SBA 504 Loan Rates: How They're Determined and What You Need to Know
Small businesses are the pillar of the American economy, but getting financing to grow as a company can be challenging. To support entrepreneurs, the U.S. Small Business Administration (SBA) provides a variety of loan programs, including the SBA 504 loan program.
When considering your business financing options, the interest rate is a critical factor that can impact the affordability and viability of a loan. Understanding SBA 504 loan rates and the benefits of SBA loans can be a valuable tool in securing the funding you need to achieve your business goals.
So what are the current SBA 504 loan rates, and how do they stack up against historical rates?
What Are SBA 504 Loans?
SBA 504 loans offer long-term, fixed-rate financing for small businesses to purchase real estate, renovate existing properties, or purchase equipment. They are not available to non-profit organizations.
SBA 504 loans are offered in different parts. The first part is through a financial institution. The second part (up to 40%) is through a Certified Development Company (CDC), which is a community-based partner that helps promote economic development. The final part comes from the borrower (around 10%). The CDC portion of the debt or debenture is then sold to a private investor, usually an institutional investor.
Unlike traditional bank loans, SBA 504 loans are backed by the SBA, which reduces the risk to lenders and makes it easier for small businesses to access the funding they need.
The SBA 504 loan program can be used for:
Purchasing or renovating commercial real estate
Constructing a new building for your business
Purchasing major equipment
Improving existing facilities or land
How Are SBA 504 Loan Rates Determined?
When you get a loan from a lender, they will give you the interest rate and fees, which make up the effective rate of the loan amount. When you get a statement, you’ll see the principal, interest, and fees.
The interest rates on SBA 504 loans are usually pegged to the 10-year U.S. Treasury bonds rate. It’s usually an increment above the current market rate and totals approximately 3% of the debt.
This allows the SBA 504 program to offer long-term, fixed interest rates that are usually much more competitive than standard rates.
Current SBA 504 Loan Rates
SBA 504 loans are subject to fees and other factors that affect the interest rates. Borrowers should contact their local CDC or lender to inquire about current SBA 504 loan rates and any fees associated with the loan.
Interest rates can fluctuate over time due to changes in market conditions, so borrowers should monitor rates and compare offers from multiple lenders to ensure they are getting the best possible deal on their SBA 504 loan.
As of May 2023, the current interest rates for the SBA 504 CDC portion of the loan range from 6.02% to 6.09%:
25-Year SBA 504: 6.02%
20-Year SBA 504: 6.072%
10-Year SBA 504: 6.036%
25-Year Refi SBA 504: 6.038%
20-Year Refi SBA 504: 6.090%
Rates have increased over the last few years, largely due to an overall increase in interest rates. In 2022, rates ranged from as low as 3.07% in January to 6.53% in December. While in 2021, interest rates for SBA loans ranged from 2.44% to 3.04%. In comparison, rates in 2008 were far higher, ranging from 6.13% to 7.72%.
Pros and Cons of SBA 504 Loans
Your small business is unique, and you likely have different needs when it comes to financing. How do you know if an SBA 504 is right for your business? Before you start the loan application process, consider the pros and cons of the SBA 504 loan program.
Pros:
Lower down payment: SBA 504 loans typically require a lower down payment than traditional loans, which can make them more accessible to small businesses.
Longer repayment terms: You can often get longer repayment terms than traditional loans, which can help you manage your cash flow.
Fixed interest rates: An SBA 504 loan typically has a competitive fixed interest rate compared to a traditional loan, which can save you money over the life of the loan and make it easier for you to budget your monthly payment.
Business expansion: You can use an SBA 504 loan for a variety of purposes, including real estate purchases, renovations, and equipment purchases.
Cons:
Strict eligibility requirements: SBA 504 loans have strict eligibility requirements, which can make them difficult to qualify for.
Long application process: The application process for SBA 504 loans can be lengthy and time-consuming, which can be a challenge for small businesses that need funds quickly.
Limited loan amounts: SBA 504 loans have a maximum loan amount of $5 million ($5.5 million for some renewable energy projects), which may not be enough for some small businesses.
Can’t be used for working capital: With an SBA 504, you are limited by what you can use the money for. You can’t use it for working capital, for inventory, to invest in rental real estate, or to refinance debt.
Alternatives to SBA 504 Loans
While SBA 504 loans can be a great financing option for small businesses, there are several alternatives that may be worth considering, depending on your business’ needs. Here are some other funding options to consider:
SBA 7(a) loans: SBA 7(a) loans are a popular alternative to SBA 504 loans. These loans are more flexible than SBA 504 loans in terms of their use of funds, allowing borrowers to use the loan proceeds for a wider variety of business purposes.
Conventional loans: Conventional loans are another financing option for small businesses. These loans are typically offered by banks and other lenders and are not guaranteed by the SBA. Conventional loans may offer more flexibility in terms of loan amounts and repayment terms, but they may also come with higher interest rates and more stringent eligibility requirements.
Business lines of credit: A business line of credit is a revolving credit account that allows businesses to borrow funds as needed, up to a certain credit limit. This can be a good option for businesses that need ongoing access to capital, but don't want to take out a large loan all at once. Backd offers a business line of credit with unlimited terms and competitive interest rates.
Equipment financing: Equipment financing allows businesses to purchase equipment or machinery using a loan or lease. Businesses that need to make a significant equipment purchase might want to consider this option, as the equipment itself can serve as collateral for the loan.
Invoice factoring: Invoice factoring is when businesses sell their outstanding invoices to a company in exchange for cash. You can receive payment for your outstanding invoices sooner, helping with cash flow.
Working capital advances: A working capital advance is a type of financing that you can use for the day-to-day operations of your business. Since you can't use an SBA 504 loan for working capital, it could be a good option for businesses looking to fund their operations.
Fund your business with the right financing
SBA 504 loans can be an attractive financing option for small businesses looking to purchase real estate or equipment. However, there are also several alternatives to SBA 504 loans that may be worth considering, depending on your business financing needs.
As a small business owner, it's important to choose the financing option that best meets your needs in terms of loan amount, interest rate, repayment terms, and other factors. Get access to the capital you need to grow and succeed with a Backd business line of credit or working capital advance. With Backd, you can get financing with flexible payment terms and competitive rates.
Apply today and get access to funds in just 24 hours.
