SBA 504 Loan Terms: Choosing Between 10, 20 and 25 Years

What each term is for

25 years: real estate. The lowest payment, and the term most owner-occupiers choose.
20 years: real estate, when a shorter payoff suits the plan.
10 years: equipment and other shorter-life assets. Ten-year debentures are sold every other month.

Match the term to the useful life of what you're buying. A 25-year loan on a 10-year machine is the wrong loan.

What the choice costs, in dollars

Same $400,000 SBA portion, three terms, at an illustrative 6.5% effective rate. Your rate is the one from the debenture sale your loan funds in.

Term	Monthly payment	Total interest over the term
10 years	$4,542	$145,000
20 years	$2,982	$316,000
25 years	$2,701	$410,000

Rounded; illustrative rate only. The calculator runs it at this month's rate.

The longer term costs more in total interest and less each month. Which matters more depends on cash flow, and for most owner-occupiers a lower fixed payment for 25 years is worth the extra interest, because the rent it replaces would have gone up.

Your two loans, two terms

This is the detail that surprises borrowers at closing, so here it is early. The SBA portion runs the full 25 years at a fixed rate. The bank's first mortgage is a separate loan with its own term, often shorter, and it may balloon or reprice at five, seven or ten years. Ask your bank what its loan does in year six before you sign, and put the answer next to the SBA portion's fixed number.

Fixed for the whole term

The SBA portion is funded by a fixed-coupon debenture, so once the rate is set at the monthly sale it never moves. No index, no reset, no balloon. Against a conventional loan that reprices at year five or ten, that's the core argument for the program. 504 vs conventional.

Assumability

A 504 loan can be assumed by a qualified buyer of the business or property, subject to SBA and CDC approval. When you sell, a buyer who takes over a fixed-rate loan set years ago may value it highly, and assumption avoids the prepayment premium. It's under-told and genuinely valuable; ask your loan officer before you list.

Questions

Can I change my term later?

Not on the SBA portion; the debenture is issued for a fixed term. You can prepay (with a declining premium in the early years) or refinance.

Does a longer term cost more overall?

Yes, in total interest. It costs less each month. The table above shows the trade-off.

What term for a mixed project?

Real estate with some equipment usually goes on the real-estate term when the equipment is a minor part; otherwise two loans. Your officer will structure it.

Does the term affect my rate?

Slightly. Each term prices off its own debenture; 10, 20 and 25-year rates differ by a fraction of a point in a given month. This month's table.

This page is for general informational purposes only and does not constitute legal, tax, or financial advice.