Currently one of the biggest issues in regards to commercial loan rates, SBA loans and in particular the SBA 7a loans is an inversion between the Prime Rate and LIBOR. As LIBOR has risen above PRIME, this has forced many foreign investors away from buying commercial mortgage securities on our already battered secondary market, further reducing the liquidity in our banking system and pushing commercial rates up.
Another challenge here is the SBA sets restrictions on the margin that banks can charged on the commercial loan rates at 2.75% max, above the index, the Prime Rate. The SBA has set this up in an effort to keep rates low for borrowers helping spur our economy.
The Prime Rate is currently at 4% while LIBOR is at 4.3% as of the beginning of November. Most capital sources for foreign investors are tied to LIBOR. This is upside down as LIBOR is typically below PRIME creating the needed spread. It simply does not make sense for foreign investors to buy this debt. The SBA announced on 11/13/08 that they will allow banks to change indexes from Prime to the 30 day LIBOR + 3% which should help create the needed spread and hopefully will keep the liquidilty on the secondary market.
So what does all of this mean for the borrower that’s trying to figure out what to expect on their effective commercial loan rates? The 30 Day LIBOR rate is currently at 1.45% so borrowers should think about their commercial loan rates at 1.45% + 3% + the banks margin of 2.75% = or an effective interest rate of 7.2%. This should be the current maximum rate on SBA 7a Loans. Many banks will offer a lower spread on the 2.75% in an effort to win deals though we are seeing most banks not compete on commercial loan rates but rather on reliability of closing. But strong borrowers might be able to secure 1.5% to 2% over or an effective commercial loan rate of 5.95% to 6.2%.
Filed under: Uncategorized | Tagged: commercial loan rates, commercial mortgage rates
