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.
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.
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.
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.
A Final Word From 504 Capital
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.