SBA is not a conventional bank, therefore special procedures and deadlines exist for prepaying your 504 loan early. In that case, you would have to pay $48,000 on top of the loan amount and other associated fees. Whether or not the first mortgage has a prepayment penalty is up to the bank or lender and the circumstances of your particular transaction, but the second mortgage always has a 10 year prepayment penalty…but it is not as bad as it sounds. The same loan would cost you just $6,000 if you paid it off in year 10 rather than year three. There is no prepayment penalty for 20-year loans after the 10th year. The simple answer to the question of whether or not there are prepayment penalties with an SBA 504 loan is yes, there are. Refinance Existing Debt and Borrower’s Cash Injection: Yes, with some requirements. 5 = .60 This website is owned by a private company that offers business advice, information and other services related to the formation, financing, operation, and management of businesses. First, the lending process for a 504 loan is similar to that of a bank loan. Everything you need to know about loan assumption for the SBA 504 loan program. Therefore, the amount of prepayment penalty would be the balance of the loan at the time of the prepayment multiplied by the prepayment penalty percentage. And, it’s important to keep in mind that if your loan has a term of less than 15 years, your lender cannot charge prepayment fees at all. What is a prepayment penalty? Assumed: Finally, you may be able to offload the loan to someone else. For example, let's take a 20-year 504 Loan debenture for $1,000,000 on December 1, 2016 at a debenture interest rate of 2.45%. SBA 504 Loan, SBA 504 Loans, SBA 504 Job Creation Requirements, SBA 504 Loan Uses, SBA 504 Loans Business Vehicles, SBA 504 Loan, SBA 504 Loans, SBA 504 Job Creation Requirements, SBA 504 CDC, SBA 504 Eligibility, SBA 504 Loans for Non-Citizens, SBA 504 Loans for Franchises, SBA Franchise Loans. Prepayment is defined as a payment of principal in excess of the amount due … The SBA requires unlimited full personal guaranty for any individual owning 20% or more of the operating company. 504 rates are fixed for 20 years, typically at the 10-year Treasury rate plus 2 1/2 to 3%. Yes SBA 7(a) and 504 loans have prepayment penalties. 11 and thereafter 0. And it may actually take longer for a 7a applicant to be approved since outside collateral is required by the program. We are not the Small Business Administration and are not a lender. Washington, DC 20416. SBA 504 Prepaid Interest. We use cookies to provide you with a great experience and to help our website run effectively. Note: the buyer is expected to be as strong financially as the seller. Simply fill out the form below for a risk-free consultation and a free SBA loan quote! Prepayment Penalty •Prepayment penalty declines during first 10 years to 0% •Loan is assumable and prepayment penalty does not apply Sample Prepayment Penalty ... •The SBA 504 Debt Refinance Program was originally enacted as part of the Small Business Jobs Act of 2010. Loan balance at time of first prepayment = $100,000. This loan has no prepayment penalty. The SBA 504 Loan Program provides economic development financing that is designed to encourage private sector investment in fixed assets, the results of which increases productivity and creates new jobs. Other customary fees also apply. You also understand that we are not affiliated with the Small Business Administration (SBA). No, there is no way to waive the prepayment penalty on an SBA 504 loan. 2 = .90 If you are a bank or credit union looking to get into SBA lending without hiring a staff, then there are very real, very profitable solutions. There is no penalty if you pay off your 504 loan at any time in the second half of the loan’s term. You could choose to sell the equipment or real estate securing the loan for the amount of equity you have in them, and the new buyer, assuming they qualify, would be able to simply assume the payments in your place. (2) Borrower makes a voluntary prepayment (or several prepayments in the aggregate) during any one of the first three successive 12 month periods following the first disbursement of the loan. Partial prepayment is not allowed on SBA 504 loans; 504 loans can only be paid off on the third Thursday of each month; Capital Access Group must receive written notice 15 days in advance of the payoff date; Prepayment penalties apply for the first 10 years of the loan. All Rights