In this article, we will answer the question, “Is there an SBA 504 prepayment penalty?”
Is there an SBA 504 prepayment penalty?
When a small business owner takes out an SBA 504 loan, they are usually doing so with the intention of holding onto the property for the long term. However, life happens and sometimes circumstances change. If a small business owner wants to sell the property that is securing their SBA 504 loan, they may be wondering if there is a prepayment penalty.
The answer is yes, there is a prepayment penalty for SBA 504 loans. If a borrower wants to sell their property within the first five years of taking out the loan, they will be required to pay a percentage of the total loan amount as a penalty. After five years, there is no prepayment penalty.
For some small business owners, this may not be a deterrent to selling their property. As they say, “it depends” on each owner’s unique situation.
How does prepaying affect the interest rate?
When it comes to SBA 504 loans, there is a lot of misinformation out there regarding prepaying. Some people believe that prepaying will negatively affect their interest rate. It won’t. Because your CDC-portion of the loan is actually a debenture, the rate you pay is fixed for the term of the loan. Your bank-financed loan rate may be variable or fixed, however. It all depends on how you structure the loan package.
When considering taking out an SBA 504 loan, borrowers should be aware of the potential consequences of prepaying the loan. Though there is no formal prepayment penalty specified in the SBA's rules, lenders may charge a penalty for borrowers who choose to pay off their loan early. This penalty is typically a percentage of the remaining balance on the loan, and can range from 0-3 percent of the total loan amount. Borrowers should factor this potential cost into their decision when considering whether or not to prepay their loan.
What are the benefits of prepaying?
When it comes to business financing, there are a lot of options out there. One option is prepaying for your loan, which can have some benefits.
For example, if you have the cash on hand, you can avoid paying interest on the loan.
However, there are some drawbacks to prepaying as well. For instance, you may be charged a penalty for pre-paying, which could offset any savings you might have otherwise achieved. Ultimately, whether or not prepaying makes sense for you will depend on your individual circumstances.
Can a Small Business Administration (SBA) 504 loan be prepaid in part or in whole?
An SBA 504 loan can only be prepaid in whole; partial prepayment is not permitted due to the nature of the financing instrument used (bonds).
Are there any costs associated with prepayment of the SBA 504 loan?
Yes. Again, because bonds are sold on the open market to fund the SBA 504 loans, there is a 10-year prepayment penalty associated with all SBA 504 loans with a 20-year or a 25-year term and a 5-year prepayment penalty associated with all 504 loans with a 10-year term.
Both are non-negotiable. The prepayment penalty goes to pay the bond holder for the early redemption of the bond.
There is a potential way of getting out of an SBA 504 loan: SBA 504 loans are assumable, meaning a new owner could take over the loan if you find a buyer before your loan term is up.
Conclusion
Pre-paying an SBA 504 loan, in most cases, is not a good idea. The best option usually is to refinance your bank loan (the non-guaranteed non-SBA component) if you can while keeping the generally low-interest SBA 504 in place. But as they say, “it all depends” on your unique circumstances.
That’s why it’s very important to consult with an experienced commercial loan advisor who can help walk you through all the different options and associated costs.
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