Starting at the end of February, small business owners with balloon payments due before December 31, 2012 can refinance their commercial mortgages using the Small Business Administration (SBA)’s 504 program[1]. Historically, 504 loans have been used for real estate or refinancing only if a business was expanding. However, since many small business owners are no longer able to refinance using conventional methods in time to avoid balloon payments, this “gap in the lending market” will be filled with “$15 billion worth of refinancing available through the 504 program.” SBA predicts that the program will generate nearly $34 billion in total project refinancing in the next two years.

SBA administrator Karen Mills described the need and the program to fill it in this way: “The economic downturn of recent years and the declining value of real estate have had a significant, negative impact on many small businesses with mortgages maturing within the next few years.” She predicts that the rescue program, which is temporary, will help the small businesses that take advantage of it remain afloat and continue to provide and protect jobs. Under the current program terms, borrowers must put up 10 percent of the equity of the property to qualify for the refinance. They can refinance 90 percent of the current appraised property value or 100 percent of the outstanding mortgage – whichever is lower. The 504 loans cannot be used for any other business expenses, and applicants must be current on existing loans.

Other businesses may be able to take advantage of this offer in the future, but, for now, SBA’s associate administrator of capital access, Steve Smits, says that “we are making this initial restriction to make sure our funding goes first to small businesses with the most need.” Do you think that this program is a good idea? Will it “rescue” small businesses?

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[1] http://www.bizjournals.com/wichita/news/2011/02/21/sba-program-helps-with-real-estate-debt.html