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.
After a few years of successful operation many small businesses decide to move out of leased spaces and buy their own commercial real estate. Thousands of entrepreneurs in Florida have used government-guaranteed debentures, sold on Wall Street, to fund part of their long-term asset purchases.
By Ralph Ross,
Deputy District Director, SBA North Florida District Office
Entrepreneurs use 504 financing for a variety of reasons. Most entrepreneurs use the program to expand. The Acapulco Restaurants in St. Augustine used two 504 deals to open two locations. Dick Gores' RV World used a 504 loan to move from a leased 2.5 acre site to an owner-occupied 6 acre site near I-95 at JIA. Raesa Pabst of Surfside Printing and Blueprints in Jacksonville Beach used a 504 deal to double her space. Dick Erickson used 504 loans to fund five of his first ten Sun Tire Locations.
Using the words Government and Wall Street in one sentence can frighten the most intrepid business person. I'm going to give a quick overview of how these deals work and why they are becoming so popular. If you want to check out the details go to www.sba.govfinancing and click on CDC/504 program.
Let's talk about leverage. The reason many entrepreneurs don't buy their own real estate is because they don't want to have their cash tied up in a building. They would much rather have their cash flowing out of and into their enterprise to generate more profit. One of the main reasons our SBA 504 program is so popular is that we are able to get many businesses into their own real estate for a 10% equity injection. (If you are using this program to start up a business you will need to have at least 15% and if there are other factors such as highly-specialized, single-purpose real estate we may need as much as 20%. Again, see the web site.) The typical 504 deals works like this:
If using two sources of funding and two mortgages looks cumbersome - you're right, it is. The good news is that our Certified Development Companies really know their stuff. They earn their money by adding small fees for underwriting and servicing the loan. They are local, they are highly-experienced, and they interact with SBA and Wall Street for you.
Let's talk about interest rates. The 504 second mortgage carries a fixed interest rate. The lender's first mortgage interest rate may be either fixed or floating. 10-year debentures are used to fund equipment and 20-year debentures are used to fund real estate. The CDC's have their agents on Wall Street pool their twenty-year debentures every month for sale to private investors. 10-year debentures are pooled every other month. Because the debentures are sold after the loans have closed it means that the borrowers will close the loan without exactly knowing what the effective interest rate will be. For the last few years 504 debentures have been priced for less than 1% more than the cost of money to the U.S. Treasury.
To pay for the cost of running the 504 program the CDC, the SBA, and a servicing agent add fees to the base or note rate. It is worth noting that for several years the 504 program has been neutral to the U.S. Treasury in that the fees we charge (the subsidy rate) have been periodically adjusted to cover SBA's losses. The nationwide currency rate on this program has stayed very high so the subsidy rate has been coming down. The result to the borrower is a long term fixed interest rate that is almost always below the market rate that would otherwise be available to the borrower.
In the March, 2006 debenture sale the lowest effective rate over the full term of a twenty-year debenture worked out to 6.74%. Due to minor variations in the fees that are best explained by your local CDC the highest rate was 7.086%. In other words, for 504 borrowers whose debentures were bundled up and sold in the most recent sale, the twenty-year, fixed rate they are paying, including all fees, ranged from 6.74% to 7.086%.”
Reprinted with authors' permission
