Everything You Need to Know About the SBA 504 Refinance Program

Your client locked in a conventional loan a few years back, and at the time, it was the right call. But loans have a funny way of aging, and what fit perfectly then can start to pinch now.

Maybe the interest rate has climbed or there’s a balloon payment looming. Or the borrower has built up equity but is currently low on cash to cover day-to-day operations. The good news is that there’s a solution, but it’s one that lenders tend to overlook—an SBA 504 refinance.

We may be biased, but we think SBA 504 doesn't come up in enough conversations, partly because a lot of lenders aren't sure when it applies or how the numbers actually pencil out. We get it—it's a nuanced tool. But when it's a good fit, it can make a real difference for your client.

At RBAC, we've been structuring 504 refinances since the program launched in 2016. Nearly a decade of hands-on reps means we can sit down with you, run the numbers quickly, and give you a straight answer on whether it makes sense to pursue. A solid understanding of the basics goes a long way toward spotting the opportunities hiding in plain sight.

What is an SBA 504 refinance? 

In short, a 504 refinance replaces your client's existing commercial real estate debt with an SBA 504 loan, giving your client all the advantages of a standard 504 loan. This includes a low fixed rate, longer terms, and a lower down payment. 

The structure typically works the same as a standard 504: The bank holds the first-position loan at 50%, the RBAC provides 40%, and borrower equity covers the remaining 10%.

Two ways to use a 504 refinance

There are two routes for a 504 refinance: with expansion and without expansion. The route the client takes depends on their needs, goals, and what the money will be used for. When you understand the differences, you can offer support and guidance for their decision.

504 refinance with expansion 

If the business owner is tackling an expansion or renovation of an owner-occupied property or a significant equipment purchase, a 504 refinance with expansion can replace the existing conventional loan and provide capital for these projects at the same time. Think of it as a two-for-one deal providing better terms on existing debt plus funding to realize future plans. 

A 504 refinance with expansion can cover eligible expenses including:

• Building improvements, renovations, or expansions
• Equipment purchases for the business
• Project soft costs like architect fees and permits

504 refinance without expansion

For clients who seek better terms on existing debt, the without-expansion route is often the answer. As a bonus, a 504 refinance offers the opportunity to take an equity draw to cover eligible business expenses (EBE).

A 504 refinance without expansion can include:

• Refinancing of qualified debt, including, existing commercial mortgages on eligible properties and equipment loans. You can even refinance multiple loans at once to streamline your monthly payments.
• An equity draw for eligible business expenses like payroll, rent, utilities, and inventory. It can also include other secured debt (debt secured by the same asset as qualified debt and not used for capital expenditures).

A Sample Scenario

To get the best understanding of how a refinance works, let’s take a look at a sample scenario. The net impact is clear: $21,600 in annual cash flow improvement, $150,000 in eligible business expenses, and a rate locked for 25 years — all in one closing, without an additional loan.

When you understand how a 504 refinance works—better terms, capital for eligible business expenses, and cash flow improvement—this is the type of savings you can show your client.

Scenarios that make sense for a 504 refinance

A 504 refinance can be a game-changer for the right business. Here are a few scenarios where it tends to be a strong fit.

• The client has a variable rate 7(a) or conventional loan and a fixed rate would better serve them.
• A balloon payment is on the horizon, and they want to avoid it.
• The property value has appreciated since the original purchase.

Will your client qualify?

Once you’ve spotted a potential fit, it’s time to go through the qualification criteria. Consider this your screening checklist, and when a client is checking the right boxes, it’s time to give us a call.

Here are the basics to look out for:

• Must meet standard 504 requirements
• The debt being refinanced must be at least 6 months old
• Their business must occupy at least 51% of their property
• 75% of funds from the original loan need to have been used for eligible 504 expenses

There are a few additional requirements to have on your radar for a refinance with expansion:

• All existing fixed asset collateral must continue serving as collateral for the 504 loan unless waived by the SBA
• Must be current on all payments due for 12 months prior to the application

There are also a few additional requirements for a refinance without expansion:

• Equity draw for eligible business expenses (EBE) may be permitted and is dependent on meeting loan-to-value (LTV) requirements
• Must be current on all debt, although there is some flexibility for late payments for qualified debt with a good explanation

This might seem like a lot of requirements to meet, but that’s where we come in. If you think your client may be a fit for a 504 refinance, give us a call. We’ll explore the options together. 

Let’s figure out the right 504 refinance moves for your client together

The 504 refinance is a powerful, yet often underused, tool in the SBA lending toolkit. But understanding when to bring this option to your client and then running the numbers to see if the math works can unlock bigger opportunities with better terms, reduced monthly payments, and growth capital all in one transaction.  

If you’re working with a client that you think is a good fit, let’s evaluate it together. We’ll walk through the scenario with you, identify the right route, and help bring the deal together.