financing – no change
  4. Has been secured by Eligible Fixed Asset(s) for at least 6 months – changed from two years
  5. Has been “current on all payments due” – deleted
  6. “May include” debt subject to a federal guarantee – changed from “is not”, subject to limitations
  7. Is not a Third Party Loan which is part of an existing 504 Project, except under limited conditions – allowed, subject to limitations
  8. May consist of one or more loans, provided each meets all the requirements of Qualified Debt – no change

» Refinance of Existing Government Guaranteed Debt

  • Allowed under limited conditions – same conditions required in 504 debt refi with expansion
  • For an existing 504 loan
    • Either both the Third-Party Loan and the 504 loan must be refinanced, or the Third Party Loan must be paid in full
  • For an existing 7(a) loan– may be refinanced in whole or in part
    • CDC must verify in writing that the present lender is either unwilling or unable to modify the current payment schedule
    • In the case of same institution debt, if the Third-Party Lender or the CDC 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
  • Note– these requirements also exist in the SBA 7(a) loan program – see SOP 50-10-6, page 227, paragraph 1.i., 1.j., and 1.k. for more information
  • The refinancing of any federally-guaranteed debt will provide a “substantial benefit” to the borrower
    • Minimum 10% savings on the new installment amount attributable to the debt being refinanced
    • Must include prepayment penalties, financing fees, and other financing costs in the amount to be refinanced when calculating 10% savings
    • NADCO has form template for Substantial Benefits Test
    • Note: This requirement also exists in the SBA 7(a) loan program – see SOP 50-10-6, page 230, paragraph 1.e. for more information