A prepayment penalty on a loan is a fee charged by a lender if a borrower pays off all or part of the loan earlier than scheduled. Both SBA 504 & 7a loans may entail prepayment penalties.
SBA 504 Loan Prepayment Penalty
SBA 504 Loan Structure Recap
An SBA 504 loan actually has two parts:
Bank (or private lender) loan – typically 50% of the total project cost.
CDC (Certified Development Company) loan – funded by an SBA-guaranteed debenture for up to 40% of the project cost.
The SBA loan prepayment penalty on the CDC/SBA portion is defined by the SBA and is non-negotiable. Hey, it’s the trade-off you make for securing long term fixed interest rate financing at extremely high leverage.
The prepayment on the Bank/Private lender loan is not set by the SBA. In this case a prepayment penalty may be negotiated between the lender and borrower and can vary from lender to lender and deal to deal. We review a couple of common SBA 504 loan prepayment structures below.
Full guide on How SBA 504 loans work here
Prepayment Penalty on CDC loan
The prepayment penalty on the CDC/SBA portion is defined by the SBA and is non-negotiable. Hey, it’s the trade-off you make for securing long term fixed interest rate financing at extremely high leverage.
25 and 20 Year Maturity SBA 504 Loan Prepayment Penalty
For SBA 504 loans with a 20- or 25-year maturity, there is a 10-year, declining prepayment penalty. This is calculated based on the loan amount and the net debenture rate (which is your interest rate on your 504 loan before service/administrative fees included in the gross debture rate). Here’s how it works and an example:
- The maximum prepayment penalty in the first year is the net interest rate of the debenture on the remaining principal for the SBA 504 loan. So if your SBA 504 loan funded in October 2025 when the debenture interest rate was 4.79%, your maximum prepayment penalty is 4.79% of the outstanding balance on your loan.
- For each year after that, the maximum prepayment penalty declines by 10%. So, for example in year 4, the prepayment would be 70% of the interest on the remaining principal for the SBA 504 loan. Using the example above, your prepayment penalty in the fourth year would be:
4.79% x 70% = 3.35%
- The penalty rate declines by 10% each year until, by year 11, there is no longer a prepayment penalty.
10 Year Maturity SBA 504 Loan Prepayment Penalty
For SBA 504 loans with a 10-year term, the penalty declines over five years instead. The penalty declines by 20% each year until, by year 6, there is no prepayment penalty.
Prepayment Penalty on SBA 504 Senior Loan
The prepayment on the Bank/Private lender loan is not set by the SBA. In this case a prepayment penalty may be negotiated between the lender and borrower and can vary from lender to lender and deal to deal. We review a couple of common SBA 504 loan prepayment structures below:
5 Year declining also known as “5-4-3-2-1”
A five-year declining prepay is often expressed as a percentage of the outstanding loan balance at the time of prepayment.
| Year | Prepayment Penalty |
|---|
| Year 1 | 5% |
| Year 2 | 4% |
| Year 3 | 3% |
| Year 4 | 2% |
| Year 5 | 1% |
| After Year 5 | 0% (no penalty) |
Flat (Fixed) Prepayment Penalty
A single fixed percentage applies if the borrower prepays at any time during the penalty period.
It doesn’t decline or vary by year.
Example:
3% penalty on any prepayment during the first 3 years
After Year 3 → no penalty
SBA 7a Loan Prepayment Penalty
7a loans with term of less than 15 years are not subject to an SBA loan prepayment penalty.
7a loans with terms greater than 15 years are subject to a SBA loan prepayment penalty if the borrower pays more than 25% in any of the first 3 years of the loan subject to the following schedule:
| Year loan is prepaid | Penalty (% of amount prepaid) |
|---|---|
| During Year 1 | 5% |
| During Year 2 | 3% |
| During Year 3 | 1% |
| After Year 3 | 0% (no penalty) |
