Can You Refinance Your SBA 504 Loan with Another SBA loan?

November 22, 2023

Refinancing your Small Business Administration (SBA) 504 loan with another SBA loan is not only possible, but it can also be highly advantageous for your business. Read on to learn more.

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Understanding the SBA 504 Refinance Program

The SBA 504 Refinance Program was created to help small businesses lower their financing costs by refinancing existing commercial real estate debt into more favorable long-term terms.

To qualify:

The original debt must be at least 2 years old
The loan must have originally been used for fixed assets like land, buildings, or equipment
The business must be operating and current on payments

Like the standard 504 loan, the refinance structure involves a CDC-backed portion and a private lender portion, with the borrower typically contributing around 10% equity.

The main appeal lies in locking in fixed, below-market interest rates and potentially improving cash flow, which is critical for small business growth.

Can You Refinance an SBA 504 Loan?

Refinancing an SBA 504 loan is possible through specific SBA programs or alternative financing options, depending on your business goals and eligibility. Businesses can refinance into another SBA 504 loan, transition into an SBA 7(a) loan, or explore conventional financing if they meet lender requirements. The right option depends on factors such as interest rates, equity position, and long-term financial strategy.

What Is Cash-Out Refinancing in the SBA 504 Program?

Cash-out refinancing under the 504 program allows business owners to access equity built up in their real estate—provided certain conditions are met.

Eligible uses for cash-out include:

Business operating expenses
Equipment purchases
Refinancing of eligible business debt

Ineligible uses include:

Personal expenses
Investments unrelated to the business

To qualify, the property must have appreciated in value, and the business must meet debt service coverage ratio requirements. The cash-out portion is limited to 20% of the appraised value of the eligible fixed assets.

This feature makes the SBA 504 refinance program especially powerful for businesses looking to reinvest into operations without taking on new debt.

The Benefits of Refinancing an SBA 504 Loan

Interest Savings: Refinancing allows small businesses to take advantage of potentially lower interest rates, reducing their monthly payments and freeing up capital for reinvestment.
Debt Consolidation: Replacing multiple business debts with a single refinanced 504 loan simplifies debt management by minimizing the number of monthly payments to track.
Budget Predictability: The fixed interest rates offered by SBA 504 loans provide budgeting predictability, an advantage over variable-rate loans that fluctuate over time.

Which SBA Loan Can Refinance My SBA 504 Loan?

SBA 7(a) Loan: This program is the most popular and flexible option other than the 504, offering funds for various business needs, including refinancing debt.
SBA Express Loan: This loan program offers a faster turnaround time for loan approvals and can be used to refinance your existing debt.
SBA 504 Refinance Program: Specifically designed for refinancing existing 504 loans, this program allows businesses to take advantage of lower interest rates or unlock equity in their commercial properties and fixed-asset projects at below-market rates. You can even cash out up to 20% of the value of the property for working capital needs.

Refinancing SBA Loans to Conventional Loans

Refinancing an SBA loan into a conventional loan can be a strategic move for businesses with strong financials, established credit history, and sufficient equity. Conventional loans may offer fewer restrictions, faster approvals, and greater flexibility in how funds are used. However, they often come with stricter qualification criteria and may require higher down payments or collateral.

You may consider conventional refinancing if:

Your business has improved cash flow and creditworthiness
You want to avoid SBA compliance requirements
You can secure competitive interest rates outside SBA programs

Quick Fact: According to the Federal Reserve, businesses with stronger credit profiles are more likely to qualify for lower-cost conventional financing.

Tip: Always compare total loan cost, not just interest rates, when evaluating SBA vs. conventional refinancing options.

504 Loan Equity Requirements for Refinancing

Before refinancing your SBA 504 loan with another SBA loan, you must understand the equity requirements involved. Your business property must have enough equity to support the new loan amount. For SBA 504 loan refinancing, the loan-to-value (LTV) ratio should generally not exceed 90% on a debt refinance without expansion. Ideally, you should have at least 10% equity in your property. However, if your refinance includes expansion, then you might be able to qualify with a higher LTV. Therefore, before proceeding, carefully evaluate your business’s equity situation to ensure it meets the requirements for refinancing an SBA 504 loan with another SBA loan.

