By Christopher Hurn
Mercantile Capital Corp.
After a historic year, expectations are high for next year’s Small Business Administration loan volume
We’re at the end of 2011, and the economy has not yet re- bounded from the Great Recession. There’s not much good news
these days — mostly we hear reports
about rising unemployment, declining
property values and other depressing
statistics. It’s not all bleak, however.
Commercial mortgage brokers can
look to U.S. Small Business Administration (SBA) loan products for increased business.
The silver lining
An increasing number of mortgage professionals and business owners are
turning to the SBA. The good news for
your small-business clients is SBA lending is not only increasing, but it also is
at all-time high levels.
The SBA’s fiscal year ended this past
Sept. 30, and this year was one for the re-
cord books. In 2011, the SBA supported
$30.5 billion in small-business lend-
ing. The previous record, $28.5 billion,
was set in 2007. From 2010 to 2011,
SBA lending increased by an impres-
sive 35 percent.
Act in September 2010. That law made
it possible to refinance commercial debt
with a 504 loan. This was great news
for small-business owners who bought
their commercial property using conventional financing and were given a
second chance. Many small-business
owners have been able to get control
over their real estate expenses with the
long-term, below-market, fixed-rate financing that the 504 loan provides.
Although the 504 refinance program
has the potential to help small businesses get back to growing and creating
jobs, it’s fallen short so far. Although it
A small boost
The two flagship SBA loans — the 7(a)
and the 504 — were created to level the
playing field for small- and midsized-business owners. The 504, in particular,
has gotten increased attention since
the passage of the Small Business Jobs
“In 2011, the SBA
supported $30.5 billion
lending. The previous
record, $28.5 billion,
was set in 2007.”
was established in September 2010, it
wasn’t until this past February that the
rules governing the program were rolled
out. Some of these regulations were so
restrictive that rejection rates were high.
For fiscal year 2011, $7.5 billion was set
aside for 504 refinances, but only about
$270 million (roughly 3 percent) were
put to use. Another $7.5 billion is allotted for fiscal year 2012, and recent developments likely will make it possible
to use more of these allotted funds.
eligible for 504 refinancing.
Here’s a quick rundown of the 504
refi program eligibility requirements,
including these new changes. Refinance proceeds now can be used for:
• owner-occupied commercial real estate;
• Machinery and equipment;
itemized business expenses; and
• closing costs associated with the
The loan being refinanced must have
been current for the past year with no
past-dues of more than 30 days. Loan
deferments and/or modifications are
now eligible for refinancing as long as
the borrower is current on the modified
terms. Before the refinance can be applied for, the debt must have been in
place at least two years, and the small
business must have been in business
at least two years.
The borrower’s 10 percent contribution may be satisfied by cash, equity
in the eligible fixed assets serving as
collateral for the refi project or equity in
any other SBA-approved fixed asset. It
is not possible to refinance loans that
have an existing federal guarantee.
This includes SBA 7(a), SBA 504 and
U.S. Department of Agriculture loans.
New life for the 504 refi
This past Oct. 12, the SBA announced
several changes to the 504 refinance
program. Two changes in particular
opened the program to more small-business owners and will allow more
uses for 504 refi proceeds.
Proceeds from an SBA 504 refinance
can now be used for itemized business expenses, like salaries, rent utilities, inventory, paying down payables
and other business obligations. This
is essentially the cash-out refi option
that was mentioned in the original law,
but it only now has become a reality. It
will allow those business owners who
bought property a few years ago to tap
their equity as a source of working capital — something that’s in short supply
from conventional lenders today.
The second meaningful change addresses business owners who have
loan deferments and/or modifications
on their commercial real estate mortgage. As long as they have not been
past due on these newly modified
terms, these business owners are now
The clock is ticking
Until conventional small-business lending thaws, it appears that SBA lending
will continue to fill the gap. Property values remain diminished and interest rates
are at all-time lows, which means that
purchasing or expanding commercial facilities is an attractive option for small-business owners. The long-term fixed
rates that the SBA 504 program provides
make this opportunity even more practical. For much of this year, 504 interest rates have ranged from 4 percent to
5 percent — and this is fixed for 20 years,
typically with only 10 percent down.
With $7.5 billion set aside and ready
to be used just for refinances (and another $7.5 billion available for acquisitions and new construction), the 504
program may be the shot in the arm
that small businesses need. Remember
that the refinance provision of the SBA
504 loan expires in September 2012,
unless an extension is granted. Smart
mortgage professionals should work
hard to make use of the allotted funds
before next September. •
Christopher Hurn is CEO of Orlando, Fla.-based Mercantile Capital Corp., a three-time
Inc. 500/5000 company, two-time U. S. Small
Business Administration Financial Services
Champion and one of the largest providers
of SBA 504 loans nationwide. Reach Hurn at
(866) 622-4504. Additional information about
SBA 504 refinancing is available at
SBA504LoanRefi.com or 504Experts.com.