Small Business Administration(SBA) offers many types of loans to support Small Business Owners to Start, Build or Buy small businesses. These SBA Loans can also be used for Real Estate purchase that is occupied 51% or more by the Small Business. These loan have several advantages such as low interest rates but have some disadvantages such as SBA Prepayment Penalty and Personal Guarantee requirement.
We have explained in detail SBA 504 Prepayment Penalty & SBA 7A Prepayment Penalty. Please read these in detail before making any loan decision. Furthermore, please check with the bank you are getting a Loan From to confirm this information as some guidelines may change from Bank to Bank.
Both SBA 504 and SBA 7A have prepayment penalties. SBA Prepayment Penalty calculations are done very differently for each of these loan type. In order to calculate the penalties you need to know the Start Date of your Loan, Loan Amount and How much principal amount have you paid in each year. You can also call your lender and they can run the numbers for your as well.
SBA 504 Prepayment Penalty
SBA 504 Prepayment penalty is tricky to calculate so pay attention. Even Many Loan Agents and bank officers make mistakes when calculating these as well.
For Example: If you have a SBA 504 Loan with 20 Year Amortization and you choose to pay the loan in the first 10 years, there is a SBA penalty associated with this. This SBA Prepayment Penalty is Required by SBA Guidelines. This penalty is pre-determined & non-negotiable.
Lets Learn More Details:
- The prepayment penalty Only applies for first 10 years and is completely eliminated in Year 11. For the first 10 years, each year penalty declines dramatically.
- In order to calculate the SBA 504 Prepayment Penalty, you will need to find the Debenture Rate. For example, in December 2021, the debenture rate was around 3% (the debenture rate changes on monthly basis and is different than effective interest rate).
- The Prepayment penalty for SBA 504 loan in this case would be the full debenture rate of 3%(Dec 2021) of the principal remaining on the second mortgage. So for a 10 year prepayment penalty years, this amount declines by 10% each year. So if you payoff after 5 years, the prepayment penalty would be cut in half, or approximately 1.50% of the outstanding balance.
If you plan on paying off your SBA 504 Loan then you need to think strategically. You need to start planning your monthly and yearly payoff amounts. If you plan ahead, you can save thousands in SBA prepayment penalties.
If you are planning to pay off your loan early, Call your lender and have a discussion.
SBA 7A Prepayment Penalty
SBA 7A loan is one of the best options when it comes down to Small Business Owners applying for loan.
In this case you don’t need to obtain 2 different loan or deal with 2 different lending institutions.
SBA 7A Prepayment Penalty on typical 7A Loan(15 Year or More) is for 3 years. You pay penalty of 5% 1st year, 3% second year, 1% 3rd year of the total loan amount. This penalty applies if you pay 25% or more of the loan amount in one year period.
If the SBA loan term is less than 15 years then there is Typically No SBA 7A Prepayment Penalty for the Loan.
For Example: If you have a 7A loan of $1,000,000 and you payoff the loan in first year you will end up paying approximately about 50,000(5% of 1M Dollars) Penalty in first year.
We have very detailed article on 7A that explains all the Pros and Cons of SBA 7A Loan. Click Here to Read the Article.
SBA EIDL Loan Prepayment Penalty
SBA Economic Injury Disaster Loan (EIDL) doesn’t have any Prepayment Penalty.
Interest rate on SBA EIDL loan fixed for 30 years at 3.75% . This is an excellent interest rate when compared to many other business loans out there.
You can take up to 30 years to pay this loan off, or pay it off earlier. There is no penalty associated with paying the loan off early.