What Is a 5-3-1 Commercial Loan?
A 5-3-1 commercial loan is a government-backed loan that carries a penalty for early repayment. The penalty gets smaller over time and disappears entirely after three years.
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SBA Loans
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The 5-3-1 penalty is required on loans of 15 years or longer that are guaranteed by the Small Business Administration under its loan program known as "7(a)."
Penalty
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A business that takes out a 5-3-1 loan is free to repay the balance at any time, but if it voluntarily repays more than 25 percent of the principal within the first three years, it is penalized a percentage of the repayment amount.
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Percentages
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For prepayments in the first year after receiving the loan, the penalty is 5 percent; in the second year, 3 percent; and in the third year, 1 percent. There is no penalty after three years.
Time Frame
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The clock starts ticking when the first funds from the loan are disbursed--not when the loan is approved.
Reasons
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The SBA requires the 5-3-1 penalty for two reasons. First, 7(a) loans are intended to help build successful businesses in the long term, not to provide short-term cash infusions. Second, the penalty ensures that lenders will make enough of a profit on 7(a) loans that they will continue to write them.
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