The SBA 504 loan program is a popular small business loan used to finance the purchase of a building, significant equipment, or to refinance existing debt used for these purposes. When the program is used for a refinance without an expansion of the business – also known as a “straight refinance” – eligible business expenses may also be included.
In this guide, you’ll learn the key points about when and how eligible business expenses can be included in your SBA 504 refinance loan.
What is the SBA 504 loan program?
The U.S. Small Business Administration (SBA) created the SBA 504 loan program to help small business owners purchase property and large equipment. This is because it can be difficult for small business owners to meet the eligibility and financial criteria needed for traditional loans.
Unlike traditional loans, SBA 504 loans:
- Require only a 10% down payment for most deals (compared to 30-40% for traditional bank loans), making it a more viable option for you.
- Offer fixed, below-market-rate interest and repayment terms up to 25 years, which makes repayment easier to budget and afford.
- Offers financing from $50,000 to $5.5 million, meaning that most small businesses can get the funding you need.
SBA 504 loans are made in partnership between the business owner, a bank, and a lender that’s certified by the SBA, like Pursuit. For an SBA 504 loan, you provide a down payment equal to 10% of the project total (for most cases), the SBA-certified lender provides 40% of the financing, and the bank provides the remaining 50%.
How to use the SBA 504 program to refinance higher-cost debt
In addition to purchasing, renovating or constructing property, or acquiring equipment for your business, the SBA 504 loan program can be used to refinance higher-cost debt that you took on for these expenses – both without expansion or with expansion. Your business’s existing equity and assets may also be considered toward the owner-equity requirement.
For example, if you used dealer financing to purchase major equipment, you may find that an SBA 504 refinance loan offers a more affordable interest rate and repayment terms. You may also be able to include eligible business expenses that can result in more cash on hand to power your business.
Simply put, if your business has high-cost debt from a business-related real estate or major equipment, and you need to refinance it to ease cash flow, the SBA 504 program is an option worth exploring.
What are the eligible business expenses for an SBA 504 refinance loan without expansion?
When using the SBA 504 loan program to refinance without expansion, the SBA allows certain business expenses to also be included, as long as the total doesn’t exceed the program’s required 90% loan-to-value (LTV). Some examples of eligible business expenses include:
- Operating expenses: Business expenses that you’ve incurred but have not paid before the SBA 504 application date or that will become due for payment within 18 months after your application date may be eligible. Some examples include salaries, rent, utilities, inventory, and other expenses.
- A business line of credit or business credit card: A business line of credit or debt on a business credit card may be included if:
- The proceeds from the SBA 504 loan aren’t used to cover any personal expenses.
- The line of credit or credit card is in the same name of the small business.
- You and your SBA lender certify in the application that the refinanced debt was incurred exclusively for eligible business expenses. If the line of credit or credit card were used for personal expenses as well as business expenses, you’ll need to identify and deduct all personal expenses.
- Other secured debt: Other secured debt (except capital expenditures) taken on before your SBA 504 loan application and secured by the same eligible fixed assets used to secure the SBA 504 refinance loan may be eligible business expenses. In this case, existing liens must be released or subordinated to the amount of the debt being refinanced by the SBA 504 loan. It’s also important to know:
- The debt that you’re refinancing must have been secured by the same eligible fixed asset for at least six months before the date of your SBA 504 loan application.
- You must be current on all payments due for at least 12 months before your SBA 504 loan application. This means no payments were more than 30 days late from either the original payment terms or modified payment terms (including deferments).
Eligible business expenses must be broken down, item by item, with a specific description and amount, rather than being presented as a lump sum, to be considered as part of the SBA 504 refinance loan.
An example of an SBA 504 refinance loan without expansion
Here’s an example of an SBA 504 refinance loan without expansion to help illustrate the benefits. However, this is a simplified example and doesn’t include potential fees or other costs associated with a refinance loan, and your situation may not be exactly the same. When you meet with an SBA lender, they can take you through this step-by-step, so that you’ll know exactly how an SBA 504 refinance loan could work for your business:
- Over six years, you have grown your specialty dog-biscuit business from a micro-business based out of your home kitchen to a business with its own small manufacturing facility.
- To support your business’s growth, you purchased a building to house manufacturing, offices, and distribution. You also purchased three pieces of manufacturing equipment to produce, package, and label your dog biscuits.
- To finance this growth, you used a lender you found online who offered $1 million with a fixed interest rate of 10% and a loan repayment term of 72 months. This resulted in monthly payments of about $18,500.
- You are current on your loan payments, but cash flow is extremely tight, and you don’t have money to reinvest in your business. Your accountant recommended that you explore refinancing the debt, which has a balance of about $730,440. Overall, your business currently has an appraised value of $1.6 million.
- Working with a certified SBA lender, you learn that you could reduce your monthly payment by several thousand dollars each month with the SBA 504 loan refinance program.
- Since your loan refinance doesn’t include expansion, your SBA lender shares that you can potentially include eligible business expenses to secure additional funds to help pay off your business’s credit card debt and be used toward upcoming operational expenses, including staff and inventory purchases.
- As part of your SBA 504 refinance loan application, you provide a line-by-line itemization of potential eligible business expenses. Your SBA lender reviews the list and the financial documents that support it. Then, your lender will approve the items and submit the information to the SBA for final approval.
- Your SBA 504 loan totaled $770,000 – enough to pay off your previous loan balance and use the rest for eligible business expenses – and as a result, you have a total monthly payment of less than $6,000 each month over 25 years. That’s a difference of more than $12,000 each month that you can reinvest in your business.
With your SBA 504 loan application approved and the refinance complete, including eligible business expenses, you can get back on track for growth – bringing on more employees and expanding to new markets.
Pursuit and the SBA 504 loan program can help
If you have outstanding high-cost business-related expenses that are eligible for refinance under the SBA 504 loan program or other business debt, contact Pursuit today. We’ll review your situation and help you determine if an SBA 504 refinance loan or other loan product can help!
Pursuit is a leading small business lender serving businesses across New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware. We offer loans and a line of credit for working capital, commercial real estate, equipment, and much more.
We’ve helped thousands of small business owners get the funding they need to achieve their goals and we can help you, too.