SBA 504 Loan Rates: What’s the Effective Rate?

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.”

What’s the effective rate, and how is it different than your SBA 504 loan rate?

These are questions that 504 lenders hear all the time! Take a deep dive into SBA 504 loan rates, how they’re calculated, and your options for better rates through the SBA 504 refinance option.

What are SBA 504 loans?

To understand SBA 504 loan rates, let’s first look at how 504 loans are used.

The SBA 504 loan program 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:

  • To purchase and/or renovate existing commercial real estate for your business
  • For construction related to a new build for your business
  • For major equipment purchases
  • To refinance an existing commercial mortgage for your business to get better terms

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.

What is the SBA 504 effective rate?

When you make an SBA 504 loan payment, the interest is paid to the bondholder that bought the debenture. 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 on your SBA 504 loan, your payment is split between the principal, interest, and fees.

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

When you receive a statement from your 504 lender, the breakdown for your SBA 504 payment will show the principal, interest, and the division of fees.

How are SBA 504 effective rates calculated?

In a nutshell, SBA 504 interest 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 does this mean for you as the borrower? It means that the SBA 504 program can give 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 to finance fixed assets.

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. Once your application is approved, your loan officer will send a commitment letter and loan authorization that outlines all fees associated with the loan program.

Finally, once your loan is funded, you’ll receive a letter that details the effective rate for your 504 loan. Your loan officer can send it to you again upon request at any time.

Is it smart to refinance into an SBA 504 loan?

If you’re a small business owner with a conventional commercial mortgage, it’s always a great idea to explore an SBA 504 refinance. You might find better terms that will free up more money in your business. And if you’re an existing SBA 504 borrower with a higher effective rate than current SBA 504 loan rates, talk to your loan officer to see if a refinance is possible.

Explore the SBA 504 loan program today

While interest rates are going up, SBA 504 loan rates are still affordable and lower than historical rates. If you’re interested in an SBA 504 loan or refinance for your business, contact Pursuit today.

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