The 4-1-1 on the SBA 504 Loan Program

(Sources & Credits: Fundera and Small Business Administration) — There are 28 million small businesses in the United States, accounting for two-thirds of new job growth and roughly half or our nation’s Gross Domestic Product (GDP). Given their importance to the American economy, the Small Business Administration (SBA) provides a range of loans and financing packages to assist small businesses expand their operations.

SBA loan rates are consistently some of the most affordable in the industry. With a partial government guarantee, SBA loans mitigate much of the risk that lenders take on when providing SBA loans and this mitigated risk allows SBA lenders to provide funding with lower interest rates.
 
One of the most popular – and important – of all SBA finance options is the SBA 504 Loan program, which are provided through Certified Development Companies (CDC) such as the Lewis & Clark CDC (which is part of the Lewis & Clark Development Group).

Often referred to as the “loan that grows America,” the SBA 504 Loan provides businesses with fixed rate financing for the purchase of long-term assets such as: land acquisition, equipment, costs of new construction or renovation costs, professional fees (such as engineering and architectural fees), leasehold improvements, and more.

Per  SBA 504 Loan requirements, applicant small businesses, including their affiliates, cannot have a tangible net worth of more than $15 million or an average after-tax profit of not more than $5 million for each of the last two years. And applicants and their bank will negotiate interest rates on the bank portion of the loan. The SBA doesn’t have any say over these rates, although they usually fall under 10%.

Over the years, the SBA 504 Loan program has become the most ideal financing options for small businesses due to favorable loan terms, rates, and amounts. And, as LCD Group SBA 504 loan officer Tracy Whitney notes, another benefit is that it is relatively easy to understand. 

The SBA 504 Loan program is really made up of two loans. The first loan comes from the applicant’s bank, which is responsible for about 50 percent of the financing. The second loan comes from the CDC, which funds about 40 percent. The applicant is responsible for the remaining ten percent in the form of a down payment on the loan.

“While there is always some complexity in the financing process, the composition of the SBA 504 Loan is very straight-forward,” observes Whitney.

Each month, CDCs submit closed loans to the SBA, which pools all the loans together and sells them to investors. The investors provide the capital that actually funds the loans.

The rates on the CDC portion of the loan are subject to SBA rules. Under those rules, the interest rates on the CDC loan are based on the current rate for 5-year and 10-year US Treasury bonds. To those rates, you must add a spread for investor returns, as well as fees that the CDC and SBA charge.

The calculations for these markups can get complicated, so a good shortcut is to take current U.S. Treasury bill rates and add a spread of 1.5% to 5.125% (which covers various CDC and SBA fees) to get your approximate interest rate. The rates on the CDC portion of SBA 504 loans are currently as follows:

  • 10-Year SBA Loan Term: 5-year Treasury rate + 1.5% to 5.125% in fees
  • 20-Year and 25-Year SBA Loan Term: 10-year Treasury rate + 1.5% to 5.125% in fees

As of August 2019, the 5-year Treasury rate is 1.84%, and the 10-year Treasury rate is 2.02%.

This brings the current SBA 504 loan rates between approximately 3.72% and 7.145%. These are fixed rates, so your payment never changes for the entire length of the SBA loan term on the CDC portion of the loan.

The Lewis & Clark CDC’s current rate for the SBA 504 Loan is 3.531% for the full 20 year loan, 3.363% for the full 25 year loan and 3.937% for the full 10 year.

“There is a reason why this program is among the most popular and beneficial to small businesses,” says  Whitney. “With rates this low, it really is an ideal time to partner with Lewis & Clark CDC to put the SBA 504 Loan  to work for you.”

For More Information: Contact Tracy Whitney at (701) 667-7602 or at tracy@lcdgroup.org to learn more about the program.