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SBA 504 Loan Interest Rate Report: April 2014

Apr 2014

The effective interest rate for 20-year Small Business Administration (SBA) 504 loans that funded in April declined once again, which is continued good news for borrowers seeking low-cost financing to expand and grow their operations.

The debenture bonds that funded this month's 20-year 504 loans were sold to investors at 3.11%, resulting in a final effective interest rate of 5.19% (the lowest since June 2013). Year to date, the 20-year rate has averaged 5.33%.

The effective interest rate for 10-year 504 loans (which is done bimonthly and was set last month) is 4.48% for March/April (down from 4.67% for January/February).

Both the 20- and 10-year SBA 504 interest rates are fixed for the term of the loan and require as little as a 10% borrower down payment.

504 loans are funded by the sale of debentures (or bonds) which are pooled and sold on Wall Street each month. The effective interest 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.

It has been anticipated that interest rates would likely start rising following the Federal Reserve's move in January to begin tapering its monthly $85 billion bond buying program by $10 billion per month.

However, the Fed now appears to be taking a more qualitative approach in determining its policy and direction moving forward. Several factors are causing a shift in the Fed's course, including turmoil in the Ukraine is supplying a bid for “safe-haven” securities, improved retail sales for March is up the most in one and half years, uneven job growth is lagging last year's numbers and a rise in consumer prices is curbing inflation.

The result is 504 loan borrowers could enjoy a continued period of lower than expected interest rates.

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

“The Fed is holding the Federal Funds Rate at a near-rock-bottom 0.25% and has now indicated it will keep rates low even after the economy improves. The Fed said in the past that the two quantitative criteria for increasing rates would be reaching 6.5% unemployment and getting to a 2% inflation rate.

“But now, the Fed's 6.5% unemployment rate threshold has been scrapped - reaching that level from the current 6.7% will no longer necessarily mean the Fed will increase rates. The 2.0% inflation rate is still a goal, but the Fed now will depend on a more ‘qualitative,' though unspecified, approach to determine policy.

“In response to the Fed's apparent shift, Treasury rates fell with the reassurance of continued cheap money. What this has meant for the 504 program is an Effective Rate for borrowers of 5.19% in April, which is the lowest since June 2013 when rates spiked due to reduced Fed purchases in the QE3 program. Along with this reduced cost of funds has been recent, increased monthly loan volume that exceeds the 12-month average of $336,000,000.

“It is expected the current trading range will stay in effect until we see stronger economic data and a resolution of political tensions,” Keane commented.

For small business owners looking to expand and modernize their operations through the purchase of major fixed assets, the SBA 504 Loan Program offered through Florida First Capital 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 projects and up to $5.5 million for green initiative and small manufacturer projects (these are SBA loan portions only; there is no limit on overall project dollar size).

Get Started on a 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.