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Tip of the Month for September, 2009

Tip: Revised SBA 504 Loan Program Designed To Get Credit Moving

Recognizing that small business is the bedrock of the economic recovery, the Small Business Administration has made changes to its lending programs recently. The latest initiative is a permanent change to the SBA 504 loan program intended to get credit moving in the cash-strapped small business sector. These moves - part of President Obama’s stimulus package - come at a time when the total dollar amount of loans funded by SBA has dropped more than 40 percent since last year.

Previously, in order to qualify for the 504 program, borrowers had to be seeking funds to finance the purchase or improvement of large-scale fixed assets, such as commercial real estate, buildings or heavy equipment. Under the new rules, 504 loans can now also be used to refinance any existing fixed asset loans (not only SBA loans) to expand or buy equipment. Here’s an overview of the rules of the revised program:

  • Borrowers may now use 504 loans to restructure debt under better terms to improve their cash flow. They can now use 504 loans to refinance existing loans that fund similar projects or purchases. The refinancing provision includes any existing fixed-asset loan (not just SBA-backed loans) used to expand or purchase equipment.
  • Beneficiaries of the revised terms include business owners who have already taken out non-SBA loans to fund projects that would meet the qualifying criteria for a 504 loan.
  • The new financing must offer better terms to the borrower.
  • Borrowers may refinance any qualifying loan as long as the amount is 30 percent or less of the total loan package.
  • The refinancing loan must be backed by fixed assets, such as land that could serve as collateral.
  • Borrowers must be current on all payments for a year prior to the refinancing.
  • The borrower must retain or create a job for every $65,000 guaranteed by the SBA (previously $50,000).

Some industry experts, while noting that the SBA move is a step in the right direction, are doubtful that the changes will bring much relief to businesses that are struggling to pay 504 loans that are due. If they are facing hard times, businesses will not be in an expansion mode and therefore won't be eligible for the debt refinancing provisions. And statistics show that 504 loans are down 41.5 percent from loans issued during the same time period in 2008. With this in mind, many pundits want to see the SBA do more to stimulate lending.

Earlier SBA initiatives generated by the stimulus package have included reducing fees for its loans and upping the guarantee on its 7(a) loans to as much as 90 percent (previously they ranged from 75 percent to 85 percent). A new emergency loan plan for small businesses caught in a cash crunch was also unveiled at the end of June. 

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