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How Does a Fed Rate Hike Affect SBA Loans?

Interest rates chart

By Sherwood Robbins, Seedcopa Managing Director –

With talk of the Federal Reserve raising interest rates beginning in March, Seedcopa is being asked: How would Fed rate hikes affect SBA 504 and other government-backed loans?

I’ll leave the heavy lifting to those with the job title “Chief Economist,” but what I can tell you is this: With the 10-year Treasury yield increasing and Treasury discussing increasing the Federal Funds rate in March, we’re heading toward higher SBA 504 interest rates. But I expect it to be a controlled shift. We know that SBA 504 rates are not directly tied to the 10-Year Treasury, but historically, they do track similarly. Take a look at the chart below from Eagle Compliance, the SBA’s Fiscal Agent, which is responsible for the marketing, pricing and sale of the 504 debenture pool.

Interest Rates Chart
Source: Eagle Compliance, LLC

The yellow line and light blue line show SBA 504 rates (20- and 25-year effective rates) from February 2019 to November 2021. While they are always a couple of percentage points higher than the 10-Year Treasury, they follow the Treasury’s progression fairly closely. It’s not a fixed spread, but it’s a similar path with the exception of the onset of the pandemic.

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

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

For those who would like a deeper understanding, I encourage you to take a look at the Weekly Market Commentary from Eagle Compliance (the SBA’s Fiscal Agent that I mentioned above) and their February 7th post titled “Strong economy + tighter policy = higher rates.”

In the meantime, I leave you with this: During uncertain times, government-backed loans like the SBA 504 offer dependable and cost-effective solutions when we need it most. Last year, borrowers were able to take advantage of fee waivers and the lowest interest rates in U.S. history. That came on the heels of covered payments just after the pandemic began, allowing borrowers to pay rent and other major expenses until PPP funds kicked in. I’ve never been more proud to offer this loan product to American businesses.

Sherwood Robbins

Sherwood Robbins, Managing Director of Seedcopa + SeedcoDE, has been with the organization since 2007 and is proud to help business owners turn their dreams into reality. Prior to joining Seedcopa + SeedcoDE, he spent more than 14 years in the banking industry, specializing in commercial banking, retail and investment services. For most of that time, he served as a dedicated government loan lender. Sherwood is Region 3 Director for the National Association of Development Companies (NADCO), representing five states and the District of Columbia. He serves as a board member/community representative of Community Lenders, a non-profit community development corporation that finances housing and commercial development projects benefitting low- and moderate-income persons throughout Southeastern PA and surrounding areas. Sherwood testified before Congress in 2017, highlighting the SBA 504 loan program to members of the U.S. House of Representatives.

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