The US Small Business Administration has amended its Direct Final Rule to make it easier for small businesses with outstanding SBA loans to refinance to lower interest loans given the Fed’s half-point interest rate cut earlier this year and subsequent quarter point rate cut in November. The new rule amends existing regulations on the SBA’s 504 loan program to make it easier for small businesses to refinance their existing 504 loans for physical property and equipment, or refinance existing 7(a) loans. 

The Federal reserve cut rates by another quarter of a percentage point earlier this month bringing the target back to levels not seen since Spring of 2023 – so if you haven’t yet looked into the possibility of refinancing your SBA 504 or 7(a) loans, now is a great time to consider it.

Refinance Your Existing SBA Loan

The federal funds overnight rate was slowly hiked to 5.5% between 2022 and early 2024 to combat rising inflation. Since the annual inflation rate has cooled significantly from a high of 9.1% in June 2022, the Fed made the second of what is expected to be several rate cuts. If your small business took out a SBA 7(a) with a fixed interest rate or 504 loan during the second half of 2023 into the first nine months of 2024, the interest rate on your loan reflects the overnight rate when it was at its highest. 

Put simply, the final direct rule streamlines the process of refinancing an existing 504 loan to a lower interest loan so that existing borrowers don’t have to go through a long application process or fill out a ton of paperwork. While this direct final rule is aimed at 504 loans, business owners with 7(a) loans that had a variable interest rate should have already seen the adjustments to their rates – which were automatic; and for those business owners who have fixed-rate 7(a) loans, it is still worth a refinancing conversation with your lender. 

If your current SBA lender isn’t willing to allow you to refinance, the SBA has updated its Lender Match tool to allow you to easily find a list of qualified SBA lenders that may be willing to allow you to refinance your existing SBA loan. 

Refinance Debt for Property and Equipment 

The Direct Final Rule also makes it easier for small businesses that purchased physical property or equipment – be it a brick-and-mortar store, farmland, office building or other fixed assets or equipment – to refinance the original SBA 504 debt incurred to purchase that property, thereby lowering their monthly debt obligations. 

One of the most important features of the rule is that it removes the requirement for small businesses to demonstrate a minimum reduction in their loan payment from refinancing. Previously, borrowers seeking to refinance had to agree to a new minimum monthly payment as part of their refinancing agreement, especially if the agreement sought to extend the duration of their loan. 

In its announcement, the SBA states that “By lifting this restriction, small business owners will have the freedom and flexibility to determine for themselves if it makes sense for them to refinance – whether to unlock savings and lower their monthly installments, or to access more capital from their fixed assets without increasing their monthly payments.”

The 504 debt refinance direct final rule was officially released on September 30, 2024 and became effective last Friday, November 15, 2024

2024 SBA Final Rules

This is not the first Direct Final rule implemented by the SBA this year.   In March 2024, the SBA issued a final rule to adopt, without change, its July 2023 proposed rule 88 FR 48739 – which made it easier for small businesses to access capital from qualified SBA lenders. Through this rule, the SBA:

• Reduced the qualifications for small businesses to participate in the Small Business Investment Company program, which helps small businesses in underserved communities gain access to capital.
• Eliminated self-certification for service-disabled veteran owned small businesses, making it easier for veteran owned businesses to participate in the SBA’s VetCert program that makes it easier for those businesses to apply for federal contracts.
• Updated Disaster federal Disaster Assistance Loan Program statutes to make it easier for small business to apply for disaster assistance, and 
• Increased the alternative size standard for the SBA’s 7(a) Business and Certified Development Company (CDC/504) Loan Programs by including inflation adjustments and contract size limits. 

In September of this year the SBA also implemented a direct final rule that amended SBA Disaster Loan Program regulations with revisions to modernize and replace the current process on  how it determines whether an applicant has credit elsewhere.  In addition it increased the unsecured threshold for physical damage loans under Major Disaster declarations and for Economic Injury Disaster Loans (EIDL) under all disaster declarations.

Talk to Your SBA Lender

Some 7(a) and all 504 loans have fixed interest rates that reflect the federal funds overnight rate at the time the loan was made. If you have an outstanding fixed-rate SBA 7(a) or 504 loan that you took out when interest rates were at their highest, you should talk to your original SBA lender about refinancing, as refinancing could significantly lower your fixed monthly payments on your loan. If the need to refinance isn’t urgent, you may also want to wait a few months, as as there could be several more rate cuts to come.