Commercial Real Estate Refinancing

When refinancing an SBA 504 commercial real estate loan, lenders usually demand proof of substantial equity, good cash flow, credit standing, and other factors. The definition of “enough” equity can vary depending on the lender, but generally, most banks and conventional lenders expect you to have at least 20% equity in your property.

Nevertheless, there are exceptions to this rule. Some lenders offer up to 85% loan-to-value ratio for owner-occupied business property (51% occupancy). Even more, if a lender has a strong relationship with your business and values your account, they might exhibit flexibility and approve a refinance with as little as 10% equity.

You can even refinance your SBA 504 first mortgage only.

For those currently holding a 504 loan, you’re likely aware of its two-loan structure, which consists of a second mortgage with a 25-year fixed, low-interest rate that seldom requires refinancing. However, many business owners may not realize that the first mortgage can be refinanced. In this process, the low-rate 504 second mortgage can be “re-subordinated.”

Refinancing an SBA 504 Loan for Professional Practices

Professional practices like law firms, medical clinics, and accounting firms can greatly benefit from refinancing an SBA 504 loan. This approach can help these businesses manage their cash flow more effectively, reallocating funds that would otherwise be spent on higher-interest repayments. With the refinanced loan, they can invest in new heavy equipment, machinery, technology, or additional professional staff to expand their business. These professional practices must first assess their financial situation and consult a knowledgeable SBA-approved lender to ensure that refinancing is the most beneficial option for their specific circumstances.

How Refinancing to an SBA 504 Loan Works

SBA 504 Loan Prepayment Penalty

The 504 loan operates on a dual-mortgage model. Often, the first mortgage carries a five-year prepayment penalty, while the second one has a ten-year penalty that lessens annually for the initial decade. The lengthier term for the second mortgage, which offers a below-market fixed rate for 25 years, aims to ensure investors a dependable income for at least a decade, discouraging early pay-offs.

When Refinancing a Business Loan Makes Sense

Refinancing a business loan makes sense when it improves cash flow, reduces borrowing costs, or aligns better with your company’s financial goals. Businesses often refinance to secure lower interest rates, consolidate debt, access equity, or transition to more predictable repayment structures. Timing and financial stability play a key role in determining whether refinancing delivers long-term value.

Common scenarios where refinancing is beneficial:

Interest rates have dropped since your original loan
Your business revenue and credit profile have improved
You want to consolidate multiple debts into one payment
You need access to working capital through equity

Tip: Review prepayment penalties before refinancing, as they can impact your overall savings.

A Final Word From 504 Capital Corporation

Considering all the possibilities, refinancing your 504 loan with another SBA can provide significant benefits. As always, consulting with a knowledgeable advisor or CDC lender like 504 Capital is recommended to understand the best options for your business in Maryland, North Carolina, Washington D.C., Chesapeake, and Virginia. Contact us today to get started.

Frequently Asked Questions

Yes, an SBA 504 loan can be refinanced through the SBA 504 Refinance Program, an SBA 7(a) loan, or in some cases through conventional financing. The best option depends on your business’s financial position, interest rate goals, and equity in the property. Many businesses refinance to secure lower fixed rates or improve cash flow.

Yes, SBA loans can be refinanced into conventional loans if the business meets lender requirements such as strong credit, consistent cash flow, and sufficient collateral. Conventional refinancing may offer fewer restrictions and faster approvals, but it often comes with stricter qualification standards compared to SBA programs.

Yes, SBA 504 loans typically include prepayment penalties, especially on the CDC-backed portion of the loan. These penalties usually decrease over time and may apply during the first 5 to 10 years. It’s important to calculate these costs before refinancing to ensure overall savings.

In most cases, SBA guidelines require that the original loan be at least 2 years old before it can be refinanced under the SBA 504 Refinance Program. This ensures the loan has a payment history and meets eligibility requirements for refinancing.

SBA loan refinancing can help businesses reduce interest rates, lower monthly payments, improve cash flow, and consolidate existing debt. It can also provide access to equity through cash-out refinancing, allowing businesses to reinvest in operations, equipment, or expansion.