SBA 504 Rates: What the Effective Rate Is, How It’s Calculated, and More

Bank officer with SBA 504 rates in hand

If you’ve received an SBA 504 loan or are exploring this alternative financing option for your business, then one of the terms that you’ll read and hear about is the “effective rate.”

In this article, you’ll learn all about SBA 504 rates, how they’re calculated and options that may be available to gain a better rate for an existing loan, too, by refinancing to an SBA 504.

SBA 504 loans

To understand SBA 504 rates, let’s first look at how the SBA 504 loan option is used.

The SBA 504 option provides long-term, fixed-rate financing up to $5.5 million for major fixed assets, including owner-occupied real estate and heavy equipment. It’s used:

However, there are key differences between the SBA 504 program and a conventional commercial mortgage from a bank.

First, an SBA 504 loan finances 40% of the total cost of a project. The rest of the project cost is financed through your owner equity (10%) and your partnering bank (50%). For example, if it costs $1 million to purchase a commercial property for your business, the SBA 504 can be used for up to $400,000 of that purchase.

Second, SBA 504 loans are financed through the sale of public bonds, called debentures. These bond sales make it possible to get very competitive fixed-interest rates over the life of your loan, which is either 10, 20, or 25 years, depending on your project. This debenture step is different than borrowing all of your funding from a commercial bank. While a bank has money to loan directly, the SBA doesn’t actually loan money.  Instead, when funders like Pursuit approve loans for SBA programs, the SBA raises funds through the sale of the public bonds.

The SBA 504 effective rate

When you make an SBA 504 loan payment, the interest is paid to the bondholder. The administrators that make this kind of loan possible also collect fees that are factored into your loan and repaid over its life. In essence, each time you make a payment toward your SBA 504 loan, in addition to the principal and interest, a fraction of each fee is paid.

This total – the interest and the fees – make up the effective rate. The effective rate is the SBA 504 interest rate that a 504 lender will present to you as part of your loan package, so there are no “hidden” fees in the process.

Unlike a statement from a bank, though, which will only show the principal and interest breakdown (because all of it goes back to the bank), when you receive a statement from a 504 lender, the breakdown for your SBA 504 payment will show the principal, interest and the breakdown of fees.

How are SBA 504 effective rates calculated?

In a nutshell, SBA 504 rates are tied to the bonds that are sold to institutional investors, and the interest rates are typically reflective of 10-year U.S. Treasury bond rates, which are long-term, fixed-rate assets.

What this really means for you as the borrower is that through the SBA 504 program, you secure long-term, fixed-interest rates that are extremely competitive (often at or even below conventional commercial interest rates). When you factor in the longer repayment terms (up to 25 years) and the reduced owner-equity requirement (usually 10% for SBA 504), it’s hard to find a better option anywhere.

When are effective rates calculated?

Your 504 lender will quote rates based on the current rate when you first contact them, including the effective rate. Upon approval of your application, your loan officer provides a commitment letter and loan authorization that outlines all fees associated with the loan program.

Finally, once your loan is funded, a letter detailing the effective rate for your 504 loan is provided and your loan officer can give it to you again upon request, at any time.

Is it smart to refinance to an SBA 504 loan?

If you’re a small business owner with an existing conventional commercial mortgage, it’s always a great idea to explore an SBA 504 refinance, simply because the terms are very beneficial for borrowers. And if you’re an existing SBA 504 borrower and you think that the effective rate for your loan is higher than current SBA 504 rates, talk to your loan officer to see if a modification is possible.

Don’t wait: SBA 504 rates will likely increase soon!

SBA 504 rates are still near historic lows, but this won’t last forever, so don’t wait. If you’re interested in an SBA 504 loan or refinance for your business, contact Pursuit today.

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