How re-fi option makes a powerful business loan better

You wouldn't think so by listening to today's campaign rhetoric, but government sometimes does things right - at least in the business lending category. In fact, business owners waiting for the right time to refinance may discover the time to get serious about a re-fi essentially is here, thanks to some timely changes to the Small Business Administration's 504 loan program.

Under the SBA 504 loan program, businesses this summer will be able to refinance their conventional mortgages and lock in a super-low, fixed interest rate for 20 years, gaining payment stability and likely saving thousands of dollars each year in mortgage payments.

By the way, those keeping score will be pleased to know the government does this at zero cost to the taxpayers.

The SBA's 504 loan has always been an efficient, cost-effective way for businesses to obtain 90 percent financing to purchase real estate and capital equipment. However, with the passage of the Omnibus Appropriations bill last December, Congress brought back a powerful refinancing option as well for entrepreneurial businesses.

Here's how the 504 refinancing plan works:

• Business owners can refinance their conventional mortgages up to an amount equal to 90 percent of the appraised value of the building.

• If the mortgage being refinanced is less than this amount, the business can take out any equity it has in the property (over the 10 percent down payment), and use it for itemized business expenses - paying off other higher-rate debt, for example; buying inventory; initiating marketing programs; or any working capital needs.

There are rules that must be followed, but they are remarkably simple:

• The property must be owner occupied, i.e., the business must occupy at least 51 percent of the square footage.

• The debt to be refinanced must be at least two years old.

• Loan payments must be current - no past dues more than 30 days - for at least 12 months prior to the application date.

Federally guaranteed loans are not eligible for refinancing.

If you meet these requirements, Wessex 504 Corporation staff will be happy to analyze your re-fi options now, so we can help you be ready when final approval comes from the SBA. Actually, the 504 re-fi plan matches the simplicity of the core SBA 504 loan: A participating bank (chosen by the business owner) finances 50 percent of the acquisition costs of the building with a conventional first mortgage loan.

Working through approved nonprofit lenders such as Wessex 504 Corporation, the SBA then finances 40 percent of the acquisition costs with a second mortgage at a low, fixed interest rate. The SBA-504 rate is set at the time of funding, but, as an example, the interest rate in April was 2.3 percent fixed for 20 years.

The borrower's down payment, in case you haven't done the math, is just 10 percent.

Fees associated with the program are financed in the loan, so the all-in effective rate for the April borrowers (with fees included) is a little over 4 percent (about 4.1 percent) over the 20 years.

The size standards for qualifying businesses vary by industry but tend toward generous. Specifically, any manufacturer with fewer than 500 employees is eligible to participate in the SBA 504 program. In other industries, companies with annual revenues of up to $100 million can be eligible.

• Karen Lennon is president of Wessex 504 Corporation, one of Illinois' leading developers of SBA 504 loans. Working with qualifying businesses and bankers, Wessex 504 Corporation in FY 2015 (the most recent for which data are available) was Illinois' third most active SBA 504 loan developer. Contact her at (312) 527-4927.