As we step into 2025, understanding the current landscape of SBA 504 loan rates is crucial for small business owners planning to finance their projects. In this blog, we will break down the latest updates on SBA 504 loan rates, compare them with SBA 7(a) loans, and explore the various options available for your financing needs.
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January 2025 SBA 504 Loan Rate Update
The SBA 504 loan rate for January 2025 has seen an increase. The 25-year debenture rate is now at 6.51%, up from 6.93% previously. This change of almost half a point is significant for those considering this financing option.
It's essential to note that the 504 loan structure consists of two loans: a senior debt portion from a bank or credit union and a second loan guaranteed by the SBA. For example, on a million-dollar project, you might have a $500,000 conventional first loan and a $400,000 second loan. The second loan, once the debenture occurs, will be fixed for 25 years at the current debenture rate.
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Understanding the SBA 504 Loan Structure
The SBA 504 loan is designed to help small businesses acquire fixed assets for their operations. The 504 loan structure typically involves a first loan from a conventional lender, which is the senior debt, and a second loan from the SBA, which is the subordinated debt. This dual structure helps businesses manage their capital more effectively.
In the case of construction loans, the first and second loans can often be interim debt during the construction phase. Once the project receives a certificate of occupancy, the second loan debenture will occur, allowing the lender to sell the guaranteed portion into the secondary market. This process is why many banks may hesitate to finance construction projects through the SBA 504 program, although we have strong relationships with lenders who excel in this area.
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Construction Loans & SBA 504 Financing
When it comes to financing construction projects, the SBA 504 loan can be a powerful tool. The interim debt is utilized during the construction phase, and once the certificate of occupancy is obtained, it transitions into permanent debt. This means that if you're planning a year-long construction project, you need to keep an eye on the debenture rate at that time.
With the current 504 rate at 6.51%, it’s vital to consider how this rate will affect your overall project costs. The timing of your project can significantly impact your financing strategy, especially if rates fluctuate during the construction period.
Comparing SBA 7(a) vs. 504 Loan Options
When evaluating financing options, many small business owners are often torn between SBA 7(a) and SBA 504 loans. The primary difference lies in the loan amount and structure. The SBA 7(a) loan has a cap of $5 million, making it suitable for smaller financing needs, while the SBA 504 loan can cover larger projects.
The SBA 7(a) loan is tied to the Wall Street Journal Prime Rate, which is currently at 7.5%. It often has a three-year prepayment penalty, making it easier to exit the loan if needed. In contrast, the SBA 504 has a longer prepayment penalty period of ten years, which means borrowers may feel more committed to this option.
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Alternative Financing: USDA BNI Loans
For projects located in eligible rural areas, USDA BNI loans can be a viable alternative. These loans offer similar benefits to SBA loans but are specifically tailored for rural properties. Understanding your project's location can open up additional financing avenues that may suit your needs better.
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Understanding Prepayment Penalties
Prepayment penalties are an essential consideration when choosing between SBA loan options. The SBA 504 loan has a ten-year prepayment penalty, which means that if you decide to pay off the loan early, you may incur additional costs. This is a crucial factor for businesses that may anticipate needing to refinance or sell their property in the near future.
On the other hand, the SBA 7(a) loan's three-year prepayment penalty offers more flexibility. It's important to weigh these penalties against your business's long-term financial strategy.
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Which Loan is Right for You?
Determining whether the SBA 504 or 7(a) loan is the best fit for your business depends on several factors, including your project size, location, and financial goals. If your project exceeds the SBA 7(a) cap, the 504 loan becomes essential. However, if flexibility and a lower prepayment penalty are priorities, the 7(a) might be the better choice.
At the end of the day, both options have their advantages, and understanding the nuances will help you make a more informed decision for your business financing needs.
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Conclusion
As we move further into 2025, staying informed about the latest SBA loan rates and options is vital for business owners looking to finance their projects. The SBA 504 loan remains a strong contender for those needing long-term financing for fixed assets, while the SBA 7(a) loan offers more flexibility for smaller projects.
If you have general questions or need assistance navigating these options, please click here. For a deeper analysis of which loan structure may suit your needs, feel free to book a call with us. We're here to help you explore the best financing solutions for your business.
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