To understand how SBA 504 interest rates are determined and why they can provide borrowers with tremendous savings, it’s helpful to understand the three-part structure of 504 loans.

504 Loans typically offer 90% financing, with some variances for start-ups or special-use properties.

  • 50% of the total project costs come from a financial institution, usually a bank, and the bank gets first lien position on the assets.
  • 40% of the total project costs come from the SBA 504 Loan Program via a Certified Development Company (i.e. Growth Corp). The 504 loan is backed by a 100 percent SBA-guaranteed debenture and the CDC gets second lien position behind the bank.
  • 10% of the total project costs come from the borrower’s down payment.

The bank’s portion of the financing is offered with either a fixed or variable rate and is typically amortized over a minimum of seven years.  Bank rate, term, and fees are negotiable between the borrower and the bank.  The interest rates on the bank’s portion of the loan are not set by SBA.  However, because the bank gets first lien position and receives an SBA guarantee on approximately 40% of the loan, the bank’s rates tend to be lower than with conventional commercial loans.  It’s important to note…SBA does not provide a loan guarantee for the bank-funded portion of the financing.

The CDC’s portion of the financing comes with a fixed rate and a term of either 20 or 25 years for real estate and 10 years for equipment. The interest rate for this portion is determined when SBA sells the debenture to Wall Street investors to fund the loan.


Where Does the 504 Loan Money Comes From?

Despite a lot of misconceptions, 504 Loans do not actually come directly from the SBA.  Instead, private investors—usually institutional investors such as pension funds, insurance companies, and large banks—buy your loan from the CDC in a monthly sale of SBA 504 loan debt.  That debt is a debenture.  Here’s how it works:  first, your CDC helps prepare your loan application and submits it to SBA for approval.  Once approved, the loan is administered by your CDC, guaranteed by the SBA, and, after completion of your project, is pooled and sold on Wall Street to investors.  The federal guarantee is a big selling point for the investors buying these debentures, since it makes the arrangement very safe for them—the loans have the “full faith and credit” of the U.S. government behind them.

The investors receive interest on the debt semi-annually, which comes from the interest you pay on your loan.  The size of the interest the investors receive is the debenture rate.  The debenture rate in April 2018 was 3.31%.  Investors also like 504 loan debentures because they pay a high rate by the standards of fixed-yield investments…higher than U.S. Treasury bonds but with the same level of safety.   Also, their rate hardly varies, and this predictability is another plus.


So, How Are SBA 504 Interest Rates Determined?

The exact interest rate on your loan is determined only after it has been funded…that is, after the sale of the debenture. While this may not immediately make sense, there is actually a simple reason for it…no one knows what the exact debenture rate will be until the sale actually takes place. The process of figuring this out goes like this:

The SBA has contracts with major financial institutions to handle the technical aspects of the loan process. The first of these is called the fiscal agentEagle Compliance is responsible for the marketing, pricing and sale of the debentures sold to investors to fund the SBA 504 Loan Program. Representing borrowers’ interests, it reaches an agreement with the Underwriters on the sale price of the debentures, which will be expressed as an increment over the rate for Treasury bills. This is when the rate of your loan is determined.

Then, the Underwriter pays for the debentures with funds from investors. Those funds go to Wells Fargo Corporate Trust Services, the central servicing agent. They do the accounting and processing of all 504 loan payments. You’ll make your 504 loan payments to them. (Wells Fargo does not provide services directly to borrowers, so questions about your loan should always be addressed to your CDC’s servicing department.)

In April 2018, the bonds that were pooled to fund the 20-year 504 loans were sold to investors at 3.31%, resulting in an effective rate (fees included) of 5.02%, locked in for the 20-year lifespan of the 504 loan.

Keep in mind, the monthly interest rate for 504 loans is the same nationwide.  All CDC’s, and all 504 borrowers with loans funding in a given month, receive the same effective rate.

Keep in mind, the monthly interest rate for 504 loans is the same nationwide.  All CDC’s, and all 504 borrowers with loans funding in a given month, receive the same effective rate.

Is It One Monthly Payment or Two?

Borrowers make two monthly loan payments, one to the bank and one to the Central Servicing Agent.


Is Interim Financing Necessary?

Usually, yes, because there is often a delay between the closing and the funding of an SBA 504 loan.  Since the 504 loan is funded through a bond sale after the closing has taken place, the documentation of project completion must first be sent to the SBA District Office for submission in the next available bond pool.  Based on the date of closing and the submission schedule of the District Office, the time period could be as little as 5 weeks or up to two or three months, especially for 10-year 504 loans that only have bond sales every-other month.

In most cases, the bank involved in the project provides an interim loan and handles the disbursement of those funds for the project.  The bank also typically waits until the SBA has approved the 504 loan and issues a Debenture Authorization before they close on their interim loan.  With the bank covering the interim financing until the SBA 504 loan funds, they could be looking at up to a 90% loan-to-value (for 50/40/10 structures).  While the interim loan can have additional collateral tied to it to protect the bank, some banks might not want to have that high of an exposure even on a short-term basis.  In those cases, there are national non-bank lenders that specialize in providing the interim financing for a 504 loan.  While that ultimately might cost the borrower additional money for fees and higher interim interest rates, it is an alternative option.

Once the 504 loan funds, the money is wired to the bank (or non-bank interim lender) to pay off the principal amount of the interim loan.  The length of the interim financing depends on the nature of the project.  Turnkey projects typically involve the shortest interim financing period.  However, for ground-up construction projects, that interim financing period could last up to a year or even more.


Does the 504 Work Well for Borrowers?

Yes!  The system has been in place for more than 25 years and is finely tuned to create value for all those involved: investors have access to an attractive investment instrument, the SBA accomplishes their goals of providing funding and creating prosperity for small business and, best of all, borrowers get to grow their business thanks to easily accessible and affordable financing.  Thousands of small businesses have taken advantage of the SBA 504 Loan Program, correlating to billions of dollars.


If you are interested in a loan, or have questions about it, don’t hesitate to contact Growth Corp. Growth Corp’s 504 loan experts will be happy to answer all of your questions, as well as to help guide you through the 504 loan process. Growth Corp has been a high-volume 504 loan provider for over 25 years and is an Accredited Lender with SBA.