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North Bay Business Journal

Monday, December 5, 2011, 6:00 am

Recent changes enhance 504 refinance program

The tweaks make the program more worthwhile for borrowers and easier for lenders.

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    NORTH BAY — Lenders are praising recent tweaks to the new U.S. Small Business Administration 504 refinance program, saying that the changes make more small businesses eligible while simplifying the process for institutions.

    Those adjustments include the ability for business owners to tap into the equity in their properties to pay for business expenses, as well as refinance more of their debt under the more favorable rates available through the SBA.

    “When it was created, it had very restrictive eligibility requirements,” said Barbara Morrison, president and CEO of SBA 504 lender TMC Financial. “Now, a business owner who has equity in their building will be able to cash it out and use it as working capital.”

    First launched in February of this year, the 504 refinancing program was created through the Small Business Jobs Act to allow business owners access to fixed 504 lending rates “without the requirement of an expansion,” allowing businesses “the opportunity to lock in long-term, stable financing, and finance eligible business expenses as well as protect jobs and hire additional workers,” according to the SBA.

    However, at its inception, the value of restructuring debt under a 504 loan was diminished for those who had significant equity in their property. The private mortgage component of the loan was required to be fifty percent of the appraised value of the property, leaving little left when refinancing the remaining debt through the SBA.

    After the changes, existing debt can now be refinanced through the program, and the private lender can be equal or greater than the SBA portion of the loan. The change opened more of the remaining debt to the low fixed interest in the SBA portion and reduced the risk required of a private lender.

    Borrowers can also finance up to 90 percent of their property’s appraised value, allowing those with more than ten percent equity to use the additional financing for qualified expenses including rent, salaries and paying off or consolidate an existing line of credit.

    There was also a requirement that lenders look at all former refinances for the property to ensure that funds were used for business purposes, an undertaking that CDC Small Business Finance Senior Loan Officer Fernando Alvarez said was prohibitively difficult.

    “It was basically a paperwork nightmare,” he said.

    After the changes, lenders can now determine compliance by looking at the most recent refinancing, he said.

    Lenders from certified development companies administering 504 loans in the North Bay said that they expected the program to generate significant interest during the SBA fiscal year 2012, which runs from Oct. 1 through the end of September. Unless extended, The program expires near the end of the year, on Sept. 27.

    “I think 2012 will be a very good year (for the 504 program),” said Jacklyn Jordan, president and CEO of the 504 lender, Capital Access Group. “People who can do the refinancing are already taking advantage of it.”

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