How Long Will 504 Rates Remain at Historical Lows?

Over the last year, 504 borrowers have enjoyed the lowest effective interest rates in the program’s 24-year history. So the question begs: how long will these low rates last?

While the answer isn’t exact (crystal ball is broken), the following attempts to shed some light on where 504 rates might be heading.

To begin, 504 loans are funded by the sale of debentures (or bonds) which are pooled and sold on Wall Street each month.  The effective rate is comprised of the debenture rate (which is pegged to an increment above the current market rate for U.S. Treasury issues), the note rate and ongoing carrying costs of the program as set by the Small Business Administration (SBA).

While the final effective rate calculation is technical, the entire process begins with the debenture rate. The entity responsible for selling 504 funding securities is the Development Company Funding Corporation (DCFC) and its fiscal agent, Steve Van Order.

According to Van Order, the low rates will likely continue for a while longer but are an unusual occurrence.

“The 20-year debenture rate has been under 5% for twelve straight months. From January 2003 through March 2005 there were three seven-month runs of sub-5% rates but there never was a single twelve-month run,” said Van Order.

“This January, the 20-year spread to treasury reached +59.6 BP, the tightest since March 2005. In the last 10 years the spread was inside of +60 BP only five times, a 4% frequency, so it is a rare event to be enjoyed,” he said.

Van Order says the spread has been tight due to 1) the record steepness of the yield curve; 2) the extremely tight interest rate swap spread; and 3) the eligibility of 504 funding securities for the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) program.

“In December, the (Fed) reiterated the TALF program for asset-backed securities will expire on March 3, at which time that spread tightening support will be gone. The steep yield curve is likely to remain for a while longer but will start to flatten in earnest once the Fed starts tightening policy later this year,” he said.

The bottom line: take advantage of the low 504 rates now. This combined with the extended temporary elimination of both the bank participation fee of 0.5% and the certified development company processing fee of 1.5% (until Feb. 28, 2010) makes a 504 loan a hard deal to beat for small business fixed asset financing.

For more information about 504 loans in Florida, contact Florida First Capital by visiting www.ffcfc.com, emailing us at insider@ffcfc.com or calling 888.320.5504.