504-Debt Refinance
Direct Final Rule September 30, 2024
In the coming days, SBA will publish in the Federal Register a Direct Final Rule regulations for the 504-debt refinancing with and without expansion. Southland EDC has long advocated for these changes that will streamline the loan application process and expand borrower eligibility. These changes better align SBA guidance with the Small Business Investment Act as amended by the Economic Aid Act.
The effective date of the Final Rule is November 15, 2024.
Changes in the Direct Final Rule
Removing the 50% cap on debt refinance without expansion to conform with current law – this corrects a drafting omission in SBA’s Final Rule released on October 12, 2023. In the December 2020 Economic Aid Act, Congress removed the cap that a CDC could provide new 504 loans for debt refinance without expansion provided the aggregate amount of those loans did not exceed 50% of the CDC’s total loan approval volume from the prior fiscal year. SBA inadvertently omitted making this change in regulation last year, and the current Direct Final Rule corrects this omission.
Raising the loan to value requirement to 90% on debt refinancing without expansion that includes other business expenses and eliminating the cap on Eligible Business Expenses – SBA implemented and later rescinded both items in last year’s 504 debt refinance rulemaking, as the underlying regulation needed updating. Southland EDC has long advocated for these changes, as they were not in the original statutory language – SBA implemented these requirements in regulation, which restricted borrower access and utilization of the 504-debt refinance program.
Aligning the “substantially all” standard for 504-debt refinancing with expansion to be consistent with 504-debt refinancing without expansion standard of 75% – Southland EDC has advocated for a consistent standard between the two 504 debt refinance programs to expand access and streamline loan processing.
Allowing certain “other secured debt” to be included as an Eligible Business Expense in 504-debt refinancing without expansion – SBA implemented and later rescinded this item in last year’s 504 debt refinance rulemaking, as the underlying regulation needed updating. Southland EDC has long advocated for this change, as it restricted borrower access and utilization of the 504-debt refinance program.
Revising the substantial benefit test for 504-debt refinancing with and without expansion when refinancing other government debt – This change provides flexibility to allow any payment improvement to meet the requirement and expands borrower access. In its policy and procedure notice, SBA may clarify (as they have in prior guidance) that additional borrower benefits can meet this test – i.e., refinancing balloon payments. Southland EDC has long advocated for this change to allow a small business owner to determine when it is appropriate to refinance their existing debts.
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Falling SBA 504 Interest Rates
12/7/2023
SBA 504 interest rates continue to drop. The 10-year treasury yield is at its lowest level in months and that is the basis for the 504-loan program. The most recent pricing is 43bp lower than the prior month. That is the most substantial month to month drop in over a year. What the Fed and economy do in the coming weeks and months will have a large impact on where pricing goes from here. Be sure to stay tuned for our monthly interest email for the latest. If you would like additional information, or to be added to our distribution list visit Request Info .
ALP Express
On June 27th, 2022, SBA released an interim final rule implementing the ALP Express Loan Program. This program has been widely anticipated and after a year and a half we finally have rules. We say a year and a half as this is the last remaining provision in the Economic Aid Act, passed in December of 2020, to be implemented. Additional guidance is forthcoming.
Under the program, ALP CDC’s (yes, we are one) will have a modest amount of delegated authority when considering debentures (SBA portion of the project) of $500,000 or less. These loans are subject to an eligibility review by SBA. Once eligibility is confirmed a loan number will be generated. This eligibility review should cut processing times in half but that remains to be seen. The program should also free up other resources at SLPC which will hopefully improve turns times on all projects.
Another thing to keep in mind is this program is a pilot and expires in September of 2023. Stakeholders are working to extend that date given the delayed implementation.
Change to 504 Debt Refinance Programs
8/2/2021
On Thursday July 29th SBA published the new interim final rule for 504 debt refinance programs authorized under section 328 of the Economic Aid Act. The interim final rule takes effect immediately and SBA has begun accepting applications. The long-awaited regulations expand the usefulness of the 504 debt refinance programs to assist small business recovery and growth. Below is a summary of the most notable changes.
504 Debt Refinance WITHOUT expansion
- Existing debt was incurred not less than 6 months prior to application.
- Existing debt can have a federal guarantee. This includes existing 504 and 7a loans, however certain conditions apply.
- If a 504 is being used to refinance federally guaranteed debt the new debt service must result in a “substantial benefit” for the borrower. At a minimum the savings must be at least 10% on monthly/annual basis.
504 Debt Refinance WITH expansion
- Amount of existing indebtedness that may be refinanced as part of a 504 project increases from not more than 50% to not more than 100% of the project costs of the expansion.
If you are interested in learning more don’t hesitate to reach out to one of our experienced lending professionals.
Extension of CARES Act Section 1112 Payment Subsidies
NADCO led a coalition of small business trade associations in advocating for extended payment subsidies under Section 1112 of the CARES Act to assist small business with critical relief during the economic recovery from the coronavirus pandemic. The legislation continues this vital relief by resuming the payment of principal, interest, and fees on small business loans guaranteed by SBA under the 7(a) [including Community Advantage], 504, and Microloan programs as originally established in the CARES Act.
• All borrowers will receive an additional three months of payment assistance starting in February 2021, capped at $9,000 per borrower per month
• After the three-month period, borrowers considered underserved will receive an additional five months of payment subsidies capped at $9,000 per borrower per month, including –
1. Borrowers with SBA Microloans or Community Advantage loans, and
2. Borrowers with any 7(a) or 504 loan in hardest-hit industries, including food service and accommodation; arts, entertainment, and recreation; education; and laundry and personal care services
• Payment subsidies for six months will resume for new loans approved from February 1 to September 30, 2021, capped at $9,000 per borrower per month
504 Debt Refinancing Fixes
The legislation repeals limitations on 504 debt refinancing enacted in 2016 including the cap on a CDC’s refinance loan volume. There are also substantial improvements to 504 debt refinancing –
• Strengthening 504 debt refinance with expansion by increasing the debt refinance amount from 50% to 100% of expansion costs
• Strengthening 504 debt refinance without expansion by allowing the refinance of government guaranteed debt, allowing the refinance of a Qualified Debt that is 6 months old (down from 2 years), and dropping the requirement that the business must be current on all payments due for 12 months (converting this to a credit underwriting consideration rather than an eligibility barrier to the program)
• Allowing the refinance of Third Party Lender loans in an existing 504 project to include cash-out for business operating expenses to assist small businesses leverage existing equity capital to fund business operating and recovery expenses
504 Express Loan Program for Accredited Lenders
The legislation grants CDCs approved under SBA’s Accredited Lenders Program (ALP) with express loan authority to approve, authorize, close, and service 504 loans up to $500,000 to speed critical access to capital to small businesses.