With Rates Dropping, The SBA Is Relaxing Its Refinancing Rules For Small Business

With interest rates easing and inflation cooling, small businesses are getting a much-needed break. A change to the Small Business Administration’s (SBA) refinancing program will help them take advantage of the shift. The SBA’s recent rule changes to its 504 loan program make it easier for businesses to refinance debt and capitalize on lower rates.

The SBA’s 504 loan program helps small businesses finance major expenses like 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 raised the loan-to-value ratio from 85% to 90%, meaning businesses can now borrow more when refinancing debt. It also removed the 20% cap on Eligible Business Expenses, allowing businesses to access more working capital. The requirement for using the loan on fixed assets was lowered from 85% to 75%, making it easier to qualify. The SBA also removed the 10% lower payment rule for refinancing. Before, businesses had to prove their new loans would reduce payments by at least 10%, but now any reduction will do. Finally, the SBA expanded the types of debt that can be included in refinancing without needing to use 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 the National Federation of Independent Business (NFIB) Research Center, says many small business owners, aside from franchisees, aren’t aware of the 504 program. But with these rule changes—expanding what can be refinanced and speeding up the application process—she recommends they talk to an SBA-approved lender to learn more.

“The debt refinancing aspect is even more critical now,” says NFIB’s Wade. The NFIB’s October Small Business Economic Trends report showed that small businesses were paying 9.7%, on average, for short maturity loans. A 25-year refinance loan through the 504 program currently comes in at just 6.125%.

With the Fed cutting rates, small businesses can now refinance, though waiting may be wise for those who can afford to.

“Businesses who have taken out loans over the last two years will certainly benefit now from being able to refinance those debts and achieve a lower financing cost,” Wade says. “That’ll go a long way to help them reinvest back into their business, it’s the biggest benefit of this rule change.”

SBA 504 loans, according to the PowerPoint shared by the SBA, can go up to $5.5 million. But only the smallest companies qualify for the program. To be eligible, a business must have a tangible net worth under $20 million and an average net income over the last two fiscal years below $6.5 million. There’s also an occupancy rule: the company must use at least 51% of its current rentable property for buildings it already owns at the time of application, which, effectively, excludes real estate companies.

These eligibility requirements ensure that the 504 program is targeted at smaller businesses that need the most support.

SBA 504 loans have a unique structure. They’re split into three parts: 50% of the financing comes from a third-party lender, usually a bank; 40% comes from a Certified Development Company (CDC) which is fully backed by the SBA; and the remaining 10% is, typically, the borrower’s down payment. A CDC is a nonprofit organization approved by the SBA to help provide financing for small businesses, typically through the 504 loan program. The SBA’s guarantee on the CDC portion of the debt makes the loan less risky for lenders, helping small businesses secure long-term financing for growth and expansion at below-market rates.

These changes come at the right time, as interest rate cuts could help businesses lower their cost of capital.

After the December 6th jobs report came in better than expected, the chances of the Federal Reserve cutting interest rates at their December meeting jumped from 62% a week ago to 89% today, according to CME Group’s FedWatch tool. FedWatch tracks the odds based on changes to 30-day Fed Funds futures prices.

That’s good news for nearly everyone, but especially for small businesses that could really use a lifeline.

High interest rates and stricter credit 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 both short- and long-term debt are now higher than pre-pandemic levels, according to the latest Federal Reserve Financial Stability Report.

“The 504 loan program was traditionally challenging to use because it came with a lot of paperwork and time requirements to go through the process,” Wade says. But for those who know the program and are willing to put in the work, it has been “a great way to gain access to larger dollar loans.”