Take advantage of the Small Business Administration’s 504 loan-refinance program before time runs out

Christopher Hurn, CEO, Mercantile Capital Corp.

As published in Scotsman Guide’s Commercial Edition, March 2012.

This past October, the Small Business Administration (SBA) announced its final round of changes to the SBA 504 loan-refinance program. This included several key provisions that opened up the program to a broader range of small businesses and finally made it possible for small- business owners to include legitimate business expenses in the refinancing, amounting to a cash-out or working-capital provision.

This is great news for small-business owners and commercial mortgage brokers, but the program remains a temporary one. Unless action is taken by Congress, the SBA 504 loan-refinance program will expire on Sept. 27. Here’s what you need to know to help your clients take advantage of this program before the window of opportunity closes.

The SBA 504 loan-refinance program was established as part of the Small Business Jobs and Credit Act of 2010. This temporary program was given a life of two years, and $7.5 billion was set aside for 504 refinances in fiscal year 2011. Unfortunately, regulations as to how the program would be administered weren’t released for nearly five months. The first applications were accepted in February 2011.

This first round of regulations made 504 refinancing available only to small- business owners who had a mortgage up for renewal on or before Dec. 31, 2012. After some slow-going and high rejection rates, the SBA lifted that restriction and the final rules were announced this past October. This final roll-out of changes addressed borrowers’ ability to include business expenses in the refinance — essentially the cash-out provision that was mentioned in the original legislation.

Because of delays and a sluggish start to the program, just $270 million of the allotted $7.5 billion (about 3 percent) was used for SBA 504 loan refinancing in fiscal year 2011.


Another $7.5 billion was allotted for fiscal year 2012, and there are high hopes that a greater percentage of these funds will be used. The economy is showing signs of life, and more business owners will turn to SBA lending as they find that conventional lending hasn’t quite thawed yet. Two new rules in the last round of changes to the 504 loan-refinance program also may make this a record year for SBA lending.

  1. The cash-out provision makes it possible for business owners to include in the refinancing what the SBA calls  “legitimate business expenses” — salaries, rent, utilities, inventory, paying down payables, and other business obligations. Commercial mortgage brokers must point out to business owners that if they have embedded equity in their commercial real estate, they can now tap that equity and pull out working capital, which is in short supply from conventional lending sources.
  2. Borrowers with loan deferments and/or loan modifications are now eligible for refinancing, as long as they are current — no past-dues of more than 30 days in the past year — on those modified terms.

Now that we have the final regulations regarding 504 refinancing and the major restrictions have been eliminated, this year certainly may see a significant increase in these loans.


Commercial mortgage brokers must know the SBA 504 loan-refinancing rules to guide their clients in the right direction. To begin, the maximum loan-to-value (LTV) ratio that can be financed is 90 percent. One advantage of the program is that additional collateral (real estate and/or equipment) can be pledged to supplement shortfalls on project collateral.

At this time, the amount of total financing cannot exceed 90 percent of the fair market value of the fixed assets securing the loan or the outstanding principal balance of the debt being refinanced, whichever is lower.

The borrower can elect to make a contribution by equity in the collateral being offered to the SBA. An additional 5 percent equity for special-purpose buildings is not required. An appraisal on all collateral, dated within six months of application date, will be required.

It is important to note that not all cases are eligible for refinances under this program. Some exclusions are:

  • Existing SBA 504 projects, SBA 7(a) loans or USDA loans
  • If the creditor on the debt is in a position to sustain an involuntary loss
  • If the borrower is seeking expansion or purchase of real estate or other fixed assets (presently, those can be part of a new 504 loan)

In addition, refinance loans must be approved by the program’s deadline: Sept. 27.

As mentioned earlier, refinance proceeds can be used for itemized business expenses. These expenses must have been incurred before the date of the 504 loan application or be expenses that will become due within 18 months of the date of the 504 application, however.

Brokers should work with clients to make sure their applications include a specific description of the business expenses for which the financing is requested and an itemization of the amount of each expense, along with a certification as to the accuracy of this information. If the application is approved and funds are disbursed for business expenses, the borrower must be able to substantiate the use of those funds through its business records (bank statements, paid invoices, etc.).

Borrowers with loan deferments and/or modifications on their conventionally financed owner-occupied commercial real estate are now eligible for refinancing as long as they’ve been current on the terms of their deferment or modification. These modifications of payment terms must have been made in writing before Oct. 12, 2011 — the date on which the change in regulations that allows this program to refinance existing debt came into effect.

In cases where same-institution-debt is being refinanced, it can be done through interim financing or an escrow account at the choice of the certified development company (CDC), the borrower and the third-party lender.

Additionally, it is important to understand the occupancy requirement. As long as the small business occupies at least 51 percent of the property at the time of the 504 application, it is irrelevant whether the occupancy requirements were met when the property was acquired, constructed or renovated.

Finally, explain to your clients that in cases of acquiring loans through this refinance program, documentation will be required only for the current debt and lien instruments — not the entire note(s) genealogy or earlier financing.

Because the program expires on Sept. 27, all SBA 504 loan refinances must be approved by that date to qualify for the program. According to the SBA, as many as 8,000 businesses could participate in the program this year. Estimates say that if the full $7.5 billion allocation is used, total project financing could reach as much as $17 billion. But even after those businesses are served, there are still many small businesses that could benefit from refinancing their commercial debt with an SBA 504 loan.

It could be a big boost for the market if Congress decides to extend this program — especially if the allocated funds aren’t fully utilized as in 2011. It’s easy to make the argument for extending the program. Here are three major points:

  1. Conventional small-business lending continues to be scarce. Refinancing with an SBA 504 loan may be the only option for some small-business owners in need of working capital.
  2. The entire SBA 504 loan program is user-fee supported, which has classified it as zero-subsidy for the past nine years. This means that it costs taxpayers nothing.
  3. The program helps small businesses get credit, grow and create jobs. The lion’s share of job creation happens in small and medium-sized businesses. These entrepreneurs need all the help they can get, especially because this sector of the economy was largely neglected in the past few years.


The Great Recession was a deep one by all accounts, and it will be a few more years before the economy fully gets back on its feet. The small-business sector needs all the help it can get, and extending a zero-subsidy program that can continue to provide credit and help create jobs should be something we can all get behind.

Christopher Hurn is CEO of Orlando, Fla.-­based Mercantile Capital Corp., a three-time Inc. 500/5000 company, two-time U.S. Small Business Administration Financial Services Champion and one of the largest providers of SBA 504 loans nationwide. Reach Hurn at (866) 622-4504. Additional information about SBA 504 refinancing is available at SBA504LoanRefi.com or 504Experts.com.