How to get a sub-5% building loan in a rising rate environment


March 6, 2021

Our news feeds have been flooded by the sky-is-falling bulletins about rising interest rates, stirring concern among investors, potential homebuyers and the general consumer.

But it’s not all economic doom and gloom, especially if you’re in the market for a commercial building. Did you know the rate for an SBA 504 loan is now below prime?

Kurt Chilcott

The effective rate for a 20-year SBA 504 loan is 4.581% compared to the U.S. federal prime rate, which stands at 5.50%, as of March 7, 2021. (Prime is a commonly used benchmark rate used by banks.) If you want a longer term SBA 504 loan, you can get one with a 25-year term, which has an effective rate of 4.737%.

Ultimately, what does this all mean for you, a would-be SBA borrower? Simple: continued low financing costs.

“The SBA 504 rate is a real advantage for entrepreneurs,” said Kurt Chilcott, president and chief executive of FE Small Business Finance, a leading SBA 504 lender. “Banks should be making it the program of choice because it is the best deal for their small business customers.”

Related: SBA 504 loan rate history

Why is the SBA 504 rate so low?

For the uninitiated, an SBA 504 loan is affordable, fixed-rate financing that can be used to buy buildings, major equipment and land. And unlike a conventional loan, an SBA 504 loan requires just 10 percent down.

An SBA 504 loan is typically a great deal for small business owners, especially in times of rising interest rates such as this one. Since the loan is backed by the federal government — the U.S. Small Business Administration — the overall rate is usually lower than that of a conventional bank loan.

Mike Owen Chief Credit Officer Director

Mike Owen

Related: How an SBA 504 loan gives businesses a competitive edge

For comparison, a typical conventional commercial real estate loan is roughly 5% to 6%, said Mike Owen, chief credit officer at FE Small Business Finance and SBA 504 expert. Bear in mind, that estimate is on the lower end of the rate spectrum.

That conventional-loan rate hinges on different factors such as the quality of collateral pledged and length of repayment. A less desirable type of collateral and longer repayment period, for instance, can ultimately drive up costs, pushing the rate past the 5% to 6% range.

Again, the big takeaway here is, with a SBA 504 loan, you’ll see savings in your pocket.

The reason interest rates are low is that there is high demand for secure investments such as government-guaranteed paper. In other words, investors are flocking toward safety.

Differences between 504 vs conventional loan

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Over time, the SBA 504 loan product has demonstrated its steadfast staying power. It continues to be one of the most affordable commercial real estate loan options for small business owners.

Its benefits include:

  • Preservation of working capital: A 10% down payment helps small businesses keep more cash in their business for their day-to-day needs and funding growth. Traditional building loans require as much as 30% down.
  • Avoiding financial surprises: With an SBA 504 loan, you have a long-term fixed rate, so you’ll know exactly how much you’ll owe each month. No surprise balances or rate increases.
  • No additional collateral pledged: With 504 financing, the asset you’re buying is the only collateral you need to complete the deal. On the other hand, a conventional lender will ask you to pledge other assets such as other useful assets of value within your business or even your primary residence.  
  • Seeing your savings grow: You’ll save in terms of interest payments and monthly real estate costs. Many SBA 504 borrowers report their mortgage payments being lower than what they paid in rent when they were leasing.  
  • And more.

Control your financial destiny with SBA 504 loan

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How often do you hear about this unfortunate scenario? Your favorite restaurant, coffee shop or boutique was forced to move or even shutter because their landlords raised the rent to unaffordable levels?

As a lender connected to its communities, we see and hear about this all too often.

Related: What 2021 holds for the small business community

That’s why we are such staunch advocates of the SBA 504 product. By securing real estate using this low-cost, low down payment tool, small business owners can take control of their financial destiny. Owning real estate not only saves you money now, it also allows you to invest in your personal and business’ future.

“I really believe that the ownership of commercial real estate is a smart business strategy. You know your costs, benefit from equity growth and gain more control over your future,” Chilcott said.

Are you ready to take control of your own financial destiny by way of a building purchase? As a leading SBA 504 real estate lender, we can guide you through this important financial decision, step by step and in easy-to-understand terms. Reach out to our team of SBA 504 loan officers to talk next steps.

Have a general question? Reach us at or (619) 243-8667.

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