Now that we have covered the length of SBA 504 loans, we can turn our attention to the interest rate. Specifically, what the rates are based on and when the rates are set for a loan. The SBA 504 loan is a bond-based loan program. Meaning that the money that funds a 504 loan does not come from the U.S. Treasury, but from the sale of a bond offering to investors seeking a low-risk investment backed by the SBA and the Federal Government.
Therefore, interest rates for 504 loans are loosely based on the 5-year Treasury rate for 10-year 504 loans and the 10-year Treasury rate for 20-year 504 loans. In addition to the base rate, the borrower pays certain fees associated with the loan that get added on to the amount borrowed. Finally, the borrower has three monthly servicing fees that are added to the standard principal and interest payment. In all, approximately 290 basis points are added to the 5-year Treasury Rate to determine the effective rate on a 10-year 504 loan and approximately 250 basis points are added to the 10-year Treasury Rate to determine the effective rate to the borrower for a 20-year loan.
The interest rate on SBA 504 loans is fixed for the life of the loan. But the rate does not get set until the loan closes and is made part of a given month’s bond pool. The rate that the bond receives is the rate for all loans that make up that bond pool. So while during the loan approval process a certain effective rate is estimated, the borrower will not know what final rate they will be getting until the project as defined is completed, the legal documents are executed, and the bond is sold. On quick turn-key projects, the chance of rates fluctuating dramatically from the time of loan approval to funding is small. However, if the project involves construction and takes several months to complete, then the risk of rates moving in one direction or another increases. For example, over the last 4 months, the effective rate for a 20-year loan has been as high as 4.88% and as low as 4.60%, or a difference of 28 basis points. However, looking back over the past 12-month period, the effective rate has been as high as 5.31% and as low as 4.60%, a difference of 71 basis points.
With that said, historically, the effective rate for an SBA 504 loan has been very competitive with fixed-rate loans through conventional bank financing where the rate is fixed for a much shorter time period than the 10 or 20-years available through the 504 loan program. Click here for a more detailed look at where SBA 504 rates have been.