Changes in the Small Business Jobs Act provide small business owners ways to avoid a defaulting on SBA loan
Small businesses have long been the backbone of the American economy. Cognizant of this fact, and the fact that the economic downturn had hurt even the best-performing small businesses, Congress amended the Small Business Jobs and Credit Act in October 2011, providing small business owners with a new avenue of debt relief: refinancing existing loans guaranteed by the Small Business Administration (SBA). The amendments made available to small business owners the option of using 504 Loans to refinance up to 90% of the appraised value of available collateral (existing commercial mortgages). Prior to the changes in the law, the SBA did not refinance loans that already had an SBA guarantee – the principal behind this policy was the organization’s goal to appropriate funds evenly.
Unfortunately, the program is only temporary, and is set to expire on September 27th, 2012.
How the SBA’s loan guaranty program works:
Because the SBA is backing a large percentage of your loan (40-50%), lenders who would not otherwise loan to small businesses (due to high risks involved) are able to offer loans to qualifying small businesses at interest rates relatively similar to those it offers larger businesses.
What the changes mean for small business owners:
Through the 504 Refinancing Program, you may be eligible to use the excess equity in your fixed assets to obtain money that can in turn be used for financing eligible business expenses, including but not limited to: paying salaries, rent, utilities, inventory, and paying off business obligations. Thus, you may be able to consolidate your existing business debts into one long-term loan through the SBA.
In order to qualify, you must have a current commercial loan with the SBA (or a refinanced one) that has been taken out within the last two years. The SBA will not refinance past due debts or loans. In addition, 85% of the original debt to be refinanced must have been used for 504-defined eligible purposes (acquisitions, constructions, expansions, renovations, conversions or improvement of long-term fixed assets) and the remaining 15% must have been incurred for the benefit of the small business as opposed to having been used for personal expenses.
For more information on whether or not your business qualifies, contact your district SBA office. (To find the closest SBA office near you, visit https://www.sba.gov/about-offices-list/2.)
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
- NEW Bank Loan (first trust) $700,000
- NEW 504 Loan $560,000
- Borrower contribution (equity) $140,000
- Working capital (from loan proceeds) $260,000
Alternatives to Refinancing:
In the event that you don’t qualify for refinancing, or your debt load is simply too much to bear regardless of the interest rate, there is another option called debt settlement. The attorneys at McCarthy Law help business owners negotiate large reductions in business debt & SBA loans, settling the debts for a fraction of the balance claimed by the lender. If you need serious debt relief from an SBA loan, contact us for a free consultation with an attorney.
Determining how to get out of debt can be a difficult decision. You don’t have to do it alone. The attorneys at McCarthy Law can review your finances and help you arrive at the decision that is best for you. Contact us today.