SBA 504 Refinance with Expansion : A Smart Financing Option for Your Business

Business owner discussing expansion plans for their SBA 504 refinance with expansion

The SBA 504 loan program is one of the SBA’s most popular financing options for purchasing, renovating, or building a commercial property for your small business. But did you know you can also use it to refinance your business debt as part of a larger project to expand your commercial property?

Here’s how an SBA 504 refinance with expansion can save your business hundreds or even thousands of dollars a month.

Key benefits of the SBA 504 loan program

The SBA 504 loan program offers financing up to $5.5 million for major fixed assets, including owner-occupied real estate and heavy equipment. With a low, fixed interest rate, loan terms up to 25 years, and down payments as low as 10%, an SBA 504 loan makes it easier to move forward with your project today and budget for the long term. It can also be a great way to refinance your existing business debt.

Plus, you don’t have to choose between using your loan to refinance your existing debt or to expand your business. Depending on what you want to do with your loan, you could refinance your debt and expand your business space at the same time.

Projects that qualify for an SBA 504 refinance with expansion

If you’re expanding your business and have existing debt, you can use an SBA 504 loan to refinance that debt as long as it doesn’t exceed the full cost of the expansion. In these cases, the debt being refinanced is added to the expansion cost to establish the total project cost.

For example, let’s say your expansion project costs $1 million an SBA 504 loan can refinance up to $1 million of existing qualified debt, too.  This means, the total cost of the project would be $2 million ( $1 million in existing qualified debt plus the $1 million cost for the expansion).

However, there are some important rules to keep in mind when exploring this option:

  • To meet the SBA’s definition of “expansion,” your project should involve the acquisition, construction, or improvement of land, renovation of an existing building or ground-up construction of a new building for use by your business.
  • The SBA 504 refinancing must provide a “substantial benefit” to your business. The SBA considers a “substantial benefit” to be at least a 10% reduction in your monthly payment on the refinanced portion (after any related prepayment penalties, financing fees, and other financing costs are included).

    For example, if your monthly loan payment before the SBA 504 refinance is $4,000, then after related fees and penalties are included, the new SBA 504 payment for the refinanced debt must be $3,600/month or less (at least a 10% reduction) to meet the “substantial benefit” criteria. An important point to know is that the “substantial benefit” test is essentially always satisfied for qualified debt that includes a balloon payment.
  • You can include equity that you have in the land and/or building that’s being refinanced in your owner-equity towards the new project. As part of the application process, you’ll have to submit cost documents supporting the expansion project, as well as a copy of the corresponding debt and lien documents for the debt being refinanced.
  • The total existing debt being refinanced may include one or more loans, including existing SBA 7(a) loans, as part of an SBA 504 refinance with expansion project. In this case, your Certified Development Company (CDC) will need to verify that your existing lender is either unwilling or unable to modify your current payment schedule in a way that would substantially improve your loan terms.

What’s considered “qualified debt” for an SBA 504 refinance with expansion?

The SBA 504 with expansion refers to “qualified debt” as part of the eligibility criteria – to meet this criteria:

  • 85% or more of the existing debt must be used to acquire a fixed asset (or several) that would have been eligible for SBA 504 financing, had it been used initially.

    For example, if you purchased high-cost equipment through a vendor’s credit program, then that is likely qualified debt. The remaining 15% is also eligible as long as it was incurred for the benefit of your business.
  • The existing debt must already be collateralized by fixed assets. Should you receive a new SBA 504 loan, the collateralized asset will be used to secure your new SBA 504 loan.
  • You’ must be current on your payments related to this debt for at least one year prior to refinancing.

Talk to Pursuit about the advantages of the SBA 504 refinance with expansion today

The best way to learn about how the SBA 504 loan program or one of our 15+ loan options can benefit your business is by reaching out to us. Our loan officers can provide the information and insight you need to make the best decision for your business and help you get the financing you need to keep your business growing.

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