April 2009
Commercial Lending
Understanding the 504 Loan Effective Interest Rate

One of the most attractive features of a Small Business Administration (SBA) 504 loan is its low effective interest rate. However, understanding how this rate is calculated can be challenging.

In conventional lending, borrowers typically pay interest at a rate which the bank determines will cover the bank’s cost of funds; and when bank fees are included the resulting rate may be referred to as an annual percentage rate (APR) on the funds borrowed. Simply put, the APR covers the lender’s overhead costs of underwriting, payment processing and servicing, which are all internal functions. This is also known as an all-in rate as it is inclusive of the cost of the funds borrowed.

In the world of 504 loan interest, borrowers pay an “effective rate,” which is derived from a variety of both internal and external cost factors.

To begin, 504 loans are funded by the sale of 25-year and 20-year bonds (debentures) which are pooled and sold on Wall Street each month and 10-year bonds (debentures) which are pooled and sold on Wall Street bimonthly. The effective rate is comprised of the debenture rate, the note rate and ongoing carrying costs of the program as set by the SBA.

The debenture rate determines interest paid semi-annually to investors. The note rate is the monthly-pay equivalent of the debenture rate. Current ongoing carrying costs of the program (i.e., fees) are the SBA Guarantee Fee, CDC Servicing Fee, the Central Servicing Agent (CSA) fee and the ongoing Borrower Fee (paid annually).

So what is the bottom line? If a 504 effective rate seems too good to be true, it probably is. If in doubt, Eagle Compliance, LLC, which is is responsible for the marketing and sale of the bonds (debentures) sold to investors to fund the SBA 504 Loan Program, maintains official 504 effective interest rate tables on its website here.

For more information about SBA 504 loans in Florida, contact a Florida First Capital Loan Officer or email us at info@ffcfc.com.  Phone: 850.681.3601 or toll-free at 888.320.5504.