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SBA 504 Loan Interest Rate Falls to Record Low Territory

Feb 2016

In the world of Small Business Administration (SBA) 504 loan effective interest rates, which are set via the sale of bonds (aka debentures) that are pooled and sold on Wall Street each month, it's not uncommon for the rate to fluctuate a few basis points plus or minus. But for the rate to move 50 basis points in a given month is rare. Well, it happened this month and dropped 0.51% to be exact!

Frank Keane, fiscal and selling agent for Eagle Compliance, LLC - the entity responsible for marketing, pricing and selling SBA 504 Loan Program funding securities - comments about market conditions, additional Federal Reserve rate hikes and the effect on future 504 loan interest rates.

The bonds that funded this month's 20-year 504 loans were sold to investors at 2.27%, marking the 21st month in a row the bond rate has remained below 3%. It's also the lowest 20-year debenture rate since May 2013 (the record is 1.93% set in December 2012). This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.32% for February (down from 4.83% in January).

The effective interest rate for 10-year 504 loans (which is set bimonthly) is 4.28% for January/February.

Understanding the 504 Loan Interest Rate

Frank Keane, fiscal and selling agent for 504 funding securities, commented following the February 20-year bond sale:

“The recent push for ‘safe-haven' assets has strengthened the speculation about additional rate hikes by the Fed. In fact, in a (recent) report BNP Paribas stated they ‘do not expect any rate increases for the Fed in 2016, and possibly not in 2017.' Such speculation will support demand for Treasury debt even as employment and wage growth remain decent.

“Global concerns, like Japan reporting a negative 1.4% growth rate in 4Q15, isolate the Fed as the only central bank having adopted a tighter monetary policy. Japan will be expected to expand its stimulus as domestic demand has declined and a stronger yen has hurt its exports.

“It was a volatile (week of Feb. 8) for all markets as they reacted to headline news about European banks, Janet Yellen's congressional testimony, and renewed fears of recessionary pressure. The most difficult time for stocks was (Feb. 11) as global indices were under pressure that created another flight to ‘safe haven' securities like U.S. Treasuries. That move pushed 10-year yields as low as 1.61% when the SBA 504 program priced 2016-20B at 2.27%, the lowest 20-year debenture rate since May 2013,” commented Keane.

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 real estate and/or fixed heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans and provide up to $5 million for standard and public policy projects (aggregate limit) and up to $5.5 million per green initiative and small manufacturer projects. These are SBA 2nd mortgage loan portions only; there is no limit on overall project dollar size.

Related: Tightened Lending Standards, SBA 504 Debt Refinancing Program, CRE Loan Delinquency and Rate Expectations

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