When a person wants to seek an SBA 504 loan from the Small Business Administration, they always have the topic of interest rates at the top of their mind.
And it's easy to see why. Just a small increase in rates can cost an investor or business owner thousands of extra dollars over the life of a loan.
So one of the first questions a would-be SBA 504 loan applicant asks is, What is the interest rate I will be paying on my new loan?
The answer is a bit complicated.
To understand how SBA 504 loan rates are established and why they can save borrowers money, consider the loan's three-part structure.
- The investor (you) provides 10 percent,
- The bank 50 percent, and
- The CDC the remaining 40 percent
There are two loans: The bank loan and the CDC loan that is 100 percent guaranteed by the Small Business Administration. The bank gets the first position or first lien. The CDC gets second position or second lien.
The first loan (by the bank) is usually amortized over seven to ten years at a fixed or variable rate. Borrower and bank can negotiate rate, term, and fees. SBA doesn't determine bank loan interest rates. The bank's rates are lower than with typical commercial loans since it gets first lien position and an SBA guarantee on about 40% of the loan. To reiterate, the SBA doesn't guarantee the bank-funded financing.
In short, you negotiate with the bank.
SBA 504 Loan Rates on the Second Lien Position are set at sale.
The CDC's financing is fixed-rate for 20 or 25 years for real estate and 10 years for equipment. When the SBA sells debentures to Wall Street (private) investors to fund the loan, this portion's interest rate is set.
The price investors are willing to pay sets the interest rate.
To get an idea of SBA 504 loan rates history, take a look at the Google Sheet below.
*Rates from March 2018 until present are for 25-year terms. Rates prior from and including February 2018 are for 20-year SBA 504 loan program.
Frequently Asked Questions about SBA 504 Loan Rates
Below are some FAQs about SBA 504 loan rates. Note that interest rates rise and fall constantly; rates on SBA 504 loans are in constant flux. Generally speaking, the best one can do is know the direction interest rates are headed and plan appropriately.
What is the current interest rate on an SBA 504 loan?
As of June 29, 2022, the interest rate on an SBA 504 loan is 5.19 percent.
Are SBA 504 rates fixed?
Yes–on the second lien position (the CDC-funded second loan), but not necessarily on the bank loan.
How is a 504 loan rate determined?
All CDC completed loans are delivered to the SBA, where they are combined to form a month-long debenture sale. All SBA 504 loans are sold to private investors, who are responsible for providing the funding for the loans.
Biden Seeks Increase in SBA Funding to Expand Small Business Access to Capital
You can read more about the SBA 504 loan here and here.