SBA 504 Loan Rates Explained: Current SBA 504 Loan Rates

The Small Business Administration (SBA) 504 loan is a popular financing tool for small businesses seeking to purchase fixed assets like real estate, equipment, and machinery. One of the most appealing aspects of the SBA 504 loan is its favorable interest rates, which tend to be lower than conventional loans. These competitive rates, coupled with long repayment terms and low down payments, make the 504 loan an attractive option for business owners looking to grow or expand their operations.

In this article, we will provide a comprehensive analysis of SBA 504 loan rates, including how they are determined, their current trends, and factors affecting them. Additionally, we will explore how these loans compare to other financing options available to small businesses.

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What is the SBA 504 Loan?

The SBA 504 loan program provides long-term, fixed-rate financing for major assets that promote business growth and job creation. The loan is specifically intended for the purchase or construction of owner-occupied commercial real estate or the acquisition of long-term equipment. The program is administered by Certified Development Companies (CDCs), nonprofit organizations that work with the SBA to offer these loans.

The 504 loan is structured as follows:

• A participating lender (usually a bank) provides 50% of the total project cost.
• A CDC, backed by the SBA, finances up to 40%.
• The borrower contributes a minimum of 10%, although startups and special-purpose properties may require a larger down payment.

This structure helps spread the risk and makes it easier for small businesses to secure funding. The primary appeal of the SBA 504 loan is the low, fixed interest rate for the CDC portion of the loan, making long-term financial planning easier for business owners.

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How SBA 504 Loan Rates are Determined

SBA 504 loan rates are not determined by the SBA directly but are based on the interest rates of U.S. Treasury bonds. The 504 loan’s interest rate is set when the loan is funded, typically after the completion of the project. There are two main interest rates to consider: one for the bank loan (the 50% portion) and one for the CDC/SBA loan (the 40% portion).

1. Bank Loan Rate (50%): The interest rate on the bank loan is set by the lender and can either be fixed or variable, depending on the lender’s terms. This rate may be influenced by factors such as the borrower’s creditworthiness, the size of the loan, and market conditions.
2. CDC/SBA Loan Rate (40%): The SBA portion of the loan has a fixed interest rate, which is pegged to the 5-year and 10-year U.S. Treasury bond rates. The loan rates are announced monthly, reflecting the interest environment at the time.

The CDC portion of the loan is amortized over 20 or 25 years for real estate loans and 10 years for equipment loans. Since the SBA portion has a fixed rate, it provides predictability and stability, making it easier for businesses to plan their finances over the long term.

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Current SBA 504 Loan Rates

As of 2024, SBA 504 loan rates remain highly competitive. The rates are dependent on the term of the loan (10, 20, or 25 years) and the prevailing U.S. Treasury bond rates. While these rates fluctuate monthly, they are typically lower than standard commercial loan rates.

These rates are attractive because they are fixed, meaning they do not fluctuate over the loan’s lifetime. In contrast, many traditional commercial loans have variable rates, which can rise unexpectedly during periods of economic volatility.

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Factors Affecting SBA 504 Loan Rates

Several factors influence rates, some related to the borrower’s profile and others tied to the broader economic environment:

1. U.S. Treasury Yields: SBA 504 loan rates are tied directly to U.S. Treasury bond yields. When Treasury rates increase, SBA 504 rates also rise, and when Treasury rates fall, so do SBA 504 loan rates. This close link means that rates are largely influenced by macroeconomic factors like inflation, Federal Reserve policy, and investor demand for government debt.
2. Creditworthiness of the Borrower: While the SBA portion of the loan has a fixed interest rate, the rate for the lender’s portion (the 50% loan) can vary based on the borrower’s creditworthiness. A higher credit score and a strong financial profile will typically result in a lower interest rate for the lender’s portion of the loan.
3. Loan Term: SBA 504 loans offer 10, 20, and 25-year terms. Generally, the longer the loan term, the higher the interest rate. However, even for the longer terms, SBA 504 loan rates tend to remain significantly lower than those offered by conventional loans.
4. Collateral and Risk Profile: Lenders assess the risk of the loan based on the borrower’s business, industry, and collateral. For riskier industries or startups, the bank portion of the loan may carry a higher interest rate, though the SBA portion remains fixed.
5. CDC Fees: There are certain fees associated with SBA 504 loans, including CDC processing fees, legal fees, and underwriting fees. While these fees do not directly impact the loan’s interest rate, they can affect the total cost of borrowing and should be factored into any decision to pursue a 504 loan.

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SBA 504 Loan Rates vs. Other Financing Options

Compared to other types of financing, SBA 504 loan rates are generally more favorable, particularly for long-term, fixed-rate financing. Below is a comparison of SBA 504 loans to some common alternatives:

1. Conventional Commercial Loans: Conventional commercial loans typically have variable interest rates that are higher than SBA 504 loan rates. Additionally, these loans often require a larger down payment, higher fees, and shorter terms, making them less attractive for long-term projects.
2. SBA 7(a) Loans: While the SBA 7(a) loan is another popular option for small businesses, it usually comes with variable interest rates. In contrast, the SBA 504 loan offers a fixed rate, providing more stability over time. However, the 7(a) loan offers greater flexibility in how funds can be used, including for working capital.
3. Equipment Financing: While some small businesses may choose equipment financing for purchasing long-term equipment, these loans typically come with higher interest rates than SBA 504 loans. The SBA 504 loan’s low fixed rate and long-term repayment schedule make it a more cost-effective option for large purchases.
4. Real Estate Loans: Traditional real estate loans often have variable interest rates and shorter terms than the SBA 504 loan. Additionally, conventional real estate loans may require larger down payments, which can be a significant barrier for small businesses.

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How to Apply for an SBA 504 Loan

To apply for an SBA 504 loan, small businesses must work with a Certified Development Company (CDC). The CDC will evaluate the borrower’s financial profile, creditworthiness, and project specifics to determine eligibility. The loan application process involves:

1. Preparing Financial Statements: Borrowers must provide detailed financial statements, including profit and loss statements, balance sheets, and tax returns.
2. Providing a Business Plan: The SBA requires a thorough business plan that demonstrates how the loan will support the business’s growth and job creation.
3. Collateral and Down Payment: Borrowers must be prepared to offer collateral and a minimum down payment of 10% (or more for certain projects).

Once the CDC and lender approve the loan, the interest rate for the SBA portion is fixed at the time of funding, typically after the project’s completion.

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Conclusion

SBA 504 loan rates provide small businesses with an affordable, stable, and predictable source of financing for long-term investments in real estate and equipment. Tied to U.S. Treasury yields, these rates tend to be lower than traditional commercial loans, making the 504 loan a preferred choice for business owners looking to grow their operations. With long repayment terms and fixed interest rates, it offers unparalleled benefits in terms of affordability and financial security. However, borrowers must be prepared to meet eligibility requirements and work with both a bank and a CDC to secure funding.

For businesses seeking to make significant capital investments, this is one of the best options available, providing access to low-cost financing that can drive growth and stability over the long term.