Can You Pay Off an SBA 504 Loan Early? The Prepayment Schedule

Q: Can you pay off an SBA 504 loan early?

Yes. An SBA 504 loan carries a declining prepayment premium on the SBA portion, applied over roughly the first half of the term and reducing each year until it reaches zero: from year 11 on a 20- or 25-year loan, from year 6 on a 10-year loan. The premium equals the remaining debenture balance times the debenture rate times a yearly factor from SBA Form 1504.

The prepayment schedule

The premium is a formula, not a flat percentage. From SBA Form 1504, the debenture itself: RP = D × I × P, where D is the remaining debenture balance, I is the debenture's interest rate, and P is the factor for the year you prepay in.

Year of prepayment	Factor, 20/25-year	Factor, 10-year
1	1.00	1.00
2	0.90	0.80
3	0.80	0.60
4	0.70	0.40
5	0.60	0.20
6	0.50	0
7	0.40	0
8	0.30	0
9	0.20	0
10	0.10	0
11 and after	0	0

Year one equals a full year's interest at the debenture rate. That's why no page should tell you "the prepayment penalty is 5%": at a 5% debenture it's 5% of the balance in year one; at a 7% debenture it's 7%. The percentage is whatever your note rate is, times the factor.

Worked: a $400,000 balance at a 5.5% debenture rate, prepaid in year 4: $400,000 × 0.055 × 0.70 = $15,400. Same balance in year 9: $400,000 × 0.055 × 0.20 = $4,400. In year 11: nothing.

Why the premium exists

Your SBA portion isn't a bank loan. It's funded by a bond, the debenture, sold to investors who expected a fixed stream of payments for the term. Paying off early means unwinding that, and the premium compensates the pool. It's the price of a rate fixed for 25 years. What the debenture is.

The two loans have different rules

The schedule above applies only to the SBA portion. Your bank's first mortgage has its own prepayment terms, and they're often stricter, with a fixed penalty during a lock period. Most borrowers don't know this until they try to sell. Read both notes.

Selling the building

Three routes. Pay off both loans at closing, with whatever premium the year carries. Have a qualified buyer assume the 504 loan, subject to SBA and CDC approval, which avoids the premium and can make your building more attractive if the rate was set in a cheaper year. Or, for a partial sale or a move, talk to servicing early; some situations have more options than borrowers expect. Assumability.

When paying early makes sense anyway

Sometimes the arithmetic says pay it. If you're refinancing into materially cheaper money, the premium may be recovered in a couple of years of lower payments. If you're selling for a strong price, the premium is a closing cost like any other. If you're in year eight of a 25-year loan, the premium is small. Run the number with the formula above, then check it with your accountant; this is one of the places we'd rather defer to your tax advisor than guess.

Questions

Can I make extra payments without penalty?

Debenture payments are on a fixed schedule; partial prepayments generally aren't accepted mid-term. Ask servicing about your specific loan.

Does the premium apply to the whole loan?

Only to the SBA portion. The bank's first mortgage has its own terms.

What if I refinance with you?

A 504 refinance of an existing 504 follows the same premium schedule on the old debenture; we'll show you the number before you decide.

When does it hit zero?

Year 11 on a 20- or 25-year loan; year 6 on a 10-year loan.

Factors from SBA Form 1504, verified September 2026. This page is for general informational purposes only and does not constitute legal, tax, or financial advice.