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Options Available to Borrowers Facing a Balloon Payment

by John Reichard on Monday, October 2, 2017 10:00 AM

When financing owner-occupied commercial real estate, many small businesses secure long-term financing through their bank.  While their payments are usually based off of a 20-year amortization, the actual term (length) of the loan might be less, resulting in a balloon payment (a larger-than-usual one-time payment at the end of the term of the loan).  Depending on the timing of the balloon payment, this could mean that about 60% of the original loan amount would become due.

When that balloon payment approaches, the company can either refinance with the current lender or seek out another lender to refinance the loan.  But they have another option they could pursue: an SBA 504 loan through SEDA-Council of Governments (SEDA-COG).  Recent changes in the program allow for the opportunity to refinance existing commercial debt.  The advantage of an SBA 504 loan is that it provides a 20-year term and amortization with a fixed-rate for the life of the loan and no balloon payment.

The SBA does have some requirements as to what loans may be refinanced.  The small business must be in operations for at least two years and the debt being refinanced must have been incurred at least two years prior to the SBA application.  The small business must be current on all payments on the loan for the past twelve months.  Finally, substantially all (85% or more) of the loan must have been used to acquire or construct real estate and/or equipment and the loan is currently secured by those assets.  Existing SBA loans or other federally-guaranteed loans cannot be refinanced with a 504 loan nor loans that were made in conjunction with an existing 504 loan.

In addition to being able to refinance existing debt, the company might also be able to include “cashing out” equity in their real estate (borrowing more than the balance of the current loan based on the appraisal of the real estate) to be used for eligible business expenses (working capital).

Refinancing with a 504 loan can also be done if a small business is expanding.  For example, as part of the financing for a building expansion, the company can include the refinancing of their existing real estate mortgage into the financing.  The benefit of this would be to reduce the overall debt payments for the company and improve cash flow.  The requirements for this type financing structure are similar to stand-alone refinancing.  Two additional requirements include the total amount of debt being refinanced is no more than 50% of the new expansion costs and that the refinancing will provide a substantial benefit to the borrower.  This includes a loan with an upcoming balloon payment.

SEDA-COG partners with lending institutions to provide these loans, which help spread the risk for the bank and makes borrowers’ financing needs more attractive to lenders.  The SBA 504 loan provides up to 40 percent of the financing needed with the bank providing 50 percent.  For refinancing projects, the existing equity in the real estate might be enough to cover the required borrower injection (typically 10 percent).

Eligible small businesses for the SBA 504 loan program include for-profit owner-occupied businesses with a net worth of less than $15 million and less than $5 million in profit after taxes.

For more information about financing projects in Pennsylvania using the SBA 504 program visit www.sedacogldc.org or contact the SEDA-COG Business Finance Department at 570-524-4491 or finance@seda-cog.org.

John Reichard

Information related to the SBA 504 loan program for small businesses.