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SBA 504 Loan Interest Rate Report: January 2018

Jan 2018

The bonds that funded January's 20-year Small Business Administration (SBA) 504 loans saw a 14 basis point increase over last month (the highest jump in six months). However, despite the hike the resulting effective interest rate (the all-in cost to a borrower) still remains under 5% to the continued benefit of small business borrowers.

504 loans are funded by the sale of bonds (aka debentures) which are pooled and sold on Wall Street each month. Understanding the 504 Loan Interest Rate

The bonds that funded this month's 20-year 504 loans were sold to investors at 2.92%, resulting in a final effective interest rate of 4.64% for January for standard 504 loans (compared to 4.49% in December). The 20-year effective interest rate for debt refinance loans is 4.69% for January.

The effective interest rate for 10-year standard 504 loans (which is set bimonthly) is 4.65% for January/February. The 10-year effective interest rate for debt refinance loans is 4.70% for January/February.

Note: For FY 2018, programfeespaid on Small Business Administration (SBA) 504 loanshave decreased. The changes are applicable only forloans approved on or after Oct. 1, 2017, through Sept. 30, 2018 (not those that are funded after Oct. 1; see Official Monthly 504 Interest Rates).

Frank Keane, fiscal and selling agent for 504 funding securities, commented following the January bond sale:

“Stocks continue to set record highs and Treasury yields continue to rise. The benchmark 10-year Note closed the week at 2.55%, up 14 bps since year-end and that level triggered comment from Bill Gross, founder of PIMCO, to declare we are in a bear market. After being challenged, Mr. Gross modified his comment by saying he thought 10-year Treasuries could reach 2.70% by December, but did say the 35-year bull market is over.

“His comment did trigger several pro and con articles on the topic. Two of them were in the Financial Times and offered strong support for both arguments.

“'Is the Bull Run Over' stated the year-to-date weakness and referenced Mr. Gross' call. Some of the points it made to reinforce that view are:

• A shift in central bank policy to tighter money.

• The Fed has already begin reducing Balance Sheet, reinvesting less money.

• The European Central Bank has cut bond buying by half, to €30 billion per month.

• The Bank of Japan's purchase of long dated bonds has slowed.

• New issue supply of sovereign debt is increasing.

• The market might be underestimating the impact of the tax stimulus.

• Inflation data is rising, though still below target.

“'Don't Bet on Higher Treasury Yields Yet' referenced calls for higher yields. When the Brexit vote took place in 2016, CT-10 was yielding 1.36% and it has almost doubled since then, to 2.55%, but is only about 1% higher, to a level that is not very high.

• Regardless of unsubstantiated headlines that China might reduce its purchases of Treasury debt, China and Japan hold their currency reserves in US$, almost one-half of outstanding Treasury debt. If they are to sell some of their holdings, what alternative, liquid market can they turn to?

• The tax cuts mostly benefit companies who have lesser impact than consumers, even though some employees are receiving bonuses and wage increases.

• Wage growth is static.

• Headline Unemployment remains at a low 4.1%, but 18% of men between 18 and 31 without a college degree did not work last year. That pool of workers can easily accommodate increased demand without pressuring wages. The equivalent figure for the worst years of the 1980s recession was 6%.

“So, maybe we have finished this bull run, but rate increases are projected to be gradual and if Mr. Gross and others are correct, another 15 bps over the next 12-months seems pretty tame. Of course, that assumes no spike in inflation and central banks maintain their support,” Keane said.

The SBA 504 Loan Program provides up to 90% financing at below-market, fixed interest rates and long amortization terms for the purchase of major fixed assets, such as owner-occupied commercial real estate and/or heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans and 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 Florida, South Alabama or South Georgia,contact a Florida First Capital Loan Officer or email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.