Reserved. It is a way of guaranteeing a specific amount of profit for the lender (or fees for the SBA) if the loan is paid off early and they do not receive the expected amount of interest. There are two ways to avoid the prepayment penalty entirely: Wait to pay off the loan: there is no prepayment penalty … The program provides long-term, low down payment, reasonably priced fixed-rate financing to health… Fees:% Q. 7 = .40 Ste B140. Unfortunately, there’s a prepayment penalty on the 504 loan for the first half of the loan term. Alternatively, the buyer can apply for a new 504 loan. The SBA 504 loan program is a 2 loan program with a first mortgage from a bank or SBA lender and the second mortgage from a CDC – Certified Development Company. The penalty is equal to 100% of one year’s interest during the first year, declining by 10% per year (to zero) after ten years. Early Payoff Penalty for SBA 504 Loans. If no individual owns more than 20%, then the majority owners will be required to be personal guarantors. The prepayment penalty for 20 year SBA 504 loans is typically referred to as a 10-9-8-7-6-5-4-3-2-1 calculation. The example above is rather simplistic. Similarly, the penalty for 10 year loans is equal to 100% the first year, 20% each year thereafter and zero after 5 years. Essentially, a penalty is charged if the 504 loan is prepaid during the first half of the loan (first 10 years). The SBA 504 and 7(a) loans to purchase or refinance commercial real estate both have pre-payment penalties. (5% year 1, 3% year 2 ... SBA guaranteed) 504 CDC maxi- amount rangesfrom $5 millionto million, depending on type of business. Your penalty will be different. (a) The subsidy recoupment fee is payable to SBA when: (1) Loan has a maturity of 15 years or more. Business Acquisition loans include 80% financing for up to a 10 year term. Consumers have received greater protection against prepayment penalties on mortgage loans in the past few years. It is actually calculated on the loan debenture rate, with the full debenture rate equaling the maximum prepayment penalty. Yes. All 504 loans are fully amortized and are assumable. 1 st prepayment made in 2 nd year = $10,000 (no penalty) 2 nd prepayment made in 2 nd year = $17,000 (now penalty is triggered) 25% of $100,000 = $25,000 (trigger) 2 nd prepayment, added to first prepayment = $27,000. We are not the Small Business Administration and are not a lender. Terms and Conditions of an SBA 7a Loan. Of course, it’s wise to confirm the prepayment penalty rules with your lender prior to taking any type of action. Boca Raton, Florida 33487, United States [email protected], Finding a LenderApplication ProcessCompare SBA LoansSBA 504 Refinancing, Loan UsesLoan RequirementsDown Payments Rates and Costs, Application ChecklistClosing Checklist SBA 504 Blog, About UsContact Us Privacy PolicyTerms of Use Advertiser Disclosure. 504 loans can be repaid early and under very favorable conditions, sometimes with no penalty. The example chart below shows how your penalty declines over time. No advance payments or partial payoffs are permitted. May be used for working capital (i.e., to pay fixed debts, payroll, accounts payable), not lost sales or profits or for expansion. ", 100% Financing for Established Businesses plus Doctors, Dentists, Veterinarians, Funeral Homes, Pharmacies, Self Storage & Mini Storage Businesses Eligible for SBA Financing, No Down Payment Commercial Property Financing. Nothing on this website is an offer or a solicitation for a loan. The SBA 504 Prepayment Penalty Myth. NGCDC, Inc. can give you a complete explanation of these procedures. The prepayment penalty exists for half the term of the loan. We have no affiliation with any government agency. term.!Thispenaltyis!equivalent!to!one!year's!interest!in!the!first!year!of!the!loan!term,! The SBA 504 prepayment penalty is contingent on the loan’s debenture rate, which directly impacts the penalty rate. The key is actually having an "asset" that can be financed. Call us to discuss this. What is the purpose of the SBA 504 Loan Program and why does it exist?A. With that being said, SBA 504 loans are assumable with lender and SBA… However, the same protections do not extend to small business owners. The local tax base is also improved by way of adding assets on which taxes are based. 