Like homeowners, small businesses with good credit can save some real money these days by refinancing their mortgages to take advantage of low-interest rates.
A temporary federal program is designed to help small firms do just that by allowing them to use a type of federally guaranteed Small Business Administration loan to refi up to 90 percent of a property's value.
The potential savings of the two-year program, under the SBA's 504 loan program, are enticing.
Trisports.com, a Tucson-based online store for triathletes, took advantage of the program and knocked nearly 4 percent off the interest rate on a $3 million mortgage.
The expected savings?
"It's millions," said Seton Claggett, who co-owns Trisports.com with his wife, Debbie.
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The idea behind the program, mandated under the Small Business Jobs Act passed by Congress in September 2010, was to boost jobs by allowing qualified small businesses to cut their mortgage costs.
But since the SBA launched the program under regulations initially adopted in February, it has produced anemic results.
Congress allocated up to $15 billion for the refi program through the end of 2012, including about $7.5 billion through the just-ended 2011 federal fiscal year, in an effort that was supposed to help up to 20,000 businesses.
But through Sept. 23, only 265 refi loans totaling $212 million had been processed, the SBA said.
In Arizona, only four 504 refis have been done, with a total value of $2.8 million.
Industry experts say the program has been held back by restrictive requirements, lack of awareness among small businesses, lack of credit and equity among potential borrowers and, some say, because of foot-dragging on the part of the SBA to adopt rules to implement parts of the program.
Chris Hurn, who heads a nationwide SBA lender, says the agency was slow to roll out the program and has failed to issue rules regarding important elements of the law.
"It's embarrassing, and it's clearly not the intent of the law or the spirit of the law," said Hurn, CEO of Orlando-based Mercantile Capital Corp.
Not only was the SBA slow to roll out the program, but it has failed to issue regulations allowing two important provisions - one to allow part of the refi proceeds to be used for working capital, and another that would allow small firms to borrow up to 125 percent of the appraised property value.
That latter requirement would help a lot of businesses that have negative equity in their properties - including many in Arizona, where Hurn has about a half-dozen customers.
Based on public comments, the SBA is preparing new rules "in the near future" that will address many of the industry's concerns, SBA spokeswoman Hayley Meadvin said.
The SBA did issue rules extending the maturity period of loans to be refinanced.
That change helped the Claggetts qualify for their 504 refi through Bank of the West.
The couple had a 2006 mortgage on their Tucson warehouse and retail store that carried an interest rate of nearly 9 percent and included a balloon payment next year.
Like regular SBA 504 loans, the refi loans consist of a bank loan, with a senior secured position, for 50 percent of the overall loan value; an SBA-guaranteed debenture or type of bond issued by a local SBA Certified Development Company (CDC); and 10 percent equity put up by the borrower. Conventional commercial mortgages can require 20 percent to 35 percent equity.
Between the bank loan and CDC loan, Trisports cut its interest rate to a combined 5.25 percent.
The Claggetts look forward to using their mortgage savings to grow their already successful business, though they said the refi loan required intensive paperwork.
"It's a good deal, but it's a lot of work," Seton Claggett said.
Beside the normally extensive documentation required for 504 loans, including past loan documents and bank transcripts, borrowers must create or retain a certain number of employees as a result of their loans.
Dave Newsom, Bank of the West vice president and relationship manager for the Tucson area, said many businesses aren't aware of the new refi program.
"If you can qualify for the loan, with interest rates where they are now, it's pretty much a no-brainer," Newsom said.
Arizona's biggest SBA lender in terms of loan volume, JPMorgan Chase, has yet to fund a 504 refi loan but has several possible loans in the pipeline, said Corie McGrath, senior vice president of small-business banking for Southern Arizona.
Allowing the 125 percent loan-to-value ratio could help some worthy but underwater businesses weather the down economy and grow, McGrath said.
"That could really help," she said. "It's always a concern when you see that appraisal."
SBA refi rules
Eligibility requirements for the Small Business Administration's 504 refinance loan program include:
• Refinanced properties must be mostly owner-occupied.
• The debt being refinanced was incurred to acquire land, to construct a building or to purchase equipment.
• The existing debt is collateralized by fixed assets.
• The existing debt was incurred for the benefit of the small business.
• The new financing provides a substantial benefit to the borrower when prepayment penalties, financing fees and other financing costs are taken into account.
• The borrower has been current on all payments of existing debt for one year prior to the date of refinancing.
Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.