December 2018
Commercial Lending
Interest Rate Report: December SBA 504 Bond Rates See Largest Decline M/M in Two Years

The bonds that funded December’s 20- and 25-year Small Business Administration (SBA) 504 loans each declined 33 basis points over November, marking the largest decline since February 2016.  This resulted in the full-term effective interest rates (the all-in costs to borrowers) to fall below 5%, also thanks to reduced loan servicing fees for FY 19 that went into effect October 1.

SBA 504 Loan Interest Rate ReportThe bonds that funded the 25-year 504 loans were sold to investors at 3.67%, resulting in a final effective interest rate of 4.99% for December for standard 504 loans (compared to 5.32% in November and 5.21% in October).  The 25-year effective interest rate for debt refinance loans is 5.02% for December.

The bonds that funded the 20-year 504 loans were sold to investors at 3.54%, resulting in a final effective interest rate of 4.92% for December for standard 504 loans (compared to 5.25% in November and 5.15% in October). The 20-year effective interest rate for debt refinance loans is 4.96% for December.

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% 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.

The 20- and 25-year rates compare to the current Bank Prime Rate of 5.25%.  The Prime Rate should increase to 5.50% when the FOMC, as widely expected, lifts the target interest rate by 25 bps this month.  Even if the Fed pauses rate hikes in 2019, leaving the Prime Rate at 5.50%, there is a good chance that 504 effective interest rates will remain below that level to the continued benefit of borrowers.

Understanding the 504 Loan Interest Rate

Frank Keane, fiscal and selling agent for SBA 504 program funding securities, commented following the December 6 bond sale:

“After early gains resulting from the temporary halt to increased tariffs, the stock market reversed course on Tuesday (December 4) and accelerated its decline into the end of the week.  Administration comments that it would take a tough stand, or increase tariffs, during the 90-day trade negotiations with China were identified as causes of the slump.  The weekly selloff was the largest since March and the early December performance is the month’s worst in ten-years, pushing the major indexes into the red for the year.

“One market’s weakness leads to another market’s strength and that saw the SBA 504 program benefit from the safe-haven trade into Treasuries, pricing its December 20- and 25-year debentures 33 bps lower than in November. The 5 bps wider pricing spread reflects the widening of credit spreads in response to the safe-haven trade and continued flattening of the 2/10 Treasury curve.  What is most impressive about these sales is that both have ongoing effective rates below 5% for any loans that were processed since October 1 (under the reduced loan servicing fees for FY 19),” 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.