Anyone who participates in SBA financing eagerly awaits new 504-debt refinancing rules. After much anticipation, on July 29, 2021, the U.S. Small Business Administration published the new interim final rules for 504-debt refinancing programs as authorized under Section 328 of the Economic Aid Act. The new rule was effective immediately. The updated regulations expand the usefulness of 504-debt refinancing programs to assist small business recovery and growth. Check out the updates below.

For 504 debt refinancing WITHOUT expansion:

Qualified debt — must be at least six months old before the SBA application date to be eligible for refinance, reduced from two years old. Qualified debt for the small business is defined as at least 85% of the original debt that was allocated for financing eligible fixed assets.

New businesses are not eligible for refinance without expansion. The applicant must have been in business for at least two years. (Note: this is not a “new” rule.)

Allows the refinance of existing government-guaranteed debt — existing SBA policies related to refinancing existing 504 or 7(a) loans will apply (these are the same requirements that currently exist for the 504-debt refinance with expansion program), including the following:

• For an existing 504 loan, either both the third-party loan (1st mortgage) and the SBA 504 loan (2nd mortgage) must be refinanced, or the third-party loan must be paid in full.
• For an existing 7(a) loan, the CDC must verify in writing that the present lender is either unwilling or unable to modify the current payment schedule. In the case of same institution debt, if the third-party lender or the CDC affiliate is the 7(a) lender, the loan will be eligible for 504 refinancing only if the lender is unable to modify the terms of the existing loan because a secondary market investor will not agree to modified terms.
• The refinancing of any federally-guaranteed debt will provide a “substantial benefit” to the borrower — minimum 10% savings on the new installment amount attributable to the debt being refinanced (same definition as currently used in the 504-debt refinance with expansion program); this is now required for all 504-debt refinance without expansion projects. Prepayment penalties, financing fees, and other financing costs must be added to the amount being refinanced in calculating the percentage reduction in the new installment payment. The portion of the new installment amount attributable to “Eligible Business Expenses” will not need to be included in this calculation. “Eligible business expenses” are defined as operating expenses of the business that were incurred but not paid prior to the date of application or that will become due for payment within 18 months after the date of application. This includes accrued expenses such as salaries, rent, utilities, inventory, and other expenses of the business that are not capital expenditures.

Current on all payments — eliminates the requirement that the borrower must be current on all payments due for not less than one year before the SBA application date. Because the qualified debt now must be incurred not less than six months before the date of the 504 Loan application, the SBA no longer requires that the applicant be current on all payments due on the Qualified Debt for not less than one year before the date of application. In accordance with prudent lending standards, the SBA expects the CDC to consider whether the applicant is current on all payments due and the applicant’s history of delinquency in its credit analysis.

Reinstates an alternate job retention standard — all existing jobs measured on a full-time equivalent (FTE) basis can be counted as jobs retained by the refinancing project.

For 504 debt refinancing WITH expansion:

The amount of the existing indebtedness that may be refinanced as part of a 504 project is increased from not more than 50% to not more than 100% of the project costs of the expansion.

All other existing policies and procedures for 504-debt refinancing with and without expansion continue to apply unless specifically modified by the interim final rule.

Specifically, in the 504-debt refinancing without expansion program, the 20% cap on eligible business expenses and the maximum loan to value for projects involving eligible business expenses continue to apply.