SBA 504 Loan Program benefits from economic stimulus act

The passage of H.R. 1, the American Recovery and Reinvestment Act of 2009 in February included several enhancements for the SBA 504 loan program. 

Two fees have temporarily been eliminated on SBA 504 loans. The lender participation fee and the Certified Development Company (CDC) processing fee will now be paid directly by the federal government. CDCs will be reimbursed for their servicing fees by the SBA. The temporary elimination of these fees will make obtaining an SBA 504 loan more affordable for small business borrowers in the coming months.

[3/19/09 update: The fee reduction is now in effect and retroactive to February 17, 2009.]  

The Stimulus Act provided $375 million for the elimination of fees for both the 7(a) and 504 programs through September 30, 2010. It remains to be seen how much of the money will be allocated between the two loan programs and SBA regulation will provide this information soon.

Also, refinancing of existing debt including government guaranteed debt such as SBA 7a & 504 loans will be allowed. This is a permanent addition to the Small Business Investment Act. The statute provides the following guidelines:

(A) Any 504 project "may include a limited amount of debt refinancing."

(B) If the project involves expansion of the small business, an amount not to exceed 50% of the project cost may be refinanced, if:

  • Proceeds will be used to acquire land, to construct or expand building or to purchase equipment.
  • Existing debt is collateralized by fixed assets.
  • Existing debt was incurred for benefit of small business.
  • Proceeds will be used only for refinancing existing debt or costs related to the project.
  • It will provide a substantial benefit when prepayment penalties, financing fees and other financing costs are accounted for.
  • Borrower is current on all payments of the existing debt for not less than one year.
  • New financing will provide better terms or interest rate.

[3/19/09 update: Refinancing is not yet available.]   

Another permanent change enacted by this legislation is amending the job creation goal for SBA 504 loans. The job creation ratio has been increased from one job per $50,000 to one job per $65,000.

[3/19/09 update: The new job ratio is now in effect.]   

Additionally, the Act established a program to provide up to $3 billion in guarantees for SBA 504 first mortgage pools that are to be sold to third-party investors. It appears these may be existing pools of loans, or new loans that may be pooled after the date of enactment.

The specifics on this new program are as follows:

  • The seller of these pools must retain not less than 5% of the pool amount to be sold to investors.
  • The seller must absorb all losses resulting from a shortage of monthly cash flows, but gets to keep any overage in monthly cash flows.
  • The fee paid to the SBA must be not more than 50 bp of the outstanding guaranteed balance per year (assumed bill change).
  • The program ends two years after date of enactment.

[3/19/09 update: Implementation of Secondary Market Guarantee Authority is expected in 90 days.]