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Thursday, October 13, 2011

IMPORTANT Business Financing Update! Major Changes to SBA 504 Debt Refinancing Program

SBA Launches Major Changes to 504 Debt Refinancing Program
Key Program Features:
·         Up to 90% LTV on refinances
·         Refinance existing debt
·         Use excess equity to obtain working capital that can be used for financing of eligible business expenses.
·         Cash out potential
·         Low fixed rates
·         No balloons
SBA launched this temporary program on Feb. 17, 2011, and began accepting loan applications on February 28, 2011.  The program will end on September 27, 2012.
Beginning October 12, 2011 borrowers can finance up to 90 percent of the appraised value of available collateral, which could include fixed assets acceptable to SBA (for example:  commercial or residential real property).  This allows borrowers with more than 10 percent equity to be able to obtain additional proceeds to pay for eligible business expenses.
In April, SBA expanded the program parameters by allowing any business with a commercial mortgage that is two or more years old to refinance its debt, regardless of maturity.
The program is structured like SBA’s traditional 504 loan program: borrowers will work with third-party lending institutions and SBA-approved Certified Development Companies (CDCs), typically private, non-profit organizations to obtain financing, in a traditional 10%/50%/40% split.  However, the program no longer requires the Third Party Lender to be 50 percent of the Project.  The Third Party Lender amount must be equal to or greater than the SBA amount.  This allows the small business to maximize the amount of long-term, low interest, fixed rate financing available.
Click here for more information about the SBA 504 Refinancing Program
Following is a summary of the refinancing program changes as published Oct. 12, 2011, in the Federal Register:
* Third Party Lender Loan – The third party lender loan is no longer required to be at least 50% of the appraised value of the 504-eligible fixed assets.  Now, as in the regular 504 loan program, the third party lender loan must be at least as much as the 504 loan.
* Financing Business Expenses – A borrower may now use its equity to finance eligible business expenses as part of the refinancing project provided that the amount of cash funds available to pay business expenses exceeds the amount to be paid to the lender of the qualified debt being refinanced. The borrower’s application must include a specific description of the business expenses to be financed and an itemization of the amount of each expense. 
"Eligible business expenses" is defined as expenses of the borrower, such as salaries, rent, utilities, inventory, or other obligation of the business that were incurred, but not paid prior to date of the 504 loan application or that become due for payment within 18 months after the date of the application. 
Both the CDC and borrower will be required to certify in the application that the funds will be used to cover the eligible business expenses of the borrower.  The borrower must, upon request, substantiate the use of funds to finance the business expenses (for example, through bank statements, invoices marked "paid," cleared checks, etc.).
* Qualified Debt – Because the qualified debt to be refinanced may have been refinanced one or more times previously with the borrower using its equity at that time to finance working capital or other expenses, the SBA has amended the regulation to provide that as follows:  if the eligible fixed asset was originally financed through a commercial loan that would have satisfied the “substantially all” standard of 85% and was subsequently refinanced one or more times with the current commercial loan being the most recent refinancing, then the current commercial loan will be deemed to satisfy the "substantially all" standard.  The borrower must certify that the existing debt satisfies the applicable requirements and the third party lender must certify, as part of the 504 loan application, that it has no reason to believe that the existing debt does not satisfy these requirements.
 On a random basis, the SBA may require the borrower and/or lender to submit additional documentation to support these certifications prior to closing the debenture, including the documents for the original loan used to acquire the fixed asset and subsequent refinancing documents to show that the current commercial loan is the most recent refinancing.  The SBA will cancel an approved 504 loan if the documents do not support the certifications.  If the borrower and/or lender are unable to produce the additional documentation, each must certify that it has made a diligent search for the documents and that the documents are not in its possession. The SBA will not cancel an approved loan solely because the borrower and/or lender are unable to produce the documentation unless the lender is the original lender who made the original loan to acquire the 504-eligible fixed asset (and not a lender who acquired or merged with the original lender.)
This same change in the "substantially all" standard has also been made for the 504 permanent expansion debt refinance program.
* Occupancy – The original loan may not have satisfied the percentage occupancy requirements of 51/49% for an existing building or 60/20/20% for new construction. The final regulations provide that as long as the borrower can demonstrate that it now occupies at least 51% of the building as of the date of 504 loan application, the percentage occupancy requirements are met.
* Current on Payments – The definition of “current on all payments due for not less than one year” has been amended to allow a borrower to be deemed current as long as during the 12-month period prior to the date of 504 loan application, no payment was more than 30 days past due under either the original payment terms or under modified payment terms (including deferments). Any modification of payment terms must have been agreed to in writing by the borrower and lender prior to Oct. 12, 2011, when the final regulations were published.  The SBA reserves the right to decide whether modified repayment terms would preclude refinancing.
* Closing Period – Temporary debt refinance 504 loans must be disbursed within six (6) months after loan approval unless an extension for good cause has been granted.  Extensions of the disbursement period up to an additional 3 months may now be granted for good cause.
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Tel: 863-299-2929
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