Is there an SBA 504 prepayment penalty?

What the section says

Section 120.940 is short, and it is worth reading slowly. The Borrower may prepay its 504 loan if it pays four things: the entire principal balance, unpaid interest, any unpaid fees, and any prepayment premium established in the note. All four are conditions. Pay the balance without the premium and you have not satisfied the section.

The word "entire" matters. The text describes full payoff. It does not describe partial prepayments, and it does not say a Borrower can reduce the principal and keep the loan going on the same schedule. If you are thinking about paying down part of a 504 loan, ask your CDC what its note and servicing agreement allow, because this section does not answer that.

Where the premium comes from

The regulation refers to "any prepayment premium established in the note." The CFR does not print a rate, a number of years or a declining percentage. Anyone who quotes you a specific schedule is working from the note, from SBA program documents outside this regulation, or from memory. This page does not state a schedule because the text it cites does not contain one.

That has a practical consequence. To know what prepaying will cost you, find the promissory note and any prepayment rider and read the premium terms. Then ask the servicer for a written payoff quote as of a specific date, because the principal and interest figures change daily and the premium may depend on when you pay. The calculator above adds the figures you give it; it cannot supply the premium.

Why prepayment is different for a 504 loan

A 504 loan is funded by a Debenture that the CDC issues and SBA guarantees, and the Debenture is sold into a pool. Section 120.801(d) explains that the Debenture is guaranteed 100 percent by SBA and sold to underwriters who form Debenture Pools, and investors buy interests in the pools.

That is why 120.940 adds three more sentences about the other side of the transaction. If the Borrower prepays, the CDC must prepay the corresponding Debenture with interest and premium. If one Debenture in a pool is prepaid, the investors in that pool must be paid pro rata and SBA's guarantee on the entire pool must be proportionately reduced. If the entire pool is paid off, SBA may call all Certificates backed by the pool for redemption. In short, your payoff has to flow through to the investors who hold the pool.

A worked payoff

Suppose a 504 loan has $1,200,000 of unpaid principal, $4,800 of accrued unpaid interest and $350 of unpaid fees, and the note says a premium of $36,000 applies on your payoff date. The payoff is $1,200,000 + $4,800 + $350 + $36,000 = $1,241,150. Enter the same four figures above to check it. If the note says no premium applies on your payoff date, the figure is $1,205,150.

The point of the exercise is the order of operations: get the premium from the note first, then add it. The premium can be the largest moving part of the payoff and it is the one the regulation leaves to your documents.

What to ask before you prepay

Ask the servicer for a written payoff statement that itemizes principal, interest, fees and premium for the date you plan to pay. Ask when the premium is calculated and whether it changes between now and the payoff date. If the 504 project is being sold or refinanced, ask the closing agent to build the payoff into the closing statement. Because the first-lien Third Party Loan is a separate loan with its own terms, check its prepayment terms separately; 120.940 governs the 504 loan and Debenture only.

If you are comparing programs, note that the 7(a) loan has its own prepayment rules in a different section; see our 7(a) prepayment fee calculator. The two programs should not be mixed up. And for the fee side of a 504 loan, see fees paid by the Borrower.

Sources

• 13 CFR § 120.940, Prepayment of the 504 loan or Debenture. Read November 2, 2026.
• 13 CFR § 120.801, How a 504 Project is financed. Read November 2, 2026.
• 13 CFR § 120.971, Allowable fees paid by Borrower. Read November 2, 2026.

Text read: Electronic Code of Federal Regulations, Title 13, Part 120, in the eCFR, current as of October 29, 2026. Dollar figures and percentages on this page are the ones printed in those sections as of that date; SBA can amend the rule and publishes loan-program procedures (such as SOP 50 10) that add detail this page does not cover. Confirm current terms with a Certified Development Company, an SBA-approved lender or at sba.gov. This page summarizes the regulation and does not replace it.