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SBA 504 Loan Interest Rate Report: February 2014

Feb 2014

The effective interest rate for 20-year Small Business Administration (SBA) 504 loans that funded in February declined slightly after an increase last month following the Federal Reserve's decision to begin tapering its monthly bond buying program.

The debenture bonds that funded this month's 20-year 504 loans were sold to investors at 3.23% (compared to 3.46% last month), resulting in a final effective interest rate of 5.30% (down from 5.54% last month). Since last October, the 20-year rate has been hovering around the mid 5 percent mark.

The effective interest rate for 10-year 504 loans (which is done bimonthly) is 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.

The Fed had been buying $85 billion of mortgage-backed securities and Treasuries each month in an effort to keep interest rates low and stimulate the economy. Beginning last month, the Fed started tapering its bond buying program.

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

“Lower Rates, Wider Spreads - this is the opposite headline to January's commentary when the market was confident of increased job growth, emerging market stability and continued gains in equity markets. Just like the header, all these conditions reversed themselves in an environment where bond investors were underweight in their portfolios, leaving them exposed to a bond market rally - which we got.

“Equities lost 5% in January and long bonds gained 1.2% as short positions were covered and investors sought the “safe haven” of U.S. Treasuries. In technical rallies like that, credit and swap spreads tend to widen and that held true, though we were able to fund .23bps better than January.

“The Fed has announced a second tapering of its monthly purchases and expectations for higher rates remain intact, but until job growth and inflation pick up we should 10-year Treasuries hold a range of 2.60%-2.85%,” Keane said.

While most officials expect interest rates to rise over the next year, small business borrowers can still expect to lock in historically cheap 504 rates now, albeit probably not at the record lows seen over the last two years.

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% fixed 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 (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.