SBA loan program can help refinance debt. Here's how.

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

Interest rates are the highest they've been in more than 20 years, and small businesses are having to find ways to cope.

For small-business owners looking to refinance debt amid what has become a difficult credit environment, one solution could be the Small Business Administration 504 loan program. During the Covid-19 pandemic (and most recently in 2023), the SBA relaxed some of the rules that govern its lending programs to allow for the refinancing of SBA and non-SBA loans into new SBA loans.

The SBA has even allowed more new lenders in its 7(a) program, as part of a bid to expand small-business credit.

That could mean big savings for business owners that qualify for 504 loans, said Kurt Chambliss, executive vice president of sales and marketing at certified development company TMC Financing. While SBA 7(a) loan interest rates currently hover between 9.5% to 11.5%, and conventional loans can be even higher, the 504 loan rate is just above 6.3%.

“The SBA has been opening the door more to using 504s to do refinances,” Chambliss said. “Now you are able to refinance SBA 7(a) loans — (you) couldn’t refinance an SBA loan with another SBA loan before.”

There are rules and eligibility criteria, which means small-business owners should contact a community development corporation that handles 504 loans, Chambliss said, to make sure they qualify.

How SBA 504 loan program can be applied

In general, 504 loans can be used to refinance existing loans if 75% of the original loan was used to acquire an asset such as land, a building or heavy equipment like a boat or a printing press.

The business needs to have operated for at least two years, be at least six months out from its last loan disbursement and the refinance must result in at least a 10% payment reduction.

That means even business owners that took out a 7(a) loan recently with a higher rate can refinance out of it into a lower rate if they qualify, Chambliss said. There are prepayment penalties associated with paying off an SBA 7(a) loan, but that's oftentimes offset by payment drops.

“The 7(a) is a very popular program. And it’s sometimes the only available option for a business owner to buy a property. But it’s not something you have to have forever,” Chambliss said.

The rate is so much lower because the money comes from the SBA bundling and selling those loans as a kind of bond that investors can then buy. It’s guaranteed by the federal government, so investors are happy with a low rate of return.

“That low rate then gets passed on to the small-business owner," Chambliss said. "It’s basically getting bond financing for small businesses."

It could mean business owners will avoid potential balloon payments on existing loans or are more easily able to get cash out. It might also allow business owners who have been renting their property to purchase the building they occupy.

But the 504 program is often overlooked by unaware business owners, Chambliss said.

“Getting the word out is hard. There are programs out there — whether it’s this one or other ones — that could really help your business,” he said.

How small businesses can reduce their debt in 2024

Business owners dealing with large amounts of debt require perseverance both mentally and physically, said Joe Camberato, CEO at National Business Capital. 

“Unless you're overwhelmed, gradually chip away at the debt, one payment at a time, until you come out on the other side of the tunnel,” Camberato said.

He said if a business owner is struggling to get funding, it might be best to explore options for capital outside of their existing financing. That could include subordinated financing that won’t interfere with more senior lending.

“Embrace creativity in your strategies — think about talking to new suppliers to reduce costs, leverage connections for potential prospects and approach old problems with a fresh perspective," Camberato said. "It won't be easy but keep in mind that the current high-rate environment is temporary."

Jay Avigdor, CEO at Velocity Capital Group, said businesses struggling to meet higher payments now should try working with their creditors to find a solution. And it's important to make sure any new agreement is in writing, he added.

“As counterintuitive as it may sound, these creditors want you to win and make payments. Work with them to find a payment plan that can fit your current situation,” Avigdor said.

Billions of dollars have started flowing to small-business owners in the form of direct investments and subsidized loans as a result of the pandemic-era small-business support program known as the State Small Business Credit initiative.

Small-business owners can look up their state and local programs to find out if they qualify for funding.

For business owners that want to find other sources of capital, there are tax credits you can apply for in 2024 as well as small-business grants that are open for applications.