# How does the 504 substantial benefit test work?

**Short answer:** The part of the new payment tied to the refinanced debt must be less than the old payment. Prepayment penalties and financing costs count (13 CFR 120.882(e)(5)). Unlike the 7(a) test, no set percentage applies (SOP 50 10 8.1, Sec. C, Ch. 1, Para. C.11).

Canonical page: https://www.sbaexpress.loans/answers/how-does-the-504-substantial-benefit-test-work/
Last checked: 2026-11-08

The 504 test asks one thing. The part of the new installment tied to the refinanced debt must be less than the existing installment. That is 13 CFR 120.882(e)(5) and Section C, Chapter 1, Paragraph C.11.b.vi of SOP 50 10 8.1.

## How the number is built

- Add the Third Party Loan installment and the 504 loan installment attributable to the refinancing.
- Use the committed interest rate of the Third Party Lender and the interest rate of the most recent debenture funding on the 504 loan.
- Add prepayment penalties, financing fees and other financing costs to the amount being refinanced.

## How it differs from the 7(a) test

A 7(a) refinance needs a new payment at least 10% less than the existing installment amounts in aggregate. The 504 rule needs only a lower payment. A 504 refinance without expansion uses this definition for a federally guaranteed loan, leaving out Eligible Business Expenses (13 CFR 120.882(g)(3)(iii)).

## Special cases

- **Balloons** meet the test independent of the reduction requirement.
- **Seasonal payments.** Average all payments over the most recent 12 months from the application date, then compare.
- **Exceptions.** The Director, Office of Financial Assistance, or designee may approve exceptions for good cause. Premier Certified Lenders Program (PCLP) Certified Development Companies (CDCs) cannot use delegated authority for them.

The financing must separately provide better terms or a better rate than the existing debt (13 CFR 120.882(e)(7)).

## Sources

- [13 CFR § 120.882](https://www.ecfr.gov/current/title-13/section-120.882)
- [SOP 50 10 8.1, Sec. C, Ch. 1, Para. C.11.b, Permissible Debt Refinancing with Expansion (Para. C begins p. 226)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)
- [SOP 50 10 8.1, App. 14, Para. A, General Requirements, Ten Percent Improvement to Installment Payment Amount (p. 355)](https://legacy.sba.gov/sites/default/files/2026-10/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%20%2010.1.2026.docx)