4 = .70 Lender Participation Fee. Year 3: 1% of the total prepayment amount Yes, “soft costs” (e.g. The example above is rather simplistic. The prepayment penalty for 20 year SBA 504 loans is typically referred to as a 10-9-8-7-6-5-4-3-2-1 calculation. Fixed rate is determined at SBA-guaranteed 504 debenture sale; Fees set by CDC; Prepayment Penalty; SBA Guarantee Fee is paid directly to U.S. Small Business Administration and finance into the loan. None of the information on this site constitutes legal advice. Terms are up to 30 years, no prepayment penalty. Note that the prepayment percentage will vary based on the debenture rate for your loan/bond. 504 loans cannot be made to businesses engaged in speculation or investment or rental real estate. Again, the SBA requires a personal guarantor on any loan, including 504 loans. However, there are ways to avoid paying it altogether that do not require it to be waived. Being a unique program, the 504 has unique prepayment conditions as well. Prepayment/assumption: The SBA 504 portion of the loan has a 10-year prepayment penalty. So, how much might you expect to pay if you were able to get out of your loan early? 3 = .80 The higher your score, the lower the rate. 9 = .20 See a CMDC loan officer for more information. SBA504.LOANS 7601 N Federal Hwy. ... and one that we have touched on already, is if they want to avoid the prepayment penalty on the loan. When this happens, you get out from under any potential prepayment penalty, but the buyer is also able to avoid prepayment penalties, as they are eliminated in the case of an assumed loan. 10 = .10 Still, looming concerns and misconceptions over 504 prepayment penalties can have negative consequences for business owners seeking funding. SBA Loan Alternatives: SBA Loans aren't always the answer and there are alternatives...if you have Assets. Asset Based Loans - Asset based loans are a quick way to access capital for your business. Understand that prepayment penalties only pertain if you pay the loan off early. 504 fees* are to 2.65% of the 504 loan amount plus $2300 and are financed with the project. According to the SBA, the prepayment penalty begins at 3% of the loan’s value in the first year, and then drops with each consecutive year, eventually reaching 0% in the 11th year (and all subsequent years). SBA 504 Loan Prepayment Penalty - How the SBA 504 loan prepayment penalty is calculated. 504 loans are fully amortizing loan with no balloon payments. There is a declining prepayment penalty for the first 10 years of the loan, based on the loan amount and funding rate. To calculate the prepayment penalty of an SBA 504 commercial loan (known as "10-9-8-7-6-5-4-3-2-1 Calculation"), multiply the remaining balance of the 504 loan with the interest rate stated on the bond (Note: this is the debenture rate, not the effective rate). This website is independently owned and operated and has no government affiliation. Real Estate loans are completed with 90% financing for up to a 25 year term. Well, suppose you took out a loan for $2 million, and were able to repay that loan within three years, rather than the 20 years originally assigned. These are as follows: Keep Paying on the Loan: While it might not be ideal, one of the simplest ways to avoid paying a prepayment penalty is to simply pay on the loan until its maturity date. sba504.loans is an independently owned and operated website and has no government affiliation. In working with banks and borrowers, one of the biggest myths we have to debunk is the one surrounding the prepayment penalty for SBA 504 loans. Loans over $25,000 generally require collateral (real estate if available, but SBA will not decline a loan for lack of collateral). This website is not a lender and does not broker loans, make loans or make any credit decisions. Year 2: 3% of the total prepayment amount . By clicking "continue" and using this site, you acknowledge that you have read and understand this message. Many people are using this program to get a facility built and leased up with 10% down on the total project costs with an eye towards refinancing after 3 years when their self storage facility is worth a lot more. Although a borrower may prepay a loan in any month with proper notice, the SBA cannot repurchase the SBA 504 debenture until the semi-annual payment date. Prepayment amount = $27,000 x 3% = $810 SBA 504 loans are amortized (meaning scheduled debt repayments are made in regular installments) over 20 years, with no balloon payment. Please contact us at 1-800-414-5285 to find out more. It is actually calculated on the loan debenture rate, with the full debenture rate equaling the maximum prepayment penalty. There is a prepayment