November 2018
Commercial Lending
SBA 504 Loan Interest Rate Report: November 2018

The bonds that funded November’s 20- and 25-year Small Business Administration (SBA) 504 loans continued to increase over the last two month, but the resulting effective interest rate (the all-in cost to a borrower) still remains in the mid 5% range thanks to reduced loan servicing fees for FY 19 that went into effect Oct.1.

SBA 504 Loan Interest Rate ReportFor standard 504 loans, the servicing fee (paid annually) was reduced from 0.642% (or 64.2 basis points) to 0.368% (or 36.8 basis points) of the outstanding balance of the loan.  For refinance 504 loans, the servicing fee (paid annually) was reduced from 0.682% (or 68.2 basis points) to 0.395% (39.5 basis points) of the outstanding balance of the loan.

The bonds that funded the 25-year 504 loans were sold to investors at 4.00%, resulting in a final effective interest rate of 5.32% under the new fee schedule for November for standard 504 loans (compared to 5.21% in October and 5.29% in September and 5.35%).  The 25-year effective interest rate for debt refinance loans is 5.35% for November.

The bonds that funded the 20-year 504 loans were sold to investors at 3.87%, resulting in a final effective interest rate of 5.25% under the new fee schedule for November for standard 504 loans (compared to 5.15% in October and 5.25% for September). The 20-year effective interest rate for debt refinance loans is 5.29% for November.

The bonds that funded the 10-year 504 loans were sold to investors at 3.47%, resulting in a final effective interest rate of 5.18% under the new fee schedule for 10-year standard 504 loans for November/December (set bimonthly; compared to 4.84% for September/October and 5.30% for July/August).  The 10-year effective interest rate for debt refinance loans is 5.22% for November/December.

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

Frank Keane, fiscal and selling agent for SBA 504 program funding securities, commented following the November 8 bond sale:

“Treasuries held firm as the market absorbed the quarterly refunding; actually declining 4 bps w/w.  The Fed leaves rates unchanged, stays the course for future hikes.  The SBA 504 program prices $323,207,000 in ten, twenty, and twenty-five year debentures; a size that matches the program’s 12-month average.

“While stocks and oil continue to express concern over trade tariffs and economic strength, it is the election results that will set up clashes over a potential repeal of tax cuts, proposed infrastructure spending, and health care, a topic which voters identified to be a primary concern.  All of these items require increased spending, meaning increased debt and that is of concern.

“The US pays $1.3 billion each day to service its public debt, benefiting somewhat from today’s relatively low interest rates.  The annual cost, per the Congressional Budget Office, is expected to be nearly $1 trillion by 2028, assuming the long term average for rates like the ten-year Note are around 3.70%.  Should rates be higher that cost will increase, and with Treasury continuing to focus on shortening its average maturity (currently six years) its need to refinance will be more frequent, incurring even greater expense at higher rates.

“The Fed held short term interest rates steady, offering an upbeat assessment of the economy with no reference made to October’s price volatility.  Comment was made about reduced business investment as corporate America continues to use tax cut related profits to repurchase stock.  Such activity adds support to equity prices but does little to sustain economic growth.  Gradual rate increases are still in the (Federal Reserve’s) plans, with the December meeting likely to produce the next change,” Keane said.

The SBA 504 Loan Program provides up to 90% financing at below-market, fixed interest rates and long amortization terms up to 25 years for the purchase of major fixed assets, such as owner-occupied commercial real estate, energy efficient “green” initiatives and/or heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans and provide up to $5 million of aggregate SBA eligibility on standard 504 projects; up to $5.5 million per 504 energy efficient green project not exceed $16.5 million in the aggregate; and up to $5.5 million per eligible small manufacturing project with no limit on total SBA dollars available.  These are SBA 2nd mortgage loan portions only; there is no limit on overall project dollar size.

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