SBA Tweaks Rules Of 504 Loan Program

JUNE 26, 2009

SBA Tweaks Rules Of 504 Loan Program
By RAYMUND FLANDEZ

In its latest effort to help cash-strapped entrepreneurs, the Small Business Administration on Wednesday permanently changed a key loan program so that businesses can refinance if they plan to expand or buy equipment.

Previously, business owners could only take advantage of the SBA's 504 program when they sought new loans to buy real estate, upgrade machinery and make improvements. Now, borrowers can refinance any existing fixed-asset loan as long as the amount is 50% or less than the total cost of expansion.

The change is designed to help business owners restructure debt under better terms and "improve their cash flow and enhance their viability so that they can grow and create jobs," said Hayley Matz, an SBA spokeswoman.

For instance, a business owner who wants a $1 million loan to expand could refinance $500,000-worth of existing equipment debt, for a $1.5 million total 504 loan package at a better interest rate, Ms. Matz said. The small-business borrower must also create or retain a job for every $65,000 guaranteed by the SBA, a change from $50,000.

Some industry experts, however, doubt that this will help struggling small businesses that need to pay a 504 loan coming due soon. Many aren't in an expansion mode and so aren't poised to take advantage of the debt refinance provision.

"Most are struggling and working overtime to figure out how to be able to survive this economy," says Bob Coleman, publisher of the Coleman Report, a newsletter for SBA lenders.

As of last week, the SBA has approved 3,900 loans under the 504 program since its fiscal year began in October, down 41.5% from the 6,671 loans in the same period a year earlier. Total dollar amount of those loans has dropped 42.5% to $2.28 billion, from $3.97 billion a year ago.

This change is the latest initiative that the SBA has rolled out in the past few months as part of President Obama's stimulus package. Since mid-February, the agency has reduced fees for its loans and raised the guarantee on most of its 7(a) loans, the SBA's flagship program, to as much as 90% from 75% to 85%. Last week, it rolled out an emergency-loan program for established businesses that are cash-strapped. Next week, the SBA plans to launch a loan program that would make it easier for car dealers to buy inventory.

"This is one more piece of the Recovery Act that is going to have a direct impact and put more money in the hands of small business owners just when they need it most," SBA Administrator Karen G. Mills said in a statement. "Lower interest rates mean lower payments and less money going out the door each month in debt repayments."

Write to Raymund Flandez at raymund.flandez@wsj.com

Corrections & Amplifications
Borrowers can refinance any existing fixed-asset loan to expand or buy equipment, not just an SBA-backed loan, as a previous version of this article implied. In addition, a business owner who wants to get a $1 million loan to expand can refinance $500,000 worth of existing equipment debt, for a $1.5 million total 504 loan package. An example of how a business can use the program in a previous version didn't accurately represent the scope of the program.