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SBA 504 Loan Interest Rate Report: May 2015

May 2015

The interest rate for 20-year Small Business Administration (SBA) 504 loans that funded in May saw a slight rise over past recent months, but still remains at near-historic lows and continues to be much in the borrower's favor.

504 loans are funded by the sale of 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 bonds that funded this month's 20-year 504 loans were sold to investors at 2.77%, marking the twelfth month in a row the bond rate has remained below 3%. This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.85% for May (compared to 4.59% in April). Year to date, the 20-year rate has averaged 4.67%.

For 10-year 504 loans (which are set bimonthly), the bonds were sold at 1.85% resulting in a final effective interest rate of 4.37% for May/June (compared to 4.40% for March/April). Year to date, the 10-year rate has averaged 4.39%.

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

“What has changed since March? This month's 10-year debenture was priced 3 bps lower than March, while the 20-year debenture was priced 26 bps higher, reflecting a steeper Treasury curve where long-term rates have risen more than short-term rates.

“You can throw a dart at the board to select a reason for this, because when the Fed officially ends this historic easy-money policy, it is reasonable to expect short-term rates to rise more because that is the sector most affected by policy. A probable explanation for the spike in long-term rates is the exaggerated valuation of European sovereign debt that had made U.S. rates look cheap. While we have seen 10-year rates increase 29 bps, German rates have had an 89 bps swing in just the last two weeks, going from 0.07% to 0.75%, to close (recently) at 0.54%. Fed Chairwoman Yellen has cautioned about stocks being `quite high,` and that was before the DJIA rallied 267 points (recently).

“Another reason for caution on long-term rates is that although the QE3 buying program has ceased, the Fed continues to buy fixed-rate debt with proceeds from its investment portfolio of $4 trillion. That exercise is expected to end once they commence a tighter monetary policy and thus will remove support for longer-term rates. So, once again, we have a push/pull dynamic with good job growth and slightly improved wage growth verses low inflation and a 1Q15 GDP of just 0.2%. It seems less likely that we will see a policy move from the Fed at their June meeting, but the market is not totally discounting it,” Keane said.

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 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 and public policy projects and up to $5.5 million per green initiative and small manufacturer projects (these are SBA loan portions only; there is no limit on overall project dollar size).

Get Started on an SBA 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.