In recent years, consumers have been better protected from mortgage loan prepayment penalties. However, small business owners are not subject to the same protections. If you’re wondering if there are prepayment penalties associated with an SBA 504 loan, the short answer is yes.
SBA 504: Loans and Prepayment Penalties for Early Repayment
In recent years, consumers have been better protected from mortgage loan prepayment penalties. However, small business owners are not subject to the same protections. The short answer to the query “Is there a prepayment penalty associated with an SBA 504 loan?” is “Yes.” But in reality, things aren’t quite so cut-and-dry.
A prepayment penalty: what is it? Put simply, it’s a cost assessed to the borrower in the event that they settle their debt ahead of schedule. It serves as a means of assuring the lender of a certain profit margin (or SBA fees) in the event that the loan is repaid early and the anticipated interest rate is not met. Thus, if you were able to pay off your loan early, how much might you anticipate paying?
The SBA claims that the prepayment penalty starts in the first year at 3% of the loan’s value and decreases with each passing year, finally coming to 0% in the eleventh year (and all years after that). The following example chart illustrates the gradual reduction of your penalty. Be aware that the prepayment percentage for your loan or bond will change depending on the debenture rate.
- First Year: 3.00%
- Second Year: 2.70%
- Third Year: 2.40%
- Fourth Year: 2.10%
- Year 5: 1.80%
- Year 6: 1.50 percent
- Year 7: 1.20 percent
- Year 8:.90%
- Year 9: 0.60%
- Year 10:.30%
- Years 11 through 20: 0.00%
What impact does that have on you? Let’s say you borrowed $2 million and were able to pay it back in three years, as opposed to the twenty years that were originally stipulated. In that scenario, in addition to the loan balance and any related costs, you would be required to pay $48,000. If you paid off the debt in year ten instead of year three, it would only cost you $6,000. The penalty on 10-year term loans likewise declines more quickly, reaching zero after the fifth year.
The preceding example is a little too basic. There will be a difference in your punishment. In actuality, the maximum prepayment penalty is equal to the entire debenture rate, which is based on the loan debenture rate.
Is it Possible to Have the SBA 504 Loan Prepayment Penalty Waived?
No, the prepayment penalty on an SBA 504 loan cannot be waived. It doesn’t have to be waived, though, if you want to avoid paying it altogether. These are listed in the following order:
Continue Making Loan Payments: Although it may not be the best option, making loan payments until the loan’s maturity date is one of the easiest methods to prevent having to pay a prepayment penalty. Recognize that early debt payoff will only result in prepayment fees. There are no fines to be concerned about if you choose not to pay it off early. Yes, paying interest is required, but it can be less expensive than the prepayment penalty or at the very least give you more flexibility while the loan is in effect.
Refinance: Two loans are actually made up in theory when a 504 loan is taken out. The CDC covered a portion of the loan, and a traditional lender funded the remaining amount. The SBA would have to give way to the first position loan (conventional) if you were to refinance. This would let you keep your 504 in place and take advantage of better possibilities or lower rates without incurring any prepayment penalties.
Presumed: At last, you might be able to transfer the loan to another individual. It is possible to assume SBA 504 loans (more on this later). For the amount of equity you have in the equipment or real estate used to secure the loan, you could choose to sell it. If the new buyer qualifies, they can take over and make the payments at your place. In this scenario, not only do you escape any possible prepayment penalties, but the buyer also does, since prepayment penalties are waived in the event of an assumed loan.
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Relevant Queries
What conditions apply to an SBA 504 loan?
The SBA 504 Loan Program offers completely amortizing loans with periods of 10 to 20 years, up to $5 million ($5.5 million for manufacturers). Rates range from prime + 1.25% to 2.75% fixed. In the case of hotels and motels, the maximum loan-to-value (LTV) is 80%, while the minimum debt service coverage ratio (DSCR) is 1.20x the current cash flow. The project assets that are being funded, as well as the major owners’ personal guarantees, serve as collateral for the loan. The loan might pay for fees, which typically total 3% of the debenture.
What advantages can an SBA 504 loan offer?
Businesses can purchase fixed assets for growth or modernization through the SBA 504 loan program, which also offers lower interest rates and down payment requirements than SBA 7(a) and Express loans. These are just a few advantages technology that the program offers. For lenders who contribute half of the project’s cost, the SBA’s backing of the loan lowers their risk. The private lender has first lien on project assets in the event of default.
Please visit the following sources for further details:
SBA 504: Private Lender Interest Rates Down Payment Certified Development Company
7(a) Loans vs. SBA 504 Loans
What is a 504 SBA loan?
What conditions must be met in order to be eligible for an SBA 504 loan?
To apply for an SBA 504 loan, your company needs to be eligible for the following:
Your company needs to operate as a for-profit venture.
Your company has to fit the SBA’s existing size requirements.
The net worth of your company cannot be more than $15 million.
SBA loan packaging cannot account for one-third or more of your company’s revenue.
Your company’s annual revenue must average $5 million or less (after taxes, and only for the two years prior to this).
There may be no speculation or passive actions in your business.
Be aware that conventional lenders or CDCs may impose additional criteria. A comprehensive list of qualifying standards and other crucial SBA information can be found here.
What conditions apply to an SBA 504 loan repayment?
An SBA 504 loan has ten to twenty years (completely amortizing) of payback terms. There is a maximum loan-to-value (LTV) of 90% and a minimum debt service coverage ratio (DSCR) of 1.20x on current cash flow. The major owners must also provide personal guarantees.
Are there fees for making early payments on an SBA 504 loan?
Prepayment penalties are really part of an SBA 504 loan. The SBA claims that the prepayment penalty starts in the first year at 3% of the loan’s value and decreases with each passing year, finally coming to 0% in the eleventh year (and all years after that). The following example chart illustrates the gradual reduction of your penalty. Be aware that the prepayment percentage for your loan or bond will change depending on the debenture rate.
Yearly Prepayment Interest
- 1~3.00% 2~2.70% 3~2.40% 4~2.10% 5~1.80% 6~1.50% 7~1.20%
- 89.90%
- 9.60%
- 10.30%
- 11–20 0.00%
The prepayment penalty for your loan or bond will change according to the debenture rate. Furthermore, by continuing to make loan payments until the loan’s maturity date, refinancing, or taking on the debt, you might be able to completely avoid paying the prepayment penalty. Please visit https://sba504.loans/sba-504-blog/prepayment-penalties-and-sba-504-loans for additional information.
