Most business owners think of the SBA 504 loan as a way to buy buildings and equipment, not as a source of working capital. But through the SBA 504 refinance program, eligible businesses can access the equity they’ve built in owner-occupied commercial real estate and use those funds for payroll, inventory, business lines of credit, and other ordinary operating expenses. Here’s how it works and how to tell if your business may qualify.
Why Do Most People Think SBA 504 Loans Can’t Fund Working Capital?
The reputation is understandable. A standard SBA 504 loan is designed for long-term, fixed-rate financing of major fixed assets like land, buildings, and heavy equipment. According to the U.S. Small Business Administration, the program exists to support business growth and job creation through those fixed asset investments.
A traditional 504 purchase loan can’t be used to cover operating costs. The refinance program is the exception, and it’s one many Nebraska business owners don’t know about.
How Does an SBA 504 Refinance Create Working Capital?
With an SBA 504 refinance, you replace an existing commercial mortgage on owner-occupied property with a new 504 loan. If your property has appreciated or you’ve paid down the original balance, the new loan can include additional funds drawn from that equity.
The SBA calls those additional funds “Eligible Business Expenses,” or EBE. Recent program updates also removed the old 20% cap on business expenses, which means more businesses can access meaningful working capital. You can review how the SBA defines eligible expenses in its 504 debt refinancing policy notice.
What Expenses Qualify as Eligible Business Expenses?
Eligible uses of 504 refinance proceeds may include:
- Payroll and salaries for your employees
- Inventory purchases to restock or prepare for a busy season
- Paying down a business line of credit used for operating expenses
- Other ordinary business operating expenses such as rent, utilities, and maintenance
Proceeds can’t be used for personal expenses. Purchasing a new business, property, or equipment isn’t considered working capital either, though those may qualify as a separate 504 project.
Who Qualifies for an SBA 504 Refinance With Working Capital?
Every project is reviewed individually, but businesses generally need to meet these requirements:
- The business occupies at least 51% of the property
- The business has been operating for at least two years
- The debt being refinanced has been in place for at least six months and is secured by eligible fixed assets
- At least 75% of the original loan was used to acquire eligible fixed assets
- The business meets SBA size standards for a small business
What Are the Benefits of Using a 504 Refinance for Working Capital?
A 504 refinance can strengthen your business on more than one front. Benefits include:
- Long-term, fixed interest rates that protect you from rising rates
- Extended repayment terms of 10, 20 or 25 years, which can lower monthly payments
- Replacing higher-cost debt like short-term lines of credit with stable financing
- Freeing up cash flow to hire, stock up, or invest in growth
A 504 refinance doesn’t just improve your balance sheet. It can also provide the working capital you need to support your business’s next stage of growth.
Talk to Nebraska’s SBA 504 Experts at NEDCO
If you own your commercial building and want to put that equity to work, NEDCO can help you determine whether a 504 refinance is the right fit. As Nebraska’s trusted SBA 504 lender, our team will walk you through eligibility, estimate how much working capital you may be able to access, and guide you through every step of the process.
Contact NEDCO today to learn how SBA 504 financing can help your business grow.