In the late fall of 2010, federal legislation was passed allowing the Small Business Administration to work with small businesses to refinance loans held on commercial real estate.
Gabe Beukinga, senior vice president and team manager at SomerCor 504, recently answered some of the most commonly asked questions about the refinancing element of the SBA 504 lending program.
Q. What was the impetus to allow SBA 504 loans to be used for refinancing?
The impetus for the legislation, like other elements it included, was to help small businesses and to stimulate activity by small businesses. The refinancing provision of the program allows businesses to secure competitively priced capital that can allow them to refinance existing debt. The bottom line is that it is a tremendous financial opportunity that provides the means to reduce other debt or to have capital available for operating the business.
There are many businesses today that because of the declining real estate values find themselves challenged to refinance. They are current on their loans, but they want to restructure those loans at lower rates and for longer terms without making a significant equity injection to bring the loan to a 75 to 80 percent LTV. After all, a company that secured a conventional loan two or more years ago at say a 6.0 percent rate, can improve their cash flow significantly when restructured at the current SBA 504 rate of 4.64 percent. Also, this locks in a 20-year fixed rate in a historically low interest rate environment with most experts predicting rising interest rates in the future.
Q. What are the parameters of a refinancing program, and how can the funds be used?
The loan must be at least two years old—which means it was initiated around mid year 2010 or earlier. The loan also must be current.
The proceeds from a refinancing, those that come from “cashing out” or taking a portion of the equity they have built up in their real estate holdings, can be used to cover any eligible business expense, for working capital, to pay off term debt, pay off reserves, hire new employees, and fund other business improvements, etc.
Q. What is the limit that can be refinanced?
Like the regular SBA 504 loan program, there are limits on how much can be refinanced: $5.0 million for typical companies and $5.5 million for manufacturing firms. Keep in mind this is only for the SBA portion of the loan. We can significantly help on most owner-user deals with debt of $12.5 million or less.
Q. Is the process for refinancing similar to a conventional loan program?
It is very similar underwriting procedures as a conventional loan program.
Q. In the typical SBA loan, a bank also is involved. Is that the case in using SBA loans for refinancing?
Yes, like the traditional SBA 504 loans, a bank is involved in the process to fund up to 50 percent of the loan.
Q. Are there any drawbacks—extra fees, etc.—to refinancing with an SBA program?
There are no extra fees or any drawbacks to using the SBA 504 lending program to refinance business debt.
Q. How long does the process take?
The entire process, from start to finish, takes approximately 45 to 60 days to close/fund. Of that time period it takes approximately two to three weeks for the SBA approvals and 30-45 days for the bank approvals, property appraisal and other steps in the process.
It should be noted that the law allowing the SBA to provide funds to refinance business loans is only valid through the end of September. To ensure that approvals make their way through the property channels, the refinancing process should begin by early July.