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SBA 504 Interest Rates Continue Dramatic Fall

Feb 2019

The bonds that funded February's Small Business Administration (SBA) 504 loans continued to drop, resulting in this month's full-term effective interest rates to fall dramatically below the Prime Rate. And the outlook for continued low rates for 504 small business borrowers is encouraging, according to the loan program's fiscal and selling agent.

The bonds that funded the 25-year 504 loans were sold to investors at 3.45%, resulting in a final effective interest rate of 4.77% for February for standard 504 loans (compared to 4.88% for January and 4.99% in December). The 25-year effective interest rate for debt refinance loans is 4.80% for February.

The bonds that funded the 20-year 504 loans were sold to investors at 3.26%, resulting in a final effective interest rate of 4.64% for February for standard 504 loans (compared to 4.75% for January and 4.92% for December). The 20-year effective interest rate for debt refinance loans is 4.67% for February.

The bonds that funded the 10-year 504 loans were sold to investors at 2.95%, resulting in a final effective interest rate of 4.65% for 10-year standard 504 loans for January/February (set bimonthly; compared to of 5.18% for November/December and 4.84% for September/October). The 10-year effective interest rate for debt refinance loans is 4.69% for January/February.

Frank Keane, fiscal and selling agent for SBA 504 program funding securities, commented following the February 7 bond sale:

“Capital markets continue to embrace the Fed's patient approach to rate hikes, with the ten-year benchmark ending the week 9 bps lower than its December 19 close, the same day the central bank raised rates for the eighth time in this cycle.

“What it means for the 504 program is continued low funding costs for small business borrowers, with both February issues' effective rates dramatically below the Prime Rate.

“Part of the reason for these low rates is the caution that has followed recent downward revisions for global economic growth, reversing projections that have been proved to be too optimistic. (A) decline in American imports, especially from China, is driving a slowdown in trade and compelling other central banks to reverse previously planned rate increases. There is a March 1 expiration date for the tariff truce and negotiations are as shaky as the budget negotiations.

“Following Chairman Powell's announcement to pause rate hikes, and amplified by Trump administration comments, the Reserve Bank of India cut short-term rates by 25 bps, and the Bank of England revised its near-term growth lower to 1.2% and is stepping back from its plans for a tighter monetary policy. The contentious Brexit talks are also a cause for this revision.

“The private sector Treasury Bond Advisory Group commented on reduced holdings of Treasury debt by non-American entities as being at 36%, down from 45% in 2009, and identifying $12 trillion of debt that will need to be funded over the next ten years. For now, domestic accounts, helped by household savers, have filled the gap,” 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, renovations, new construction, energy efficient “green” initiatives and/or fixed heavy duty machinery and equipment, as well as the refinance of commercial mortgage and other business debt with or without a cash-out option.

Under a typical 504 loan structure, a commercial lending partner provides financing for 50% of the 504 loan and takes a first lien position; Florida First Capital/SBA provides 40% of the project financing and takes a second lien position; and the borrower provides a down payment of just 10% in most cases.

504 loans 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/First Capital Finance Loan Officer or email us at info@ffcfc.com. Phone: 850.681.3601 or toll-free at 800.504.LOAN.