A few years ago, the U.S. Small Business Administration temporarily offered a refinancing program that allowed companies to convert existing loans to SBA loans with low, long-term, fixed interest rates.
It was part of the government’s effort to boost business activity after the Great Recession. Companies that bought real estate during the pre-2008 boom and faced expensive mortgages or balloon payments could make their debt more affordable — a big help in staying afloat during tough times.
Advocates said the program worked but ended too soon, just as people were becoming familiar with it.
Now it’s back — and this time it’s permanent. Starting Friday, the SBA began accepting applications for the new version of the program.
It’s an offshoot of the SBA’s 504 loan program, so it’s known as SBA 504 refinancing. In SBA 504 loans, the SBA partners with a conventional lender, such as a bank. Together, they make loans to companies for purchases of “major fixed assets” — that is, equipment or real estate.
The new program takes the same approach to help companies with existing debt.
‘Very easy to do’
Dutchland Inc., based in Gap, was one of the companies that took advantage of the original version of the SBA program, rolled out in 2011 and 2012.
Dutchland, which designs and builds concrete tanks and custom wastewater treatment plants, was making some financial changes at the time, and the SBA’s refinancing program suited its needs, said Don Sheaffer, the firm’s vice president of finance.
Working with EDC Finance Corp., the financial arm of the Economic Development Co. of Lancaster County, the company rolled several of its debt obligations into one $2.3 million SBA loan.
That, combined with some other moves, secured lower interest rates for Dutchland, freeing up cash for operations and capital for growth, Sheaffer said.
The SBA component “was very easy to do,” he said.
Reasons to consider it
A company might consider SBA 504 refinancing for several reasons, said Lyle Hosler, EDC Finance Corp.’s director of finance.
First, its bank may prefer to share loan risk. In a typical 504 loan, the bank funds 50 percent, EDC Finance funds 40 percent through its SBA lending authority, and the borrower puts up the remaining 10 percent in equity. In the refinance version, since real estate is usually the main source of equity, the starting point is a 50-50 split between the bank and EDC finance, Hosler said.
In either case, the bank gets a very conservative loan-to-value ratio. If the borrower falls behind, the bank is first in line for repayment. For a lender, it’s an attractive proposition.
Second, a company may like the certainty of locking in a long-term, fixed interest rate. SBA 504 loans have 20-year terms for real estate and 10-year terms for capital investments.
Banks, in contrast, might only offer shorter terms for such loans, or offer loans that switch to a variable rate or require a balloon payment in just a few years.
Third, companies may be able to obtain lower interest rates through SBA 504 refinancing. That was much more likely in 2011 and 2012, when many firms had loans arranged prior to 2008, and it was a major selling point. It’s less so now, after many years of record-low interest rates.
EDC Finance is already discussing potential use of the program with local companies and banks, Hosler said. Initially, the organization is authorized to lend up to $3.5 million for refinancing deals. Thanks to the 50-40-10 structure, the EDC’s outlays will leverage as much or more in conventional financing, Hosler noted.
Come Oct. 1, the organization will have a fresh allocation. It will be based on last year’s 504 lending, and Hosler expects it to to be a similar amount. But if an exceptional project comes along, EDC Finance can seek a waiver allowing it to lend more, he said.
Nationwide, the SBA is authorized to lend up to $7.5 billion a year through the refinancing program.
Read the full article from LNP here.