How changes in the SBA’s 504 loan can benefit your business’s cash position Featured

12:27pm EDT January 3, 2012
How changes in the SBA’s 504 loan can benefit your business’s cash position

Recent changes to the Small Business Administration’s 504 loan program have made it easier for small business owners to obtain loans. The definition of businesses that qualify has been expanded, and a reduction in the paperwork requirements has sped up the application process, says Ralph Barnett, executive vice president, SBA/Real Estate division, at Bridge Bank.

“When this was rolled out in February 2011, the SBA set criteria that weren’t very well received by the banks and the small business community,” says Barnett. “So it has modified the program to make it easier for small businesses to qualify for loans.”

Smart Business spoke with Barnett about how to take advantage of the SBA program to decrease the amount of your loan payments and increase your business’s cash flow.

How does the 504 loan program work?

The loans are used for real estate or major fixed asset transactions. One of the unique things about the program is that the bank makes the first positioned loan on the collateral and the SBA does a second, or junior, position on the same collateral. That encourages banks to lend, because there is a much lower advance rate on the property.

In the past, the program was only used for new acquisitions, but the SBA recognized that many small business owners also own their buildings, and the value of those buildings has fallen significantly as a result of the recent recession. This caused many lenders to ask borrowers to make significant payments to reduce their principle balances, and some lenders were even calling notes early or refusing to renew.

As a result, and as part of the Small Business Jobs Act, the SBA modified the 504 program to accommodate requests for refinances. This relieved much of the pressure felt by small business owners, and helped to minimize additional turmoil in the real estate market.

Who is eligible?

Some businesses may not be eligible for traditional bank financing, perhaps as a result of loan to value restrictions or insufficient financial performance. These businesses may, however, qualify under the SBA loan program. To understand the criteria, borrowers should seek advice from Preferred SBA Lenders — lenders who have been carefully selected by the SBA based on their performance history, including the demonstration of a high level of proficiency in processing and servicing SBA-guaranteed loans. In general, the SBA program enables borrows to receive up to $5 million in financing, and the lender can theoretically refinance projects as large as $20 million.

Most borrowers are seeking to refinance their real estate loans that may be about to adjust, or are reaching the point where a balloon payment is due. They’re seeking to take advantage of the favorable rate environment we’re in, and to improve their cash flows. Refinancing through the SBA program can provide a significant advantage for small businesses.

How has the program been modified?

The criteria have been expanded, and the application process has been streamlined. These changes are an incentive for banks to be active in lending to businesses hurt by the credit crunch, and for those businesses to continue to borrow and invest in their operations. In the past, the process was quite onerous, and could take six to eight months for a small business to obtain financing. Additionally, business owners felt burdened by some of the exhaustive requirements for information, so the SBA recently relaxed some of those requirements, making the process more efficient.

The SBA also recognized that, not only do small businesses need the ability to refinance their debt, but they also may need to draw out cash on that same property. We are starting to see businesses stabilizing and growing again, and they need to get working capital. So now the program allows for cash out, which it has never done before, to be used for future operational needs.

Finally, the SBA has adjusted loan ratios. Previously, there were cases in which the bank might make a million-dollar loan and the SBA would come in for $100,000 or $200,000. But it’s the SBA portion of the loan that has low market rates fixed for 20 years, which banks don’t offer. The SBA wanted to encourage banks to make loans and wanted small businesses to benefit. So they only thing it now requires is that the bank loan and the SBA loan be equal, essentially taking the loan and splitting it with the SBA. This modification is very advantageous to both the bank and the small business borrower, who gets access to a favorable below-market, 20-year fixed rate.

When the refinance program was first introduced in February, the level of applications remained low; conditions were still too restrictive. Since the modifications in October, however, the number of applications has increased tenfold. The door is now wide open for small businesses to take advantage of this beneficial government program.

What does the SBA look for in applicants?

Like all lenders, the SBA wants to lend to borrowers who can demonstrate their ability to repay the debt. To mitigate potential risk, the SBA and the bank will review the most recent 12-month repayment period to make sure the business has the ability to meet the terms and conditions of the note, and that it can make on-time payments.

That being said, the SBA also realizes that most small businesses have been impacted by the recession to some degree, and it has made some favorable adjustments to the program to accommodate for that impact. So even if the borrower’s business has had significant losses in the not-too-distant past, as long as the business has stabilized in terms of revenue and cash flow, and there is evidence that it can repay the loan, the bank can generally provide financing without requiring certain ratios for the past three years.

Ralph Barnett is executive vice president, SBA/Real Estate division, at Bridge Bank. Reach him at or (408) 556-8334.