Should I refi my commercial real estate loan with an SBA 504 loan?

Small Business Loans
April 16, 2019

Do you own your own commercial or industrial building and have a pending balloon payment on the horizon?

Wish you could slash your monthly commercial loan payments to free up your cash flow?

Are you stuck paying a higher-than-normal interest rate on your conventional building loan?

If you nodded at any of those questions, then you could be a great candidate for the SBA 504 refinance program. Under this little-known program, qualified business owners can refinance their existing conventional loan to a more affordable and beneficial SBA 504 loan.

An SBA 504 loan is government-backed financing that comes with two huge advantages. One, it offers business owners a below-market, fixed rate that stands at mid-4%, as of April 2019. The other advantage is occupancy-expense predictability. You’ll enjoy a repayment period of up to 25 years, with no balloon payments during the course of the loan.

Related: How to get a sub-5% building loan in a rising rate environment

With both, you’ll be able to lock in more affordable payments over a longer period, so you have the option of reinvesting your savings back into your business in other means than thru mortgage costs.

“The biggest benefit small business owners will get from the SBA 504 refinance program is improved cash flow, which inevitably helps your business grow,” said Mike Owen, chief credit officer and SBA 504 expert at leading SBA lender CDC Small Business Finance.

How does the SBA 504 refi program work?

There are two ways small business owners can benefit from the SBA 504 refinance program.

Straight refi: One is through a straight refinance of existing conventional commercial debt. Through this federally backed program, small business owners can refinance up to 90% of the property’s appraised value. In other words, the loan-to-value can be as much as 90% of value even when you are combining multiple term loans secured against the property into a single loan.

Related: Hotel linens servicer used SBA 504 loans to expand to 400+ employees

Cash-out refi: The other option is a cash-out refinance where borrowers can tap into their equity to use as working capital for their business to cover costs such as hiring, inventory and day-to-day operations. In this case, the maximum loan-to-value is 85%. As much as 20% of the appraised value can be tapped as working capital.

Through the SBA 504 refi program, several conventional commercial loans can be consolidated and refinanced at below-market rates.

Does my conventional loan qualify for this refi program?

To refinance your existing conventional commercial loan into an SBA 504 loan, you’ll need to have a conventional loan secured against your owner user property. Other characteristics include:

Current loan type: The loan not guaranteed by the government, so no current existing SBA loans,

Loan use: The financing was used to acquire or construct a business asset such as owner-occupied commercial real estate, developed land or major equipment that’s generally considered SBA eligible at the time of its purchase.

Timely payments: Where the existing loan payments are current for at least the last 12 months before submission of your 504-refinance application,

Age of loan: That’s loan is at least 24 months old at the time of application.

How you factor into this: Being the majority occupant of your commercial or industrial building.

Learn more: Want to learn more about qualifications? If you’re in California, Arizona or Nevada, reach out to one of our SBA 504 loan experts to talk them through.

What if I’ve tapped my equity? Can I still qualify for an SBA 504 refi?

During the life of your conventional commercial real estate loan, you may have tapped your equity to access working capital, which is a common practice among business owners.

If that’s your case, you may still qualify for a refinance through the SBA 504 program. SBA 504 lenders like CDC Small Business Finance consider the “bookend decision” of your loan — from its original acquisition purchase being eligible to its current appraisal value versus loan cost not exceeding 85% to 90%.

As long as you meet the program requirements, then you will likely qualify for an SBA 504 loan.

Why haven’t I heard of the SBA 504 refi program?

Compared to the overall SBA 504 program, the 504-refinance program is not as well known. That’s due to a perception that commercial-loan refinancing is a complex and time-consuming process.

Not so, says Mike Owen, the SBA 504 expert at CDC Small Business Finance. In fact, the typical time it takes to complete an SBA 504 refinance deal is comparable to that of a conventional loan; just a few more forms and a bit more document research on the existing debts to be refinanced.

Related: How this family-owned rest stop broke new ground with SBA 504 loan

It also helps if you work with a reputable lender who is experienced in these deals. CDC Small Business Finance has been providing SBA 504 loans to entrepreneurs since the inception of the program in the 1980s.

Throughout those decades, our in-house loan experts have developed a thorough understanding of how the program works. And we keep up-to-date on the latest policy changes to best help our clients navigate the loan process.

“Given CDC’s extensive expertise and knowledge in the SBA 504 program and our deep understanding of its guidelines, we process these loans efficiently to provide our clients a smooth and successful process,” added Owen, who has 30-plus years of experience in SBA 504 loans.

How would I benefit from an SBA 504 refi?

Made permanent in 2016, the SBA refi program was designed to help business owners ease their financial burdens while spurring job creation.

The longer repayment cycle on an SBA 504 loan means you’re reducing the monthly loan payments. The money could be used to strengthen your business, such as reinvestment without taking on outside debt, hiring more employees to support growth, or starting an emergency fund.

Fixed, lower payments also give you peace of mind, especially when you’re facing rising operating expenses and interest rates.

How can I prepare for my SBA 504 refi application?

Preparation is the key to a smooth SBA 504 refi process, said Owen, the SBA 504 expert.

Collect important financial records. As part of your qualification, your SBA 504 lender will ask you for important financial paperwork such as your original commercial mortgage.

Be up-front about past credit issues. Have you run into some credit issues in recent years, personally or as a business? Those are not necessarily deal breakers when it comes to qualifying for an SBA 504 refinance. To make the process easier, please be up-front with your lender about any issues by disclosing early and thoroughly explaining why the issues arose. Since 504 loans are backed by the SBA, CDC Small Business Finance is able to consider businesses that traditional lenders would consider a bit riskier due to a slightly imperfect credit history.

Continue to be financially savvy…especially now. It’s always a good thing to be financially prudent. But when you’re about to apply for an SBA 504 refi, it’s more important than ever to be financially responsible such as not running up debt. The better you look on paper, the better your chances are at qualifying for a refinance.

Do you have a balloon payment coming due, or just want a lower monthly payment?

Ask our SBA loan experts about the possibility of refinancing your existing conventional commercial loan. Let’s talk! Reach us at or (619) 243-8667.

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