If you are a small business owner looking to refinance your SBA 7(a) loan to a 504 loan, you will likely want to know what to expect. Our guide will help you learn the eligibility and documentation requirements and highlight a few examples of when a refinance is a smart business option.
Why Refinance to a 504 Loan?
In general, refinancing your 7(a) loan to a 504 is beneficial when you need additional funds and/or want better terms. The 504 has several advantages over the 7(a), including a fixed interest rate, lower down payment requirements, and higher loan amounts. The following are instances when a 504 loan may be a good option:
- When a 7(a) loan was used to purchase a building or other fixed asset, but the rate and payments are increasing.
- If a business does not qualify for a conventional loan because of cash flow issues or other factors, like being in a high risk industry
- When a business is looking for a cash out refinance option, but their current lender considers this too risky
- When a business has an outstanding 7(a) loan or loans but cannot refinance to better terms because of investor restrictions or other issues, like sold guarantees
504 Loan Restrictions
While the SBA 504 loan does have advantages over the 7(a), it is not as flexible where eligible business expenses (EBE) are concerned. If you need funds for anything other than fixed assets, the 504 is not for you. Working capital, purchasing inventory, and consolidating or repaying debt, for example, are not eligible for the 504.
On the other hand, if you need to purchase equipment, a building, or another fixed asset, the 504 is an excellent option. The loan offers fixed interest rates and repayment terms of up to 25 years for real estate and 10 years for equipment. Some examples of fixed assets that might be financed by the 504 include:
- Purchasing real estate
- Construction of a new business
- Manufacturing equipment (for long-term use)
- Land on which to build a business
- Land improvements, like paving
- Expanding a current business
- Utilities installation
- Modernization, including steps to go green
Other SBA Eligibility Requirements for the 504 Loan
In addition to using the 504 loan for fixed assets, the SBA has a few other requirements in order to qualify for a refinance:
- The loan must be at least 6 months old and secured by a qualifying fixed asset during that time
- The current lender must supply written confirmation that they are not going to modify the terms of their loan
- The refinance must result in at least a 10% improvement for the borrower in the monthly payment
- The business must be at least two years old (formally operating)
- Original collateral and guarantors must be included in the new loan*
- At least 85 percent of the original 7(a) loan proceeds must be used for qualifying 504 expenses (i.e. it must pass the 85/15 test)
- The business must remain in compliance with all terms of the existing SBA loan
*Special cases may be exempt from this requirement
Documentation Needed for a 7(a) Loan Refinance
Your CDC representative will help you collect all supporting documentation needed to refinance your 7(a) loan to a 504 loan. That being said, it will streamline the process if you have the documentation ready to submit. In addition to your application, you’ll need:
- Full financial package and personal history forms
- Proof of a 12-month payment history on the current loan
- Pay off statement
- Any available third party reports, such as appraisals and on-site assessments
- Closing documents for the loan or loans to be refinanced (signed, of course)
- A copy of the SBA final authorization
- The current lenders written statement that they are unwilling to modify the existing loan
How to Streamline the 7(a) Refinancing Process
- Gathering required documentation is a good first step in making sure your refinance goes smoothly. The other crucial step is involving a CDC lender in your plans as soon as possible. CDCs are the only institutions eligible to facilitate your refinance, so they are well-versed in the process. They will help you identify any possible obstacles and offer resources to help you address them. This includes:
- Confirming that the proceeds of the current 7(a) loan will be covering at least 85% of EBEs
- Suggesting you obtain a reasonable estimate of the value of the collateral you intend to use (this is usually the value of the real estate, land, building, etc. you want to finance in the first place).
- Determine if the refinance will benefit your business according to SBA guidelines
- Identifying and addressing any collateral or guarantor issues in advance
Refinance a 7(a) Loan in Colorado
If you are looking to refinance your currency 7(a) loan to a 504 loan, contact the professionals at CEDCO. We have helped hundreds of borrowers achieve higher amounts and better terms, allowing them the freedom to truly expand their businesses. Call or go online today to schedule a free consultation.