SBA 504 Loan Interest Rates
Official monthly SBA 504 effective interest rate tables can be found at Eagle Compliance LLC. 25- and 20-year term loans fund every month; 10-year term loans fund every other month. Effective interest rates are inclusive of servicing fees, which are subject to credit risk of the applicant.
Q: When is life insurance required on a Small Business Administration (SBA) 504 loan?
A: Previously, the Certified Development Company (CDC) was tasked with assessing whether the viability of the business is tied to a specific individual or individuals. When this was found to be the case, the CDC would require key man life insurance. However, in the event that the CDC determined that the viability of the business was not specifically tied to one person and that person provided a detailed management succession plan, the CDC was allowed to waive the life insurance requirement.
However, under the new SOP 50 10 5(J) effective Jan. 1, 2018, life insurance is REQUIRED for principals of:
• Sole proprietorships;
• Single member LLCs; and
• Businesses otherwise dependent on one owner's active participation*
In the cases outlined above, the CDC is unable to waive the life insurance requirement and the borrower will need to obtain a collateral assignment of an existing life insurance policy or a new policy.
The only exception is in the event the borrower is deemed uninsurable, in which case the CDC must obtain written documentation from a licensed insurer stating the same.
*Examples of businesses dependent on one owner's participation include businesses where special training or licenses are required, e.g., doctor's offices, assisted living facilities, law offices, mechanic shops, etc.
Q: How is the required amount of life insurance determined?
A: Per SOP 50 10 5 (J), the life insurance required must be consistent with the size and term of the loan. However, the amount and type of collateral available to repay the loan in the event of the death of the applicant may be factored into the determination of the appropriate amount of life insurance.
The SBA recently offered guidance to CDCs regarding calculating insurance requirements in relation to current standard liquidation rates for the industry:
• Commercial real property (includes buildings): 75%.
• Residential real property (includes buildings): 80%.
• Land only: 50%.
• Equipment: 50%.
• Leasehold improvements: 5%.
• Furniture and fixtures: 5%.
Given the above rates, following is a sample calculation:
Sources and Uses:
Total project - $1,000,000
Structure - 50/40/10
Third party lender (50% 1st mortgage holder) - $500,000
SBA (40% 2nd mortgage holder) - $400,000
Borrower (10% down payment) - $100,000
Project Breakdown:
Building/land - $800,000
Furniture and fixtures - $150,000
Soft costs - $50,000
Liquidation Value:
Building/land - 75% or $600,000
Furniture and fixtures - 5% or $7,500
Soft costs - $0
Total liquidation value - $607,500
Given that the third party loan is $500,000, that leaves $107,500 ($607,500 - $500,000) to be applied towards the SBA second lien reducing the collateral shortfall to $292,500 ($400,000 - $107,500).
As such, the life Insurance requirement in this particular example would be $292,500.
If you have a question you'd like our SBA 504 loan experts to answer, email us at info@ffcfc.com or call 850.681.3601 or toll-free at 888.320.5504.
