What Is an SBA 504 Loan Debenture?

what are loan debenture rates

What goes on behind the scenes when you get a Small Business Administration (SBA) 504 loan? Where does the money come from? It all has to do with debentures. This post will help you understand the inner workings of the loan and highlight some terms that will prepare you to meet with and talk to your Certified Development Company (CDC).

Where the 504 Loan Money Comes From

You might think that your 504 loan money comes from the government, but that’s not technically correct. In fact, the 504 loan program costs the government nothing (even the incidental expenses of providing guarantees are covered by the 504 loan fees). The process is a little more complex than that. Let’s take this step by step:

  1. First, your Certified Development Company (CDC) helps you prepare your loan application, and submits it to the SBA for approval. This step is fairly straightforward, and the only part of the process that involves the borrower. After the application is submitted, you can go back to focusing on your business. But a whole lot more is happening behind the scenes.
  2. Once approved, the loan is implemented by your CDC and is guaranteed by the SBA. This federal guarantee is a big selling point for investors, since it makes the arrangement very safe for them—the loans have the “full faith and credit” of the U.S. government behind them.
  3. Finally, private investors—usually institutional investors such as pension funds, insurance companies, and large banks—buy your loan from the CDC in a monthly sale of SBA 504 loan debt. That debt is a debenture. The investors receive interest on the debt semi-annually, which comes from the interest you pay on your loan. The size of the interest the investors receive is the debenture rate.  The debenture rate in September 2017 was 2.59%.

Another reason investors like 504 loan debentures is that they pay a high rate by the standards of fixed-yield investments, higher than U.S. Treasury bonds but with the same level of safety. Also, their rate hardly varies, and this predictability is another plus.

How the 504 Loan Money Gets to You

As you may know, you find out the exact interest rate on your loan only after it has been funded, that is, after the sale of the debenture. While this can seem a bit unorthodox, there is a simple reason: no one knows the exact rate until the sale actually takes place. The process of figuring this out goes like this:

  1. The SBA has contracts with major financial institutions to handle the technical aspects of the loan process. The first of these is called the fiscal agent. Eagle Compliance is a single-purpose, veteran-owned corporation that is responsible to the SBA and CDCs. Representing borrowers’ interests, it reaches an agreement with the underwriters on the sale price of the debentures, which will be expressed as an increment over the rate for Treasury bills. This is when the rate of your loan is determined.
  2. Then, the underwriter pays for the debentures with funds from investors. Those funds go to Wells Fargo Corporate Trust Services, the central servicing agent. They do the accounting and process all 504 loan payments. They pay you your loan money and you make your loan payments to them. (Wells Fargo does not provide services directly to borrowers, so questions about your loan should always be addressed to your CDC’s servicing department.)
  3. Finally, the issuer and trustee (Bank of New York Mellon) converts the debentures into Development Company Participation Certificates (DCPC), which is what the investors receive. These have a minimum value of $25,000 and can be resold on the secondary market.

The 504 Loan Is a System That Works

A lot happens when you take out a 504 loan, and many people work together to make sure you get your financing. This system has been finely tuned to create value all around: investors have access to an attractive investment instrument, the SBA accomplishes their goals of providing funding and creating prosperity for small business and, best of all, you get to grow your business thanks to easily accessible and affordable financing.

If you are interested in a loan, or have questions about it, do not hesitate to contact TMC Financing. TMC’s 504 loan experts will be happy to answer all of your questions, as well as to help guide you through the 504 loan process. TMC Financing has over three decades’ experience providing 504 loans and is a high-volume Premier Lender with the SBA.

Kurt Chambliss is Executive Vice President of Sales and Marketing for TMC Financing, focused on serving small business clients throughout San Francisco’s East Bay. With over 16 years of SBA 504 lending industry experience, Kurt seamlessly guides clients through the loan process helping to secure SBA financing for small businesses and introducing them to the best first mortgage lenders that meet the clients’ needs, supporting them through the entire process. Kurt acts as an advocate for small business owners, and is passionate about helping small businesses grow and succeed.
Kurt Chambliss