Pre-Payment Penalty Trap
Many small business owners are unfamiliar with pre-payment penalties associated with purchasing or refinancing commercial real estate through the SBA 504 or 7(a) guaranteed loan programs. So let me educate you on what they are and how you can avoid the pre-payment penalty trap.
A pre-payment penalty is a fee charged by a lender to the borrower for making incremental payments to the remaining principal balance in addition to the required monthly payment or paying the loan off in full prior to maturity or expiration of the pre-payment penalty period.
The SBA 504 and 7(a) loans to purchase or refinance commercial real estate both have pre-payment penalties.
The SBA 504 prepayment penalty can be calculated by multiplying the remaining balance of the SBA portion of the loan or 2nd Trust Deed with the sum of the debenture interest rate not to be confused with the effective rate, multiplied by the resulting factor for the applicable year. The factor ranges from 1 to .1 declining from year 1 through year 10 from the loans origination date. For example, the factor in year 3 is .8.
The SBA 7(a) pre-payment penalty is much simpler to calculate as it is 5% in year 1,3% in year 2 and 1% year 3 of the remaining principal loan balance..
You can avoid th e pre-penalty trap by deciding whether the 504 or 7(a) pre-payment penalty structure matches your goals before applying and signing on the dotted line. If you’re not sure whether you have a pre-payment penalty on your existing loan or still need help understanding how the pre-payment penalty is calculated, please contact ThinkSBA by visiting our website at https://thinksba.com/ready.
My SBA Loan Pro
The My SBA Loan Pro Podcast is hosted by Your SBA Loan Pro, Ryan Smith. In each episode Ryan provides valuable information and best practices regarding the SBA loan program.
Each episode is approximately one minute in length and addresses topics related specifically to SBA 7(a) and 504 loan programs to purchase real estate, acquire a business or franchise and obtain working capital.
You’re encouraged to listen and subscribe to ensure you’re notified each time a new episode is available. Ryan publishes a new episode weekly on Tuesday mornings, unless he’s kidnapped to a deserted island of course.