Another potential lift in SBA lending may arise from a provision in the Jobs Act that allows for the refinancing of loans using the SBA 504 program. Prior to the legislation, projects were ineligible to utilize the SBA 504 program for refinancing; now the program can be used for refinancing 504 loans for expansion under the following criteria:
- The new loan must involve a business expansion where the refinance may not exceed 50% of the project costs.
- The loan must be collateralized by fixed assets.
- The existing debt must have been incurred for the benefit of the small business.
- The proceeds must have been used to acquire land, to construct or expand a building, or to purchase equipment.
- The borrower must be current on all payments of existing debt for one year.
- The new financing will provide better terms or interest rate.
- The new financing will be used only for refinancing existing debt or for costs related to the project being financed.
“I am concerned the criteria may be too limiting,” notes Jim Brett, senior underwriter at ValueXpress. “Renovation or construction creates additional risks beyond simply the ability to repay the loan; it adds construction overruns and potential liens to the mix. Most lenders are not experienced in monitoring construction loans and would have less of an interest in SBA 504 loans with construction.”
“The criteria for SBA 504 refinancing as proposed is much more restrictive than SBA 7(a) refinances,” said Brett. “An SBA 7(a) loan refinance must also benefit the business, have been current for an extended period of time and provide better terms, but there is no expansion requirement.”
But there may be hope. The final regulations on SBA 504 refinances have not been established. The rules are expected to be issued in January 2011. Some interpretations of the proposed regulations do not require expansion as a qualifier. We hope the eventual rules follow the SBA 7(a) program and then 504 refinances will have the potential to take off!