Do SBA loans have prepayment penalties?

Which SBA loans have prepayment penalties?

Two: SBA 7(a) loans with terms of 15 years or more, and the debenture half of an SBA 504 loan. Everything else is free to repay early. A 10 year 7(a) loan for working capital, equipment or a business purchase has no penalty, and SBA Express loans almost always carry terms under 15 years, so they have none either.

Microloans come from nonprofit intermediaries that typically charge no penalty, and SBA disaster loans have none. The surprise is usually the 504: the bank holding the first lien sets its own prepayment terms, separate from the SBA schedule on the debenture, and they are often the stricter of the two.

How do SBA 7(a) loan terms decide the penalty?

The line is 15 years. SBA 7(a) loan terms run up to 10 years for working capital, equipment and acquisitions and up to 25 for real estate, so the penalty mostly touches property loans. On those, the SBA charges a subsidy recoupment fee in the first three years: 5% of the amount prepaid in year one, 3% in year two, 1% in year three.

It applies only in a year when you prepay 25% or more of the balance. Example: a $1,000,000 balance, and you pay off $400,000 in year two. That is 40%, so the fee is 3% of $400,000, or $12,000. Pay off $200,000 instead and there is none.

How does the 504 prepayment penalty work?

It starts at roughly one year of interest and steps down to zero. In year one it is about the debenture rate times the balance. On a 20 or 25 year debenture it falls by a tenth each year and ends after ten years; on a 10 year debenture it falls by a fifth each year and ends after five.

Example: a $400,000 debenture at 6.5%, paid off in year three. The penalty is 80% of 6.5%, about 5.2% of the balance, roughly $20,000. The debenture can only be prepaid in full, on a semiannual payment date. The bank's first lien follows the bank's own note, often a 5%, 4%, 3%, 2%, 1% step down.

What lender fees can apply when you pay off early?

Small ones. The SBA limits what a 7(a) lender may charge, and a lender cannot add a prepayment penalty of its own on top of the SBA schedule. A payoff statement will show interest through the payoff date, sometimes a payoff statement fee, and lien release costs: a mortgage release and UCC terminations, typically $50 to $200 each.

On a 504, add accrued interest to the next semiannual date and any processing charge from the certified development company. If a conventional loan is taking out the SBA loan, its origination fee and closing costs are part of the math. How to read a term sheet shows where to find the prepayment clause.

When is paying an SBA loan off early worth it?

When the interest you save is clearly larger than the fee plus the cost of the replacement money. On a 25 year loan at roughly 10%, a year of interest is close to 10% of the balance, so even a 5% fee in year one is recovered quickly if you are refinancing several points lower or selling the asset.

Timing matters more. A few months from the third anniversary on a 7(a), waiting often beats paying 1%. On a 504 the penalty shrinks every year, so later is cheaper. Our guide to refinancing an SBA loan walks through the math.

Do SBA loans have prepayment penalties you can avoid?

Yes, with planning. Keep extra payments under 25% of the balance in each of the first three years on a long term 7(a). Time a sale or refinance after the third anniversary. On a 504, prepay on a semiannual date in a later year. Where the asset allows, choose a term under 15 years.

In Canada, CSBFP and BDC loans follow the lender's own prepayment terms, so read the loan agreement. To compare a new loan against one that would trigger a fee, apply here for real offers, or ask your AI assistant to apply for you through our MCP server; see the agents hub.