April 2018
Commercial Lending
SBA 504 Loan 25-Year Debenture Update; Program Reaches Funding Milestone

The Small Business Administration (SBA) has issued additional guidance on its newly approved 25-year term for 504 loans.  The program also recently reached a milestone in direct funding.

25-Year Debenture Update

504 loans are funded by the sale of bonds (aka debentures) which are pooled and sold on Wall Street each month.  Understanding the 504 Loan Interest Rate

In response to industry requests, the SBA has authorized the issuance of a 25-year debenture for 504 loan projects approved on or after April 2, 2018.  The new fully amortized term, which is expected to be available in July, is in addition to existing 20- and 10-year terms.

Third party loans accompanying 25-year 504 loans must be at least 10 years. 504 loans approved prior to April 2, 2018, may not be extended to 25 years.

SBA 504 Loan Program Marks Funding MilestoneIn regard to the ability to modify term lengths between 20 and 25 years on 504 loans, the SBA has determined that Certified Development Companies (CDC) will be permitted to request term modification after the Sacramento Loan Processing Center loan approval under the following circumstances:

1. The 504 loan application was approved on or after April 2, 2018.
2. The CDC must submit a 327 request including justification for the extended maturity.
3. The CDC must secure from the applicant a written request/consent to the modification and retain in file.
4. No changes may occur after the debenture closing request is submitted to the SBA.

Since it is uncertain how much initial demand might exist for this maturity, the SBA decided that the July 2018 sale will be the first one to contain 25-year debentures and on a monthly basis thereafter, provided there are approved 25-year loans each month.

Of course pricing will not be known until the actual bond sale in July.  According to Eagle Compliance LLC, fiscal agent for SBA 504 program funding securities, for the initial three 25-year debenture sales, the program’s underwriters – Bank of America Merrill Lynch and Credit Suisse – have committed to pricing a specified amount of those debentures no wider than +35bps to the 20-year debenture rate.  That means if there had been a 25-year debenture in March, its debenture rate would have been no wider than 3.55% and would have resulted in effective interest rate (the all-in cost to a borrower) of 5.19% for standard 504 loans and 5.23% for refinance loans.

Per Eagle Compliance, “(T)he SBA 504 loan program has a 32-year history of pricing 20-year debentures and just as we have used Treasury and Swaps benchmarks to price that product we can use the 20-year debenture as a guide to pricing 25-year debentures.  It is expected the +35bps spread relative to 20-year debentures will be improved once consistent size for the product is established, and that is even possible in the (upcoming) July sale.”

The new 25-year term option provides an even better cash flow for small business borrowers and its introduction is very timely as the Federal Reserve Bank continues to move away from its accommodating monetary policy, with plans for additional rate increases through 2019.

SBA 504 Loan Program Reaches Funding Milestone

The SBA 504 Loan Program – one of the nation’s most effective assistance programs for small businesses – has reached $75 billion in direct funding.

The $75 billion is the money raised by the SBA in private bond (debenture) sales to finance nearly 145,000 504 small business loans throughout the nation.  The bonds are part of total 504 loan funding packages that exceed $187 billion in small business expansion projects.

It is estimated that SBA 504 projects over the life of the loan program have created or retained 2,193,286 jobs nationwide since 1991, when the relevant data became publicly available.

For more information about SBA 504 loans in Florida, South Alabama or South Georgia, contact a Florida First Capital Loan Officer or email us at info@ffcfc.com.  Phone: 850.681.3601 or toll-free at 800.504.LOAN.