Check the SOP: Q&A

Q – Is there a way for a 504 loan borrower to avoid paying a prepayment fee for the early termination of the loan?

A – Yes, in most circumstances. Due to the nature of the 504 debenture funding, the early termination of a 504 loan is assessed a fee in order to repay the bondholders who have purchased the long-term bonds from the U.S. Treasury which provide the funds for the 504 loan program. However, if a borrower sells the project property, the fee may be avoided if the new buyer assumes the 504 loan. The assumption allows the transaction to be completed with the original 504 portion intact, to the continued benefit of the new buyer.

Another option is a “collateral substitution,” in which the 504 loan is “transferred” to the borrower’s new real estate as a subordinate lien (e.g., a 2nd mortgage). SBA evaluates the acceptability of the substitution based on maintenance of an adequate collateral position for SBA. This is another means to avoid the cost of prepayment of the 504 loan, and to allow the small business borrower to continue to enjoy the fixed-rate, below market benefits of the 504 loan.

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