Do you have some questions for us?
Yes, there is a prepayment penalty for the first 10 years on a 20 year 504 loan (and for 7 years on a 10 year 504 loan). Many bankers and borrowers incorrectly believe that this prepayment penalty is extremely burdensome and therefore do not consider the SBA 504 loan option. Current misconceptions place the 504 prepayment penalty rates as high as 10% of the outstanding loan balance. In fact, the 504 loan has a prepayment penalty that is often in the same range as prepayment rates for similar long-term, fixed rate conventional loans.
The SBA 504 prepayment penalty rate is based on the debenture rate in place at time of borrower’s 504 funding date. The penalty rate is an annually declining percentage of the debenture rate starting at 100% of the rate in year one, 90% in year two, 80% in year three and so on, declining to 10% of the rate in year 10.
As an example, assume the debenture rate for the October 2017 debenture sale was 2.85%. If a 504 borrower whose loan was funded in the October 2017 debenture sale chose to prepay in year three, the prepayment penalty rate would be approximately 2.28% (2.85% x 80%) of the outstanding 504 loan balance.
We encourage prospective referral partners and borrowers to discuss the prepayment penalty with a representative from The 504 Company to gain a better understanding of the fee in the context of the transaction and the borrower’s other alternatives.
It is also helpful to know that in many cases the existing 504 loan can be assumed by a successor to the borrower provided SBA eligibility criteria are met. For example, if the business and business premises are being sold, the buyer may be able to assume the existing 504 (at what could be an extremely attractive rate) and the seller could avoid the prepayment penalty entirely and maybe even get a higher price for a sale that includes some imbedded, attractive financing!
Banks refer borrowers to The 504 Company. Community Partners, who are economic development companies, IDAs, EDZ companies and chambers of commerce, make many referrals, as well.
We can help a business refinance its debt in order to reduce current interest rates and/or convert from a floating rate to a fixed rate, reduce monthly payments by extending the loan maturity, convert short-term debt to long-term debt, or use the equity that’s built up in fixed assets to provide cash for the growth of the business.
This can be done through the Community Advantage Loan Program.
We have financed many different types of equipment for our borrowers ranging from desks, chairs and computers to industrial handling and manufacturer's equipment, vehicles, construction equipment, printing presses, airplanes, barges, trains and more.
Typically, we match the repayment term of the loan with the useful life of the equipment being purchased ranging from three to 10 years. For equipment that has a useful life of greater than 10 years, such as a printing press, we can utilize the SBA 504 loan program. This program allows for up to 10 years repayment with a fixed interest rate and as little as a 10 percent down payment. It is only available for the acquisition of equipment, not for refinancing of equipment.
The SBA 504 Loan Program is administered through The 504 Company. This fixed asset economic development program is designed to promote growth and job creation in small and medium-sized businesses and is intended for use by businesses with good track records and promising growth opportunities.
Loans from $25,000 to $5 million can be made for land acquisition and improvements, building acquisition and/or construction, and machinery and equipment. Applicants must have net worth of less than $15 million and net profit of less than $5 million.
Please see our Loan Application Checklist for a useful tool to help borrowers gather the necessary information The 504 Company will need to evaluate the business.