In this article, we are going to explain how interest rates for SBA 504 loans are determined.

The Small Business Administration (SBA) offers several loan programs to help small businesses get the financing they need. One of these programs is the SBA 504 Loan Program, which provides long-term, fixed-rate financing for major capital investments.

So how are interest rates for SBA 504 loans determined? 

The answer depends on a few factors, including the size of the loan, the maturity of the loan, and the current market conditions.

Let’s break down how the SBA 504 process works. You actually get two loans, one for 50 percent of the total project cost from a bank and one from a CDC, or Certified Development Company, for 40 percent of the project cost. YOU, the borrower, have to make up the other 10 percent in the form of an equity injection.

The bank loan interest rate can be either a fixed- or variable rate. The bank and borrower negotiate the rate. The bank essentially determines the pricing for the loan depending on how much they are lending, their risk appetite, the time period of the loan (the longer the maturity, the higher the rate), and current market conditions, among other factors such as your credit score and the fiscal health of the business.

All of those factors just listed are considered by the CDC as well. Because the entirety of the loan amount is guaranteed by the SBA, CDCs often price their loans (i.e., the interest rate) a little lower than a bank would because they are taking on a lower risk.

However, it is this CDC portion of the total loan proceeds that doesn’t get an interest rate until after the loan is processed and funded.

Why? The CDC loan gets sold to investors in the securities market as a debenture. Depending on supply and demand, your SBA 504 loan may have an interest rate that is lower OR higher than the previous month.

The SBA has posted a schedule of the sale of these CDC “debentures” here. You can find the current interest rates for SBA 504 loans here.

In a nutshell, SBA 504 rates are linked to the bonds that are issued to institutional investors, and the interest rates are often representative of the rates on 10-year U.S. Treasury bonds, which are long-term investments that have fixed rates of return.

What this actually implies for you as the borrower is that by utilizing the SBA 504 program, you are able to get highly competitive long-term fixed interest rates. This is made possible through the programs (often at or even below conventional commercial interest rates). When you take into account the extended repayment terms (up to 25 years) and the decreased owner-equity requirement (typically 10% for SBA 504), it is extremely unlikely that you will find a better choice anyplace else.

When are the actual rates of interest calculated?

When you first make contact with your SBA 504 lender, they will provide you with rate quotes that are based on the current rate, including the effective rate. Your loan officer will present you with a commitment letter and loan authorization once your application has been accepted. This letter will detail all of the fees that are involved with the loan program.

In conclusion, once your loan has been funded, a letter outlining the effective rate for your SBA 504 loan is sent to you. Your loan officer is able to give it to you again at any time upon your request, and they are required to do so by law.