New Debt Refinance Rules Released!
The long-awaited interim final rules for the 504 debt refinancing program have been released! The rules are effective immediately and they are permanent enhancements to the program. The modifications will allow more businesses to tap into the historic low rates the 504 loan program is now offering. The rules also open up the door for federally guaranteed debt to be refinanced, which means existing 504 customers may now refinance their loans to lock in lower rates as well.
A summary of the changes for both expansion and non-expansion projects are summarized below. It is important to remember that one of the most stringent tests to utilizing either scenario is to make sure there is a "Qualified Debt" being refinanced.
What is a Qualified Debt? It is a commercial loan where 85% of the original loan proceeds were used to finance eligible fixed assets for the small business. Additionally, the debt must be at least 6 months old (reduced from 2 years) prior to the SBA application being submitted to the SBA.
Changes to Debt Refinance With Expansion
Previously, when a business utilized the Debt Refinance With Expansion Program, they were only allowed to roll existing debt into the project that did not total more than 50% of the expansion costs. SBA has now increased this and will now allow a business to refinance an amount equal to 100% of their expansion costs.
Example: Let's say a small business owner wants to expand their current facility or maybe even expand their footprint by buying a new location. If the cost of the expansion is $1,000,000, they can now roll in another $1,000,000 of "Qualified Debt" into the project versus the $500,000 they were once limited to.
Changes to Debt Refinance Without Expansion
- Allows the refinance of existing government-guaranteed debt - existing SBA policies related to refinancing existing 504 or 7(a) loans will apply (these are the same requirements that currently exist for 504 debt refinance with expansion program), including:
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When refinancing an existing 504 loan, both the Third-Party Loan (1st lien position) and the 504 loan (2nd lien position) must be refinanced, OR the Third Party Loan must be paid in full.
- For an existing 7(a) loan, the 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 modify the terms.
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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 (same definition as currently used in the 504 debt refinance with expansion program); this is now required for all 504 debt refinance with expansion projects.
- Current on all Payments - The SBA has eliminated the requirement that the borrower must be current on all payments due for not less than 1 year before the SBA application date in accordance with prudent lending standards, SBA expects the CDC to consider whether the applicant is current on all payments due and the applicant's history of delinquency in its credit analysis.
