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SBA 504 Loan Interest Rate Report: November 2014

Nov 2014

The effective interest rate for Small Business Administration (SBA) 504 loans that funded in November held steady to last month's 17-month low rate and will likely remain low for the foreseeable future despite the Federal Reserve's recent decision to end its bond buying program.

SBA 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 2.80%, marking the sixth month in a row the bond rate has stayed below 3%. This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.87% for November (compared to 4.82% in October and 5.00% in September). Year to date, the 20-year effective interest rate has averaged 5.09%.

For 10-year 504 loans (which are set bimonthly), the bonds were sold at 2.03%, resulting in a final effective interest rate of 4.55% for November/December (compared to 4.69% for September/October and 4.51% for July/August). Year to date, the 10-year effective interest rate has averaged 4.57%.

So what impact will the Federal Reserve's decision to stop buying bonds have on interest rates and cost of funds for the 504 Loan Program? Probably not much according to an Oct. 30 statement from Frank Keane, fiscal agent for Development Company Finance LLC, the entity responsible for marketing and selling 504 funding securities.

“After 26 months of buying fixed-rate securities as a way to improve unemployment and economic growth, the Federal Reserve officially ended its bond buying program on (Oct. 29). While buying $1.8 trillion of bonds, it saw unemployment drop from 8.1% to 5.9%, and (the recent) report of 3.5% growth in 3Q14 affirms the economy is gaining traction.

“The Fed will still keep interest rates low until they see a more sustained pace of growth, not just domestically, but also in Europe. Our debenture sales are based on where 10-year Treasuries trade and while we might expect a near-term backup in rate, I believe we are range bound and should be able to maintain funding at or below our average of 2.90%,” Keane said.

Keane also commented following the recent the November bond sale:

“Range Bound - this month's 20-year debenture represents the sixth consecutive sale priced below 3.0% and reflects the continued easy money policies of central banks. While our domestic growth is improving, along with consistent job gains, the global picture remains sluggish and quite disinflationary. The Federal Reserve has seen its goal achieved regarding unemployment, inflation is below target but not by much, and our domestic bond rates are very cheap compared to Europe and Asia.

“Added to this mix is an improved budget deficit resulting in less issuance of debt and demand exceeds supply, for now. The end of QE3 has had little impact on the market and the Fed has indicated it may continue to reinvest some interest and maturing debt proceeds until they pursue a tighter monetary policy, expected to be mid-2015. This will not preclude the market from taking rates higher before then, but we will need to see a sharp reversal in global growth and inflation for it to happen anytime soon,” 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% below-market, fixed interest rate financing with repayment terms up to 20 years for the purchase of commercial property and/or heavy duty fixed 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 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.