18 Hoosier Banker July 2016 LENDING / CREDIT SBA and Congress Bring Back SBA 504 Program Refinancing The popular 504 refinance program of the Small Business Administration (SBA) is returning. Congress has reauthorized the 504’s refinancing feature, and the SBA is now writing the rules. “Refi” was intended for a limited run when it was authorized in 2012, nearly 30 years after the SBA 504 program itself was created. Refi proved so popular that lenders and borrowers missed it when it expired. To summarize, the SBA 504 loan program provides approved small businesses with long-term, fixed-rate financing for acquiring fixed assets ‒ such as real estate, buildings or equipment ‒ for expansion or modernization. Nationwide the program has been highly successful, resulting in $67 billion in 504 loans and over one million U.S. jobs created. Refi Available Now The existing 504 program has the ability to include some refinancing of existing debt. Currently, if there is a 504 project that expands an existing facility, the loan package can also include an additional 50 percent of other fixed-asset debt as part of the eligible project. Example: ABC Company owns an existing building. The company is considering a major renovation and expansion at a cost of $1 million. This $1 million is the traditional 504 project. However, ABC Company already has a $500,000 mortgage on the existing building. Since this debt is less than or equal to 50 percent of the traditional 504 project, it can be rolled into the 504 structure. Following is the structure of the resulting project: $500,000 Existing debt +$1,000,000 Expansion and renovation =$1,500,000 Eligible 504 project Funded as follows: $750,000 Senior lender (your bank) (50 percent) -$600,000 SBA-authorized certified development corporation (40 percent) $150,000 Borrower down payment (10 percent) The borrower down payment can be cash or equity in the real estate. The Return of Full 504 Refi The new regulations for the return of full 504 refi are currently in clearance and are expected to be released in late June. This will reinstate the ability to refinance fixed-asset debt (even without expansion) utilizing the 504 structure. The program is expected to include the following parameters: - 85 percent of the debt being refinanced must have been used to fund eligible fixed assets; - The loan must have been outstanding for at least two years; - The loan must have been current for at least the last 12 months; How can a bank small business lender benefit from this opportunity? • Review existing clients to see if they have equity locked up in existing real estate and could benefit from freeing up capital for other business needs. • Look for high-priced debt on a borrower’s balance sheet that could be replaced by attractive 504 terms (20-year fixed rate, currently 4.3 percent). • Check to see what is going on in the market. Find new customers who would find this structure attractive. About the Author Jean Wojtowicz is president of Cambridge Capital Management Corporation, Indianapolis. She founded the firm, a manager of nontraditional business capital, in 1983. Cambridge Capital manages Indiana Statewide Certified Development Corporation, the state’s largest lender of SBA 504 loans; Lynx Capital Corporation, a source of capital for minority-owned firms in Indiana; Indiana Community Business Credit Corp., a pool of growth capital that can supplement bank financing; and Cambridge Ventures LP, a small business investment company. Wojtowicz serves on the boards of directors of Vectren Corp., First Merchants Corp., First Internet Bank, OneAmerica Mutual Insurance Holding Company and the Indiana Department of Financial Institutions. A graduate of the University of Wisconsin, she was named 2011 Business Leader of the Year by the Indiana Chamber of Commerce. The author can be reached at 317-843-9704, email: jwojtowicz@cambridgecapitalmgmt.com. Cambridge Capital Management Corp. is an associate member of the Indiana Bankers Association.
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