SBA eases debt refinancing with big loan program changes

By Andy Medici – Senior Reporter, The Playbook, The Business Journals

Oct 3, 2024

The Small Business Administration has issued a final rule making it easier for small businesses to refinance some of their debt.

The new rule, which becomes effective on Nov. 14, 2024, revolves around the agency’s 504 loan program, simplifying some rules and waiving old restrictions in order to make the loans more flexible and widen the businesses that qualify.

One goal is expanding access to small businesses.

The 504 program offers loans through a community development corporation to purchase or construct buildings or new facilities, buy land or purchase heavy, long-term machinery and equipment, along with other uses. The SBA guarantees the resulting loans from the 504 loan program, which allows larger financial institutions to package them and sell them as an investment vehicle.

The new changes include:

Removing a previous requirement for community development corporations that mandated a 50% cap on debt refinancing that did not come with an expansion of the business. The previous cap was changed by Congress during the pandemic, now allowing CDCs to approve more debt refinancing opportunities.
Beefing up the percentage of qualified debt in projects, including eligible business expenses, from 85% to 90% and removing the 20% cap on eligible businesses expenses. At the moment, the portion of a refinancing project provided by a 504 loan and a third-party loan may be no more than 85% of the fair market value of the fixed assets that will serve as collateral, and the borrower may receive no more than 20% of the fair market value of the assets securing the debt — caps that will be removed under the final rule.
Under current regulations, one of the conditions of a 504 debt refinancing with expansion project is that substantially all (85% or more) of the proceeds of the indebtedness were used to acquire land, including a building situated on that land, to construct a building on that land, or to purchase equipment. SBA is lowering that to 75% to create consistency with debt refinancing without expansion, which already had the 75% threshold.
Expanding eligible business expenses to include debt. Under current rules, debt refinancing without expansion may include a request to finance eligible business expenses, but debt is generally not included except for specific types of unsecured debt. Now, more types of debt can be included as eligible business expenses, except for debt incurred as for capital expenditures, as they are not day-to-day expenses.
Revising a standard that said 504 debt refinancing must provide a “substantial benefit” to the borrower, essentially lowering that portion their new payment by at least 10%. That requirement became overly burdensome as interest rates rose over 2022 and 2023. Now, business owners must simply show a “documented” benefit in refinancing.

The agency also stressed the recent Federal Reserve interest rate cut, in which it lowered interest rates by 0.5%, would save about 200,000 borrowers of SBA 7(a) loans about $360 million in annual savings.

SBA rolls out other changes to loans, programs

The SBA has been beefing up its loan programs and tweaking its small-business services as part of a wider effort to expand lending to the smallest and most underserved businesses.

That includes, for the second time, letting nontraditional lenders apply for one of its Small Business Lending Co. licenses. Lenders interested in the SBA's offerings can apply to become an SBLC, which can make loans of up to $5 million across the country through the agency's principal 7(a) lending program.

The SBA also is taking applications from lenders seeking to become nonprofit Community Advantage SBLCs, which can lend up to $350,000 but only in specific geographic areas. The SBA will accept applications for new SBLCs through Oct. 15. The agency plans to award up to three additional licenses.

The SBA in July said it was expanding its Community Advantage SBLC loan maximum to $500,000 for active lenders. It also was launching an application process for lenders to go up to $1 million for those loans — or $2 million for projects related to climate change.

The agency in June rolled out its Working Capital Pilot Program for its 7(a) lenders, a program carrying fees, rates and terms intended to give small-business owners more flexibility. The fee structure includes a transaction-based loan for individual projects or orders, and an asset-based loan to access funds against a company's assets.

Owners can go to the SBA's website for more information or use the agency's Lender Match tool to find a lender near them.

SBA surety bond guarantees also went up in March for the first time since 2013. That means the SBA is now able to guarantee bid, performance, payment and ancillary bonds of up to $9 million for all projects and $14 million for federal contracts — up from $6.5 million and $10 million, respectively.

The SBA also recently revamped and rebranded its existing 7(j) Management and Technical Assistance Program — now called the Empower to Grow program — which offers customized, one-on-one training and consultation to qualifying small-business owners.

All of those actions are separate from a series of changes the SBA rolled out for its disaster-loan program that dramatically boosted loan sizes and extended deferment periods for homeowners and business owners alike.