On October 1, the Small Business Administration (SBA) introduced a major update to its 504 Loan Program, intended to simplify the process for small businesses to refinance existing debt. The 504 Loan Program provides long-term, fixed-rate financing for essential business investments like real estate and equipment. These new rules, which cover both debt refinancing with and without expansion, are designed to give small businesses more flexibility and better refinancing opportunities. Read on as we discuss some key changes and their potential impact on small businesses seeking to restructure their debt.

Removing the 50% Cap on Debt Refinancing Without Expansion

One of the most notable amendments removes the 50% cap on debt refinancing without expansion. Previously, businesses could only refinance up to 50% of their total loan amount for existing debt if they weren’t also using the loan for expansion purposes. This cap limited many businesses from taking full advantage of the refinancing option.

Under the new rule, this restriction has been eliminated, allowing businesses to refinance a higher percentage of their debt. This change could be especially beneficial for businesses looking to stabilize their finances without taking on additional costs related to expansion projects.

Raising the Loan-to-Value Requirement to 90%

Another crucial update is the increase in the loan-to-value (LTV) ratio requirement for debt refinancing without expansion. Previously, the LTV was capped at 85%, meaning that businesses could only refinance up to 85% of the value of their collateral. The new rule raises this threshold to 90%, giving small businesses more borrowing power when they refinance.

Aligning the “Substantially All” Standard for Debt Refinancing With Expansion

The SBA has made its rules easier by applying the same “substantially all” standard for debt refinancing with expansion as it does for refinancing without expansion. At least 75% of the loan must be used for eligible business expenses in both cases.

By making these rules consistent, the SBA is reducing confusion and making the refinancing process easier for businesses. This change simplifies the requirements, expands access, and allows business owners to more easily understand the program.

Incorporating “Other Secured Debt”

The new rule also allows certain “other secured debt” to be included in the refinancing process, providing more flexibility for small businesses that have a variety of secured debts they wish to consolidate under the 504 Loan Program.

This can be a game-changer for businesses that previously couldn’t refinance all of their obligations under the program. Now, they can combine various types of debt into one refinanced loan, simplifying repayment and reducing overall costs.

Revising the Substantial Benefit Test for Government Debt

Finally, the SBA has revised the substantial benefit test for refinancing government debt under the 504 Loan Program. This revision applies to both debt refinancing with and without expansion. The substantial benefit test is used to determine whether refinancing will provide a meaningful advantage to the borrower such as lower monthly payments or better cash flow.

The new test will make it easier for businesses to qualify for refinancing if they are seeking to refinance government-backed loans. By simplifying this process, the SBA is ensuring that more businesses can access the program’s benefits, even when dealing with complex government debt structures.

Overall, these SBA rule changes could offer small businesses the financial relief they need by helping them consolidate debt, reduce interest payments, and free up cash flow to invest in growth and long-term stability.