Tuesday, August 3, 2010

SBA Loan Basics for Borrowers- What is the rate on a SBA loan?

So what is rate on a SBA 504 loan?

The 504 debenture effective yield is now down to only 4.93%. That is a rate fixed for 20 years.

What is a 504 debenture? It is a second trust deed through the SBA typically up to 40% of the purchase price of a building. A bank provides a first for 1/2 the purchase price and a borrower puts down only 10%

So what is effective yield? Is that the same as the interest rate? There are three different rates with a 504 loan-
•Debenture rate
•Note rate
•Effective yield

Debenture buyers are government and corporate bond investors who expect semi-annual payments (twice a year). Debenture rate is the yield to the buyer of that debenture. Borrowers however make monthly payments which is what the debenture note rate is to convert that monthly payment into a semi-annual payment. In addition to the interest that is paid there are on-going fees to keep the 504 program self funding. Those fees added to the note rate make up your effective yield.

This effective yield is now down to an all time low. Borrowers looking to acquire a building for their business (they must occupy at least 51% of it) should seriously consider the 504 program.

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