The Atlanta Journal-Constitution
New rules may help pay off home equity lines
Modifications may allow refinancing into small business loan. ‘Complete change in policy’ by the SBA.
The Great Recession and subsequent slow economic growth hit Atlanta’s small business community particularly hard.
What’s more, the precipitous decline in real estate values has been a double whammy for business owners who tapped their home equity for working capital to keep their companies afloat.
But as property values continued to plunge from their 2007 peak, many home equity lines of credit sank deeply under water, putting banks under pressure to have them paid off.
The urgency, in part, is because regulators require banks to mark down the real estate values in their portfolios to their current worth and book the losses.
There is promising news, however, if you used your home equity lines of credit for business purposes.
The U.S. Small Business Administration’s new refinancing rules for its program might permit you to refinance your existing business debt and fold the home equity lines of credit into a new bank loan that is partially guaranteed by the agency.
Extensive modifications to SBA’s standard operating procedures became effective June 1. And among its many changes, an important one may allow you to refinance your home equity lines of credit into a refinanced business loan.
That is if the debt was originally incurred to start a business, used as working capital, to purchase business equipment, or for any other business purpose.
The Small Business Association frowned upon the use of its programs to finance personal debt with some exceptions for credit cards used for business activities.
“Refinancing personal debt, such as credit cards, incurred for business purposes has been available to small business owners for many years,” says David Perry, the U.S. Small Business Administration’s deputy district director for Georgia. In June, the association initiated “changes to allow home equity loans to qualify for refinancing.”
“Of course the owner must certify that the proceeds of the debt were used for business purposes and provide documentation such as tax documents to support the claim,” Perry says.
“This can be a great benefit to many small business owners unable to attain more traditional and more affordable financing.”
Underwriting requirements include owning a successful small business that has a track record of sufficient cash flow to pay back the refinanced loan. It may also mean pledging business collateral, including machinery, furnishings, fixtures and equipment.
Having an acceptable personal and business credit history and being in an industry that your banker believes will continue to thrive, are also required.
When Ethan Smith was told of the SBA’s new initiative, he said it was a big deal since so many business owners used their homes to finance their businesses during the recession because they lacked alternatives.
Smith is a principal with Starfield & Smith PC, a Pennsylvania-based law firm that specializes in SBA-guaranteed small business and commercial real estate financing.
“This is a complete change in policy by the agency,” he said.
Another question to consider is whether the refinancing would pay off the HELOC and remove the lien on the home. “Yes,” Smith said. “I would think that the SBA lender would likely require the HELOC to be closed and the lien satisfied.”
Smith dug deeper and cited that there may be a conflicting rule.
“SBA rules state that when a lender refinances a debt, that it must take the same collateral as the loan being refinanced,” he said.
If enforced, refinancing would pay off the HELOC lien and lien your home again with the new SBA loan.
“As always, there is a great deal of ambiguity and uncertainty in the SBA’s drafting,” Smith said.
SBA’s Perry says, “The rules do require that the lender take the same collateral that secured the personal debt.”
Moreover, he notes that whether or not to re-lien on your home depends upon the substitute collateral being offered.
“The fluctuating value of real estate and other property offered for collateral requires that the lender and SBA consider releasing collateral on a caseby-case basis.”