Defending the Rise in SBA 504 Interest Rates


September 17, 2013

idsgraph091713by Tom Wallace
President, IDS

Lenders have recently been challenged in marketing the 504 loan program by the sudden spike in debenture rates over the past ninety days. With the beginning of the tapering of “QE3” possibly on the horizon at this week’s FOMC meeting, a further level of uncertainty has afflicted marketing efforts. However, as the chart below indicates, a touch of perspective, combined with some hints about the impending actions of the Fed, may indicate somewhat smoother seas through the end of the year.

The chart tracks the history of the ten year treasury, the underlying twenty-year 504 debenture rate and the spread over the treasury from September 2006 through September 2013. It also includes a statistically smoothed trend line for the debenture, as well as a set of basic statistics on the data strings.

The immediate observation is that while rates have certainly increased over the past ninety days, by comparison to more normal times, before the recent unpleasantness of “The Great Recession”, they are historically rather low. Thus the 504 program remains a solid value proposition for borrowers.

A more subtle proposition may come from some inferential leaps regarding the nature of the tapering of “QE3”. Currently, the roughly $85BN of monthly debt purchases are divided between Treasury and a variety of CMBS products. Estimates are running of reductions in the monthly bond purchases of anywhere between $5BN to $15BN. It would appear likely that CMBS type purchases will be favored over Treasury purchases, as the declining deficit would otherwise imply the Fed buying most of the coming year’s new Treasury debt issuance. In this case, might the continued Fed QE effort in CMBS purchases provide an impetus to the market to re-evaluate the run up in the underlying twenty-year 504 debenture rate?

In any event, a short term change in long term interest rate trends, should not be the critical determining factor for a decision on financing a capital asset acquisition. The basic fact remains that current 504 rates are well below historic levels, and that the opportunity to lock in low occupancy costs and a stable location for a business is a benefit that neither small business owners nor their bankers should not ignore.