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Rate Drop: July 2015 SBA 504 Loan Interest Rate Report

Jul 2015

The interest rate for 20-year Small Business Administration (SBA) 504 loans that funded in July fell back below 5% following a slight increase last month. The 10-year interest rate also declined.

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 2.88%, marking the fourteenth 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 4.96% for July (compared to 5.06% for June and 4.85% for May). Year to date, the 20-year rate has averaged 4.77%.

For 10-year 504 loans (which are set bimonthly), the bonds were sold at 1.80% resulting in a final effective interest rate of 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 July bond sale:

“What's next? The crisis in Ukraine remains, but is no longer in the headlines. The crisis in Greece has a temporary resolution, but does anyone believe it has been resolved? And then there is the potential default by Puerto Rico on $72 billion of debt, obligations they admit being unable to fulfill. All three have financial implications and are of some concern to the Fed as they prepare to reestablish a normalized monetary policy.

“Chairwoman Yellen stated last week that she expects a rate rise will be appropriate sometime this year, and that encourages investor caution, but of more interest is what path rate rises might take. Any hike this year would probably be the only one, as low inflation and wage growth remain below the Fed's targets and are causes of concern for a fragile economic recovery. This month's 20-year debenture sale reclaimed a sub 5% effective rate for borrowers and until we get closer to that policy change, any increase in rate should be measured.

“An increased financing calendar for High Grade Corporate and CMBS debt has served as a counter balance to any safe haven trade that Greece provided and this new issue supply should last through the summer. So, while higher rates are to be expected, there remains strong global demand for fixed-rate assets and that should provide a smooth, less volatile path for rates. I emphasize the word ‘should',” 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.