Temporary 504 Loan Refinancing Program for Small Business Owners

Posted on by Kriti

 The recent years’ economic recession along with reduction in real estate values have impacted many small businesses quite seriously, especially small businesses with soon-maturing mortgages. Many small business owners are facing difficulties in refinancing and restructuring their debts.  To counteract this situation, the U.S. Small Business Administration (SBA) has come up with the Temporary 504 Loan Refinancing Program – Small Business Jobs Act which can provide up to $7.5 billion in financing. Recent changes in the Small Business Jobs and Credit Act now allows 504 Loans to be used for refinancing up to 90 % of the appraised value of existing collateral. However, this program is available only until September 27, 2012.

The Temporary 504 Loan Refinancing Program allows for small businesses to use excess equity in fixed assets to obtain working capital that can be used for financing regular business expenses such as rent, utilities, salaries, etc. as also to pay off other business obligations. This refinancing program will help to consolidate existing debt, fix long-term and stable financing, and reduce variable expense. It can also be used to finance business expenses thus allowing for better cash-flow. In the wider sense, the Temporary 504 Loan Refinancing Program will help to protect jobs and support local communities by increasing employment. The Temporary 504 Refinance Loans are processed and approved by Certified Development Companies (CDCs).

Details of Temporary 504 Refinance Loans Program

  1. The debt to be refinanced is a commercial loan which was incurred not less than 2 years prior to the date of application, including any prior refinancing of the debt;
  2. Substantially all (85%) of the proceeds of the original debt being refinanced must have been used for 504 eligible purposes (acquisitions, construction or improvement of long-term fixed assets) and the remaining (15% or less) must have been incurred for the benefit of the small business;
  3. The debt to be refinanced must be secured by eligible fixed assets;
  4. The project also may include using available equity to pay eligible business expenses;
  5. The small business must have been in operation for two years or more (no start-ups); and
  6. The debt refinancing must not involve expansion of the small business (however, this may be eligible under the regular 504 loan program).

Source: http://www.sba.gov/content/cdc504-loan-program

504 Loan Refinancing Example

Refinancing of existing loan

  • Current Appraised Value of Property              $1,400,000
  • Outstanding Debt                                                 $1,000,000
  • 90% LTV                                                             $1,260,000

Loan Structure

  • New Bank Loan (first trust)                                  $700,000
  • New 504 Loan*                                                     $560,000
  • Borrower contribution (equity)                             $140,000
  • Working capital (from loan proceeds)                  $260,000

504 Loan provides fixed-rate, long-term financing for up to 20 years

Source: http://www.sba.gov/content/cdc504-loan-program

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