SBA’s new 504 refi rule put 504 lending centerstage as lenders and borrowers gave it rave reviews. So with all that recent attention, is the 504 loan program SBA’s favorite child?
Is 7(a) forgotten? Not to Worry. SBA Procedural Notice 5000-814473, effective Sept. 8, 2021, changes all that. Now, lenders can refinance a short-term loan originally made with the intent of refinancing with 7(a) loan proceeds. This was prohibited under SOP 50 10 6 except in cases where SBA allows interim (bridge) loans after Authorizations are issued but before disbursement. (Part 2. Section B, Chapter 1, Paragraph A.1.b.iii.; Paragraph A.l.l..ii)
Why the change? Previously, lenders were restricted so they quickly closed a deal, but missed out on assisting a small business. Let’s say you’re lending to a borrower who purchasing a business. Competition is high. Either the pressure is on you to get the deal off the street, or the borrower has a limited window to execute. You can approve a bridge loan to assist the borrower quickly.
Or let’s say that while you’re working on an approved loan you get the news that SBA has placed a moratorium on funding until a new budget is approved. Don’t let the loan fall apart. You could make a bridge loan until the SBA resolves its budget and approves lending.
What’s the catch? No catch. But there are some requirements:
- The lender must demonstrate the necessity for the interim loan.
- The interest rate on the interim loan must not exceed SBA’s maximum allowable interest rate, and the lender may not charge prepaid interest on the interim loan. (For the interim loan to be eligible for 7(a) refinancing, any excessive interest must be rebated to the borrower.)
- The interim loan may have a short-term maturity (12 months or less).
- The lender may not charge the borrower any fees in connection with the interim loan that would be prohibited for a 7(a) loan. And the combined total of all fees and expenses on the interim loan AND the 7(a) loan must not exceed SBA’s maximum allowable fees. Any unallowed fees or expenses must be rebated to the borrower for the interim loan to be eligible for 7(a) refinancing.) interim loan must be current, i.e., no more than 29 days late on any required payment and must be paid as agreed. (SOP 50 10 6 Part 2, Section A Chapter 5, Paragraph C)
- Unless the 7(a) loan is otherwise fully secured, all collateral (with the same lien position) and guaranties securing the interim loan must be provided as security for the SBA-guaranteed loan.
- If the new loan is an Export Working Capital Program (EWCP) loan, the standard requirements for refinancing existing short-term export lines of credit apply.
“Waste not, want not.” I’m getting good at applying old proverbs to SBA lending. “Waste not, want not” applies so well: If we manage our resources carefully. we’ll always have what we need.
Same holds true when it comes to the funds SBA has allotted for the statutory stimulus. The fiscal year is almost over, and you may have loans that are approved but may not be funded by 9/30/2021. You might consider canceling the loan. Cancel you say? Cancelling the loan puts the funds back into the pot, slowing the drain on program funds, but more importantly making these funds available for borrowers truly needing funding by 9/30/2021.
Now everybody’s taken care of. After all, it’s all in the family!