Federal Reserve Raises Interest Rates Again; SBA 504 Loan a Wise Choice

On Wednesday, July 26, 2023, the Federal Reserve increased interest rates once again, making the prime interest rate 8.50%, the highest it has been in 22 years, as noted by CNBC News.

How is the prime rate defined?

The prime rate is defined by The Wall Street Journal (WSJ) as “The base rate on corporate loans posted by at least 70% of the ten largest U.S. banks.” Changes in the prime rate are highly correlated with changes in the federal funds rate. The prime rate typically changes a day or so after a change in the federal funds rate. The prime interest rate has gone from 3.25% in March 2020 to today’s rate. 

SBA Celebrates 70 Years of Service

Celebrating 70 years of service, the SBA has designed its loan programs to support small businesses seeking to start, grow and expand. One of the SBA’s signature loan programs, the SBA 504 Loan, is a fixed-rate, long-term loan for major fixed assets that promote business growth and job creation. The 504 loans may be used to purchase or refinance owner-occupied commercial real estate, equipment or tenant improvements for small businesses.

Rising Rates Do Not impact SBA 504

The SBA 504 loan is not impacted by rising prime interest rates. As an economic development program, the program sells government guaranteed 504 debentures at attractive rates for growing small businesses. Debenture pools are sold monthly, and the interest rate is fixed for the 10, 20, or 25-year life of the loan.

The SBA’s other general purpose loan program, the 7a loan, provides banks, non-bank lenders, and non-profits administering the Community Advantage Small Business Lending Company (SBLC) program, with a government backed guarantee of 75% to 85%, depending on the size of the loan.

These loans are impacted by the rising interest rates since they are priced based on the WSJ prime interest rate. This loan can be used to finance commercial real estate, equipment and improvements as well as other general business purposes, including business acquisitions, inventory purchases and other working capital.

Small businesses today may be feeling anxious about the rise in interest rates, and the increase in monthly mortgage payments with their 7a real estate loan. The Federal Reserve has indicated that another rate increase is likely in September. 

The SBA 504 loan is a viable solution offering a fixed rate and a 10, 20, or 25-year loan term for refinancing a variable rate 7a loan used to finance commercial real estate or equipment.

Key Tips to Help

Key tips to help facilitate an expedited process to refinance into a fixed-interest loan:

• Have the most recent twelve months of mortgage payments (a transcript) available.
• Provide a copy of your SBA 7a Authorization and Loan agreement.
• Document the use of proceeds for your SBA 7a loan.

All other documentation is standard financial information for obtaining a business loan.

Start with your local Certified Development Company (CDC) or ask your banker about the SBA 504 refinance program.  In California, AmPac Business Capital is a local CDC serving the state of California.  AmPac can assist businesses directly or introduce them to a local bank partner. 

For more information about the SBA fixed versus variable interest loan programs, visit ampac.com or the SBA website at sba.gov. You may also call the AmPac office for more information at 909.915.1706 or download the AmPac mobile app for an array of resources for small businesses.