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SBA 504 Loan Interest Rate Report: October 2016

Oct 2016

The bonds that funded this month's 20-year Small Business Administration (SBA) 504 loans saw an uptick over the past few months, but continue to remain low to the benefit of small business borrowers. Additionally, new lower program fees for 504 loans approved in FY 2017 kicked in.

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 2.21%, marking the 29th consecutive month the bond rate has remained below 3%. This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.26% for October for standard 504 loans. The 20-year effective interest rate for refinance loans is 4.31%.

The effective interest rate for 10-year standard 504 loans (set bimonthly) is 4.29% for September/October. The 10-year effective interest rate for refinance loans is 4.35%.

For FY 2017, program fees paid on Small Business Administration (SBA) 504 loans have decreased. The changes are applicable for loans approved on or after Oct. 1, 2016, through Sept. 30, 2017.

The Upfront SBA Guarantee Fee will continue to be zero for both regular and refinance 504 loans. (Note: this is not the bank fee, which is paid on the first mortgage amount.)

The Ongoing SBA Borrower Fee for 504 standard loans (paid annually) has been reduced from 0.914% (91.4 basis points) to 0.697% (69.7 basis points) of the outstanding balance of the loan.

The Ongoing SBA Borrower Fee for 504 refinance loans (paid annually) has been reduced from 0.958% (95.8 basis points) to 0.697% plus 0.034% for a total of 0.731% (69.7basis points plus 3.4 basis points) of the outstanding balance of the loan.

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

“(The bond sale) was priced Thursday (Oct. 6) at a rate of 2.21%, reflecting the softness in the market as rates backed up, but is still below the 12-month average rate of 2.34%. (The week of Oct. 10) saw a continued erosion of investor confidence due to the release of FOMC minutes from the July meeting, new Treasury debt, a continued sloppy market for stocks, and sustained weakness in the British pound as the UK prepares to negotiate its EU exit.

“Fed minutes confirmed the decision to hold rates steady was a close call (7-3), but the vote was more divided than originally thought. The members voiced concern about labor market slack being affected by continued low interest rates, stating ‘a reasonable argument could be made to hike rates.' Such a policy change is unlikely before the November 8 election, but December is looking more certain,” 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 for standard and public policy projects (aggregate limit) and up to $5.5 million per green initiative and small manufacturer projects. 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,contact a Florida First Capital Loan Officeror email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.