Long awaited changes that primarily impact one of the Small Business Administration (SBA) flagship loan programs, the 504 Loan Program, took effect as of April 21, 2014. The new rules increase the flexibility of the 504 loan program. A 504 loan is used to finance fixed assets such as real estate and equipment.
Affiliate Rule Remains Unchanged: The proposed rule would have clarified what affiliated relationships would affect loan eligibility. However, due to extensive public comment, the SBA has decided to further study the issue, and the current definitions will remain in effect at this time.
Elimination of Personal Resource Test: SBA has eliminated Section 120.102 known as the “personal resource test,” which required that an applicant demonstrate that it did not have personal resources available to inject into a project. While an applicant may still be required by a lender to demonstrate that it has personal assets., the, elimination of this rule may give borrowers flexibility to negotiate with the lender, including requesting that personal assets be pledged as collateral rather than being immediately injected into the project, providing liquidity for business operations.
The 9-Month Rule: SBA has eliminated what is commonly referred to as the “9-month rule” which presumed that costs not incurred within 9 months prior to an application were ineligible for 504 financing. This change allows for 504 financing of expenses regardless of when they were incurred, so long as they are directly attributable to the project. This elimination of the 9-month rule allows for greater flexibility for a company that seeks to refinance assets that were previously purchased, such as refinancing a bridge and other temporary loan for the purchase of real estate and equipment.
Changes to Governance Requirements for CDCs: The 504 application is made to a Certified Development Company (CDC) which makes loans that are subordinate to a conventional loan. The new SBA rule makes several changes to the operational requirements of CDCs, including reaffirming that under current rules, only non-profits may apply to become a CDC and refinement of governance and operational requirements of CDCs. These changes do not materially affect a 504 borrower, but CDCs are encouraged to consult with their legal counsel to assure that their bylaws and operating rules are in compliance with the new SBA requirements.