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Rate Drop: August 2015 SBA 504 Loan Interest Rate Report

Aug 2015

The interest rate for 20-year Small Business Administration (SBA) 504 loans that funded in August remained below 5% for a second month in a row following a slight increase in June. Frank Keane, fiscal agent for Development Company Finance LLC -- the entity responsible for marketing and selling 504 funding securities - comments about the future of 504 rates.

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

The bonds that funded this month's 20-year 504 loans were sold to investors at 2.82%, marking the fifteenth month in a row the bond rate has remained below 3%. This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.90% for August (compared to 4.96% for July and 5.06% for June). Year to date, the 20-year rate has averaged 4.78%.

The effective interest rate for 10-year 504 loans (which is set bimonthly) is 4.32% for July/August (compared to 4.37% for May/June). Year to date, the 10-year rate has averaged 4.37%.

Frank Keane, fiscal agent for Development Company Finance LLC - the entity responsible for marketing and selling 504 funding securities - commented following the August bond sale:

“Still under 3%, but rising - was last month's header, and while this month's debenture funding remained under 3%, with an effective (interest) rate to borrowers that remains under 5% (4.90%), longer-primary reason for that is the rate increase's impact will be felt mostly in short-dated maturities and the slope of the rate curve is already reflecting that. In addition to recent, increased supply of credit products, the market will absorb $64 billion of intermediate and longer-term Treasury debt (in August) and that will test the sector's resilience.

“Gradual is the adjective most often used by (Federal Reserve) Chairwoman Yellen to describe the Committee's planned path of rate increases and only one such hike is expected this year and that is expected to occur around the same time of next month's funding date, so we can expect more market anxiety leading up to our September sale.

“Reflecting their own form of anxiety, China has added devaluation of the yuan to a long list of initiatives to boost trade and stabilize its stock markets. (That recent) move caught markets by surprise and one effect was an increased bid for Treasuries, moving the 10-year benchmark down to 2.15% while credit product spreads continued to widen,” Keane said.

The SBA 504 Loan Program provides up to 90% below-market, fixed interest rate financing with repayment terms up to 20 years for the purchase of commercial property and/or fixed heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans, providing up to $5 million of small business financing for standard and public policy projects and up to $5.5 million per green initiative and small manufacturer projects (these are SBA loan portions only; there is no limit on overall project dollar size).

Get Started on an SBA 504 Loan

For more information about SBA 504 loans in Florida,contact a Florida First Capital Loan Officer hereor email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.