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SBA 504 Loan Interest Rate Report: January 2014

Jan 2014

The effective interest rates for Small Business Administration (SBA) 504 loans that funded in January increased slightly on the recent decision by the Federal Reserve 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 3.46%, resulting in a final effective interest rate of 5.54%. The 20-year effective interest rate had held steady at 5.45% for the last two months. For 2013, the effective interest rate for 20-year loans averaged 4.84%.

For 10-year 504 loans (which are set bimonthly), the debenture bonds were sold to investors at 2.14%, resulting in a final effective interest rate of 4.67% for January/February (up from 4.40% in November/December). For 2013, the effective interest rate for 10-year loans averaged 4.21%.

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 this month, the Fed will taper its bond buying program by $10 billion per month.

But the complete end to Fed stimulus is still probably years away. Fed officials have been stressing lately that tapering does not mean "tightening." In fact, the Fed extended its commitment to keep short-term interest rates "exceptionally low" until either the unemployment rate falls to around 6.5% or the inflation rate exceeds 2.5% a year.

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

“Treasury rates had risen 108 bps since our January 2013 sale, with Interest Rate Swaps and credit spreads widening due to reduced economic stimulus from the Fed. Expectations are for a continued, gradual rise in rate during 2014 but (the Jan. 10) Non-Farm Payroll report is a reminder that is not guaranteed as job growth was disappointing and drove rates even lower than when we priced (on Jan. 9).

“Markets have recovered from their mid-year spike in rates and we have been able to improve our pricing spread to Treasuries by .18 bps since the August wide of +.66 bps. Lackluster economic growth, disinflation and the lowest civilian labor force participation rate in 35 years are proving to be formidable obstacles to the Fed's Zero Interest Rate Policy and until they improve, we may find ourselves stalled in this recent rate range,” Keane said.

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).

Most officials expect interest rates to rise in 2015, despite the fact that inflation will likely still be below the target at that point. But rates will remain low for a while, so small business borrowers can still expect to lock in historically cheap 504 rates, albeit probably not at the record lows seen over the last two years.

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.