SBA Loan Refi FAQ
SBA 504 Loan Refinancing Frequently Asked Questions
Download a printable version of the FAQ
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Is financing for business expenses allowed for in this program?
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What eligible business expenses may be paid with the refinancing proceeds?
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What is the benefit of allowing first mortgage loans to be less than 50% of the project?
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Can I pledge other collateral to cover my equity requirement or to finance business expenses?
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Has the program been expanded to allow loans that mature after December 31, 2012?
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How long must a small business be in operation to be eligible for this loan program?
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Why must all Jobs Act 504 Debt refinancing loans be disbursed within six months of approval?
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Why are PCLP CDCs not allowed to process applications for refinancing under delegated authority?
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The rules indicate that the loan must have been current. Define “current”.
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What documentation must be provided to SBA to document the loan(s) to be refinanced are current?
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Why is there no “cash-out” provision, as allowed for in the Small Business Jobs Act?
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What if a small business needs to expand, for example, to purchase equipment or a building?
How is the temporary Jobs Act Debt Refinance program different from the permanent 504 debt refinance program?
- In the permanent 504 refinancing program approved under the Recovery Act, the project is required to have an expansion component and the refinanced portion must not exceed 50 percent of the total cost of the expansion. The new, temporary 504 refinancing program does not allow an expansion to be financed and can only be used to refinance existing eligible debt.
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Is financing for business expenses allowed for in this program?
- The Small Business Jobs Act authorized SBA to provide funding to small businesses for additional business expenses not originally part of the debt being refinanced. On October 12, 2011, SBA revised the program to allow financing of eligible business expenses.
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What eligible business expenses may be paid with the refinancing proceeds?
- Any expense directly related to business operations. Examples include: indebtedness to the business, salary, utilities, inventory, or insurance.
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What is the benefit of allowing first mortgage loans to be less than 50% of the project?
- It maximizes the amount of long term fixed rate debt.
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Can I pledge other collateral to cover my equity requirement or to finance business expenses?
- Yes. Other fixed assets acceptable to SBA may be pledged.
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Has the program been expanded to allow loans that mature after December 31, 2012?
- Yes, the program initially targeted businesses that have maturing mortgages and/or balloon payments coming due within the next two years. These businesses had the greatest need for the funding available for this program as a number would face foreclosure without it. However, on April 4, 2011, SBA expanded the program to include loan maturities after December 31, 2012.
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How long must a small business be in operation to be eligible for this loan program?
- The Small Business Jobs Act states that debt must have been incurred at least two years prior to the application date to be eligible for refinancing under this program. Therefore, a business must have been in operation for at least two years prior to the date SBA receives the loan to be eligible for refinancing.
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What if the debt being refinanced includes some proceeds that would not be eligible for the traditional 504 program?
- The existing debt may qualify if the loan that originally financed the eligible fixed asset satisfies the 85/15 criteria and the current commercial loan is the most recent refinancing of that original loan. As long as a substantial portion (85% or more) of the original loan was used to acquire, construct or improve eligible fixed assets, it would qualify for refinancing under this program.
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Are assets financed with a federal guarantee—including an SBA-approved 7(a) or 504 loan – eligible for refinancing under this program?
- No. The Small Business Jobs Act prohibits loans with any government guarantee from being refinanced under this program.
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Why must all Jobs Act 504 Debt refinancing loans be disbursed within six months of approval?
- By law, this refinancing program ends September 27, 2012. Loans that do not disburse within 6 months will be cancelled to enable other businesses to access the program before the expiration date.
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How would the small business show that substantially all of the debt was for 504-eligible purposes and that the remainder of the debt was for the benefit of the small business?
- The application must include certifications by
the small business, CDC and Third Party Lender that either:
- (a) If the original loan is the current loan: substantially all (85% or more) of the proceeds of the indebtedness being refinanced was used to acquire an Eligible Fixed Asset (e.g., land, including a building situated thereon, to construct a building thereon, or to purchase equipment) and the remaining amount (15% or less) was incurred for the benefit of the small business seeking the refinancing; or
- (b) If the original loan has been refinanced: The loan that originally financed the Eligible Fixed Asset must satisfy the 85/15 criteria AND the current commercial loan is the most recent refinancing of that original loan.
- Both the small business and the CDC must certify that the debt satisfies these requirements, and the Third Party Lender must certify in its commitment letter that it has no reason to believe that the existing debt does not satisfy the requirements.
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Why is the Sacramento Loan Processing Center conducting a random sampling of use-of-proceeds documentation?
- Reviewing the documentation on loan use-of-proceeds allows SBA to ensure that borrower, lender, and CDC certifications are valid and appropriate. If the borrower and lender cannot provide the documentation, they must each certify that they have made a diligent search and that the documents are not in their possession. SBA will not cancel an approved loan before disbursement on this basis, but does expect a lender to be able to produce the documentation if it is the original lender.
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Why are PCLP CDCs not allowed to process applications for refinancing under delegated authority?
- A CDC with PCLP authority may submit applications for refinancing to the processing center, like any other CDC, but the statute prohibits it from using its delegated authority.
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The rules indicate that the loan must have been current. Define “current”.
- Current is defined as: No payments more than 30 days past due according to original or modified terms (including deferments)
- Any modification must have been entered into in writing prior to publication of Final Rule in Federal Register
- SBA reserves the right to determine if a modified payment schedule would preclude refinancing under this program (e.g. adversely affects creditworthiness)
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What documentation must be provided to SBA to document the loan(s) to be refinanced are current?
- If this is the first time the loan is being refinanced, a transcript of loan payments for the last 12 months indicating the loan has been current for this entire period is required. For loans that have been refinanced more than once, the transcript for the last 12 months of the most recent refinancing (prior to Jobs Act project) must be provided. If a loan has been modified during that twelve month period to grant temporary relief to the borrower, a written agreement of the modification must be provided and a full transcript may be requested.
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What if a bank portfolio transfer has occurred and there are issues obtaining the original debt bank transcripts?
- SBA experience with the permanent 504 debt refinancing program is that transcripts are available even after a bank portfolio transfer; however, it may take longer to obtain such transcripts. /li>
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Is the requirement to report any Jobs Act loan delinquency to SBA after loan approval, but before loan funding, different from the 504 program’s policy for the permanent program? /a>
- It is not. CDCs and Third Party Lenders are always required to disclose an adverse change. SBA is placing an increased priority on this requirement due to the increased risk of a refinanced loan.
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Why are first mortgages under this program that are being refinanced by the same institution that made the original loan not allowed to be sold on the secondary market as part of a pool of guaranteed loans?
- This requirement ensures a long-term commitment of the Third Party Lender (TPL) as a measure to minimize the potential that a TPL might submit marginal credits for introductions into the 504 portfolio. A new lender refinancing another unaffiliated institution’s loan can be sold in the SBA’s First Mortgage Loan Pool program.
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WWhen the amount of the refinance is not sufficient to repay the entire outstanding debt balance, who decides which of the required methods, will be used to handle the balance of the debt?
- The small business borrower will negotiate the balance of debt with the third party lender as there may be tax implications for the business depending on the option chosen. /li>
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Will the borrower be required to increase its contribution to 15 % or 20% if the fixed asset to be refinanced is a limited or special purpose building?
- NNo
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What if a small business needs to expand, for example, to purchase equipment or a building?
- Borrowers who need to expand their businesses may pursue the regular 504 program or 7a financing.
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