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Can SBA 504 Interest Rates Keep Up Record Setting Pace in 2013?

Jan 2013

For most of 2012, borrowers of Small Business Administration (SBA) 504 loans enjoyed the lowest effective interest rates in the history of the program. In fact, the interest rate for 20-year 504 loans broke program records an astonishing eight times last year, including the lowest rate ever recorded last month at 4.00%.

Over the last 12 months, the 20-year interest rate has averaged 4.45%. This is incredible for a fixed rate commercial loan, especially when you consider down payments can be as little as 10%.

This month, the 20-year interest rate is 4.21%, slightly up over previous months but still below the 12-month average.

For small business owners looking to purchase or renovate property or upgrade major equipment, these low rates have been welcomed news. But with the 20-year rate trending upward this month, does this mean the record setting pace is over?

First of all, 504 loans are funded by the sale of debentures (or bonds) which are pooled and sold on Wall Street each month. The effective rate - the rate borrowers pay - is comprised of the debenture rate (which is pegged to an increment above the current market rate for U.S. Treasury issues), the note rate and ongoing carrying costs of the program as set by the SBA.

(Understanding the 504 Loan Interest Rate)

The entity responsible for marketing and selling 504 funding securities is the Development Company Finance LLCand its fiscal agent, Frank Keane.

According to Keane, rates are likely to remain low in 2013, estimating the 20-year effective rate should be around 4.5% on average.

He offers the following insights: “Pricing for the January sale showed continuing spread improvement (and) was priced at its tightest ever spread to benchmark Treasuries, + 23 bps, an 8 bps improvement from the previous mark. January was the third largest 20-year sale and collectively, it was the second largest sale in the program's history.

“Fiscal cliff concerns have turned to debt ceiling negotiations and market rates seem to be range bound for the foreseeable future. There are several factors that lead me to believe we will approximate the 12-month average rate for our 20-year debentures for the foreseeable future: 2.33% (debenture rate), with an average effective rate around 4.5%.

“The primary reason is the Federal Reserve Bank's Quantitative Easing which is pumping $85 billion in to the markets each month, buying long dated Treasury and Mortgage Backed bonds.

“Secondly, the Euro zone sovereign debt problem has eased but has not been settled, making Treasury and SBAP debt attractive.

“Thirdly, the Fed is committed to their QE policy until unemployment at 6.5% and/or CPI above 3% is reached and with our economy lagging neither one of those goals seems reachable in the near future.

“Most analysts predict a ‘boring' 2013 bond market and I'm all for that as it would keep us where we are now, but we know that change is a constant and can happen at any time,” Keane concluded.

For those small businesses that have been considering purchasing, building and expanding their facilities or upgrading their equipment, now is a great time to act. 504 loans are paired with private-sector commercial loans, providing up to $5 million of small business financing for standard projects and up to $5.5 million for green initiative and small manufacturer projects (SBA loan portions only; there is no limit on overall project dollar size).

(Getting Started on a 504 Loan)

The 504 program is an equally great loan product for commercial lenders. Under the program's unique distributed credit structure, our commercial lending partners get a 50% loan-to-value first lien position on the assets being purchased - cutting its risk in half.

Florida First Capital provides SBA-backed financing up to 40% of the project cost and takes a second lien position, and the borrower provides a 10% down payment in most cases. No other loan program offers this type of risk security to a lending partner.

There is just no better deal available today for the purchase of real estate or major equipment upgrades. Contact a Florida First Capital loan officer to take advantage of these great low interest rates while they last.

For more information about SBA 504 loans in Florida, contact Florida First Capital, Florida's original statewide SBA Certified Development Company (CDC). Email: info@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.