Author: Doug Nelson
By Doug Nelson, Vice President - Financial Services
Amarillo EDC / Texas Panhandle Regional Development Corporation
I believe there is no question that we will see continued escalation of long-term rates over the next few years. I do not believe that short-term rates will rise substantially over that same period of time. This wider gap between short-term rates and long-term rates presents challenges for potential borrowers who are attempting to negotiate the lowest cost of funds for their project. Over the past few months, long-term interest rates have spiked sharply to the tune of 155 basis points. This represented a change more drastic than the decline in interest rates seen in 2012, only over a much shorter period of time. In fact, July’s rate was the second largest jump in the history of the 504 program.
Beginning in May, the Federal Reserve Chairman, Ben Bernanke, suggested on several occasions that the Federal Reserve would start "tapering" the current stimulus program which was injecting about $85 billion dollars a month into the economy. Those words sparked a major reaction in the market which drove up long-term interest rates, including rates on 504 loans.
However, perspective can significantly aid our understanding of the interest rates relative to the history of the 504 loan program. Interest rates are still historically low compared to rates from even just a few years ago. For example, as recently as five years ago, rates were much higher, 7.75% versus 5.45% today. 504 rates typically move in unison with the 10-year Treasury Notes (as seen in the chart below) and are similarly affected by world events, such as the debt crisis in Greece and the recent comments by Mr. Bernanke.
Nonetheless, this short-term change in long-term interest rates should not be the sole factor in determining your course of action for small business financing. The 504 loan program continues to be an excellent financing tool for small businesses by offering below market, long-term fixed rates in combination with small down payments on the part of borrowers.
If you have commercial real estate financing needs, please contact us to see how the 504 program can benefit you.