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How does a Fed rate hike affect SBA loans?


Image via Wikimedia Commons.

Jerome Powell, Chairman of the Federal Reserve.

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While talking about the Federal Reserve raising interest rates starting in March, Seedcopa is asked: How would Fed rate hikes affect the SBA 504 and other government-backed loans?

I’ll leave the heavy lifting to those with the title of “Chief Economist”, but what I can tell you is this: with the 10-year Treasury yield rising and the Treasury discussing the increase in the federal funds rate in March, we are heading towards higher SBA 504 interest rates. But I expect it to be a controlled change. We know that SBA 504 rates are not directly tied to the 10-year Treasury, but historically they track the same. Take a look at the chart below from Eagle Compliance, the SBA’s fiscal agent, which is responsible for the marketing, pricing, and sales of the 504 Debenture Pool.

The yellow line and the light blue line show the SBA 504 rates (20- and 25-year effective rates) from February 2019 to November 2021. Although they are still a few percentage points higher than the 10-year Treasury, they follow the progress of the Treasury. pretty close. It’s not a fixed spread, but it’s a similar path except for the start of the pandemic.

So yes, I expect we are headed for a rising interest rate environment, albeit a controlled one. I don’t see us jumping from an interest rate of 3.22% to 7.22% overnight. Instead, I see us going from rates that were hovering around 2.75% to rates that were hovering around 4%. For borrowers who became interested in SBA 504 loans when rates were at historic lows, this is a substantial increase. But an interest rate around or just above 4%, fixed for the entire 25-year life of the loan, is still historically very attractive.

We should also always be aware that the 504 debenture is its own investment, and capital market investors decide their investment amount and appetite for rate of return monthly based on their own research and portfolio needs. I don’t see a shortage of investors at this point, and I don’t expect it.

For those who want a deeper understanding, I encourage you to read Eagle Compliance’s weekly market commentary (the SBA tax agent I mentioned above) and its Feb. strong + stricter policy = higher rates.”

In the meantime, I’ll leave you with this: in times of uncertainty, government-backed loans like the SBA 504 offer reliable, cost-effective solutions when we need them most. Last year, borrowers were able to take advantage of fee waivers and the lowest interest rates in US history. This follows covered payments just after the pandemic began, allowing borrowers to pay rent and other major expenses until PPP funds kick in. I’ve never been prouder to offer this US business loan product.


Sherwood Robbins is the managing director of Seedcopa, an affiliate of the Chester County Economic Development Council that was ranked number one by the US Small Business Administration for securing the most SBA 504 loans for small businesses in Eastern Pennsylvania. He can be reached at [email protected] or 610-321-8241.