penalty for the first initial three years. The 504 Program requires the First Mortgage Lender to pay a lender participation fee. There is no prepayment penalty for 20-year loans after the 10th year. By allowing a buyer to assume the loan, they are able to get out from under those payments without being required to pay a prepayment penalty. There are often prepayment penalties with SBA loans; however, as the terms of each loan are specific to the facts regarding that loan and the borrower, make sure to check with the lender regarding any prepayment penalties. The final rate is set at the time of loan funding. Therefore, when a borrower prepays a loan, the prepayment includes interest due up to and including the next semi-annual payment date. Please give us a call at 1-800-414-5285 to find out how you can realize the benefits of being an SBA lender without incurring all of the usual costs. David Amick 2015-07-02 00:58:01. Prepayment penalty for loans with maturities of15years or more ifprepaid during first 3 years. Yes, you can. Penalty = D (I x P), where All users should perform their own due diligence and research, especially if they are connected with a third-party lender. By using this website, you agree to our use of cookies, our Terms of Use and our Privacy Policy. The SBA 504 loan is another type of SBA loan that offers long-term financing to help purchase real estate, equipment, and other fixed assets. If you need to visit the SBA directly please click here: sba.gov. Can other costs be included in a 504 loan? If you are looking to flip your wash, the 504 prepayment penalty may not be ideal for your situation. If you do not pay it off early, there are no penalties to worry about. The CDC funded part of the loan, but a conventional lender funded the remainder. SBA 504 loans are subject to a prepayment premium. © 2021 Green Commercial Capital. How does that affect you? No, there is no way to waive the prepayment penalty on an SBA 504 loan. So, for prepayment-eligible SBA 7(a) loans, prepayment penalties include: Year 1: 5% of the total prepayment amount . SBA Answer Desk 1-800-827-5722. www.sba.gov. The prepayment penalty for SBA 504 loans is sometimes misunderstood by potential borrowers and industry professionals, alike. Click here if you need to visit SBA.gov. I = the interest rate stated on the face of the Bond expressed in decimal points (Important: this is the debenture rate – not the effective/note rate). Click here for our Advertiser Disclosure. Lastly, the prepayment penalty for 504 loans is less expensive than the 7a in fees and the prepayment amount. So you don’t need to worry about a massive final payment. SBA 7a, SBA 504 & Green Commercial Financing. Your penalty will be different. Amount varies based on loan guarantee amount. It also connects businesses with third party lenders that can assist in providing SBA-backed and other loans. If you are trying to reach the SBA click here to be redirected. Similarly, the penalty for 10-year loans starts at 100% of the debenture rate on the balance of the loan, and falls 20% each year to zero after five years. P = the factor set forth below for the applicable year, 1 = 1.00 appraisals, environmental, construction interest, closing costs) also can be financed in the 504 loan, allowing the small business to preserve working capital. Since the bondholders are guaranteed interest payments and their principal back the SBA puts a prepayment penalty on 504 loans through the first 10 years of a 20-year loan and through the first 5 years of a 10-year loan so there are enough funds available to pay the interest back to the investors for the remaining term of the bond. Yes, this does mean paying interest, but it may be more affordable than the prepayment penalty, or at least allow you greater liquidity during the loan’s life. 8 = .30 Prepayment Premiums. The premiums decline over the life of the loan and are eliminated entirely half way through the loan term. The prepayment penalty in the first half of the term begins at the debenture rate and declines by 10% annually, calculated at six-month intervals. That’s not required from 504 borrowers. However, it’s not actually quite so clear cut. The 10% down SBA program only has a short 3 year prepayment penalty and the penalty is only 1% after year 2. More info about 504 Loans: CDC 504 Program, "I am extremely pleased with the loan you helped me obtain.  Your service, rates, terms and professionalism impressed me. 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