Interest rates are falling, and new SBA rule changes aim to help small businesses take advantage. (Photo by Samuel Corum/Getty Images)
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With interest rates falling and inflation slowing, small businesses are getting a much-needed break. A change to the Small Business Administration (SBA) refinancing program will help them take advantage of this change. The SBA’s recent rule changes to its 504 loan program make it easier for businesses to refinance their debts and capitalize on lower rates.
The SBA’s 504 loan program helps small businesses finance major expenses such as real estate and equipment with lower down payments and longer repayment terms than traditional loans. It can also be used to refinance existing debt. In November, the SBA made changes that streamlined the process and expanded the types of loans eligible for refinancing.
First, it increased the loan-to-value ratio from 85% to 90%, meaning businesses can now borrow more to refinance their debt. It also removed the 20% cap on qualifying business expenses, allowing businesses to access more working capital. The conditions for using the fixed asset loan have been lowered from 85% to 75%, making it easier to qualify for. The SBA also removed the 10% lower payment rule for refinancing. Previously, businesses had to prove that their new loans would reduce their payments by at least 10%, but now any reduction will be enough. Finally, the SBA expanded the types of debt that can be included in refinancing without the need to use the proceeds for business expansion.
The Small Business Administration directed Forbes to a PowerPoint presentation detailing the changes in response to a request for comment.
Holly Wade, executive director of National Federation of Independent Businesses (NFIB) Research Center, says many small business owners, except franchisees, are unaware of the 504 program. But with these rule changes – expanding what can be refinanced and speeding up the application process – it recommends they speak to an SBA-approved lender to learn more.
“The debt refinancing aspect is even more critical today,” says NFIB’s Wade. NFIB October Small Business Economic Trends report showed that small businesses paid an average of 9.7% for short-term loans. A 25-year refinance loan through the 504 program currently costs only 6.125%.
With the Fed’s rate cut, small businesses can now refinance, although waiting may make sense for those who can afford it.
“Businesses that have taken out loans over the past couple of years will certainly now benefit from the ability to refinance those debts and reduce their financing costs,” says Wade. “This will go a long way in helping them reinvest in their business, that’s the biggest benefit of this rule change.”
SBA 504 loans, according to the PowerPoint shared by the SBA, can be up to $5.5 million. But only the smallest businesses are eligible for the program. To qualify, a business must have a tangible net worth of less than $20 million and an average net income over the past two fiscal years of less than $6.5 million. There is also an occupancy rule: the company must use at least 51% of its current rental properties for buildings it already owns at the time of application, which effectively excludes real estate companies.
These eligibility requirements ensure that the 504 program targets small businesses that need support the most.
SBA 504 loans have a unique structure. They are divided into three parts: 50% of the financing comes from a third-party lender, usually a bank; 40% comes from a Certified Development Corporation (CDC) fully supported by the SBA; and the remaining 10% is usually the borrower’s down payment. A CDC is a nonprofit organization approved by the SBA to help finance small businesses, usually through the 504 loan program. The SBA guarantee on the CDC portion of the debt makes the loan less risky for businesses. lenders, helping small businesses obtain long-term financing for growth and expansion at below-market rates.
These changes are timely, as interest rate cuts could help businesses reduce their cost of capital.
After the Dec. 6 jobs report was better than expected, the odds that the Federal Reserve will cut interest rates at its December meeting rose from 62% a week ago to 89% today. today, according to the CME group. FedWatch tool. FedWatch tracks quotes based on changes in 30-day Fed Funds futures prices.
This is good news for almost everyone, but especially for small businesses that could really use a lifeline.
High interest rates and stricter lending standards have made it harder for small businesses to access loans, according to the NFIB’s Small Business Economic Trends Survey. At the same time, delinquency rates on short- and long-term debt are now higher than pre-pandemic levels, according to the latest report. Federal Reserve Financial Stability Report.
“The 504 loan program was traditionally difficult to use because it involved a lot of paperwork and time to go through the process,” says Wade. But for those who are aware of the program and are willing to make the investment, it is a “great way to access larger loans.”