February 2020
Ask The Experts
SBA 504 Q&A: Prepaying a 504 Loan

Q: Can a Small Business Administration (SBA) 504 loan be prepaid in part or in whole?

Ask the SBA 504 Loan ExpertsA: An SBA 504 loan can only be prepaid in whole; partial prepayment is not permitted due to the nature of the financing instrument used (bonds).

Q: Are there any costs associated with prepayment of the 504 loan?

A: Yes. Again, because bonds are sold on the open market to fund the SBA 504 loans, there is a 10-year prepayment penalty associated with all 504 loans with a 20-year or a 25-year term and a 5-year prepayment penalty associated with all 504 loans with a 10-year term.  Both are non-negotiable.  The prepayment penalty goes to pay the bond holder for the early redemption of the bond.

Q: What is the process for prepaying a 504 loan?

A: The small business must notify Florida First Capital in writing at least 45 days prior to the date it wishes to prepay the 504 loan.  At this point, personnel in the Servicing Department will contact the borrower and provide written instructions to complete the payoff.

The payoff amount consists of an amount equal to the outstanding principal balance of the 504 loan plus all interest accrued and unpaid thereon to the next allowable semi-annual repurchase date (the bond associated with the 504 loan can only be repurchased by the SBA year), plus the prepayment penalty and all SBA and central servicing agent fees normally due and payable (that are also accrued and unpaid thereon to the next allowable semi-annual repurchase date).

Q: How is the prepayment calculated?

A: The prepayment is typically referred to as a 10-9-8-7-6-5-4-3-2-1 calculation when the term of the 504 loan is for 20 or 25 years. The equation for the penalty is:
Penalty = D (I x P), where:

D = the remaining principal balance of the 504 loan.
I = the interest rate stated on the face of the Bond expressed in decimal points.
P = the factor set forth below for the applicable year.

Year    P
1         1.00
2         0.9
3         0.8
4         0.7
5         0.6
6         0.5
7         0.4
8         0.3
9         0.2
10       0.1
11 and thereafter    0

There is no longer a prepayment penalty associated with the 20-year or 25-year 504 loan from year 11 and thereafter.

In the term of a 10-year 504 loan, the penalty factor is set forth below for the applicable year.

Year    P
1         1.00
2         0.8
3         0.6
4         0.4
5         0.2
6         0

There is no longer a prepayment penalty associated with the 10-year 504 loan from year 6 and thereafter.

Note: Because the prepayment penalty is referred as the 10-9-8 … penalty, it is commonly misunderstood that the penalty begins at 10%.  Instead, for a 20-year loan (or a 25-year loan), the penalty decreases from the bond rate by a tenth each year until the penalty expires in year 11.  For a 10-year loan, it decreases from the bond rate by a twentieth each year until the penalty expires in year 6.

There are several options regarding refinancing the companion loan to the SBA 504 loan that would not involve the prepayment penalty. An example would be for the borrower to request a subordination of the SBA 504 loan to the new conventional loan.

Note: There are restrictions regarding refinance, subordination and assumption of the existing 504 loan, so if a borrower is considering any of these options, instead of a prepayment, please contact your Florida First Capital servicing representative for details.

For more information on prepaying an SBA 504 loan or refinancing the participating first mortgage loan, please contact your Florida First Capital servicing representative in our corporate offices directly and they will be happy to provide a prepayment estimate or answer any follow-up questions.  Email us at info@FloridaFirst.com or call 850.681.3601 or toll-free at 800.504.LOAN.