The U.S. Small Business Administration (SBA) Express financing program is often thought of as one of the unicorns of government-guaranteed small-business lending. Many find it hard to believe the little-known and inexpensive program even exists, or they believe it’s too good to be true.
Despite the SBA Express program having a sterling record, it is not heavily promoted in the commercial real estate marketplace, and few SBA lenders and brokers specialize in the program. There are some reasons why SBA Express financing is not a preferred product for many lenders, brokers and other mortgage professionals, but there also are many reasons why it should be.
For Express loan sizes of less than $350,000, the SBA does not require that the lender underwrite financial statements or tax returns.
The SBA Express program is actually a subset of the more widely known 7(a) program. Like other SBA 7(a) options, Express loan proceeds can be used for almost any small-business need, including working capital, equipment, the purchase of commercial real estate, the refinancing of debt, or other expansion and growth needs.
The 7(a) Express loan can cover more needs than the recently created 504 Express program, which is mainly used to buy equipment or property, or to enhance or develop an existing property. One of the best features of the 7(a) Express loan is that it can be approved for funding in hours or days, versus weeks or even months for other SBA programs.
Smaller and faster
The SBA Express program allows for financing of loans of $500,000 or less. The regular SBA 7(a) program enables funding up to $5 million. SBA Express loans have financing terms of up to 25 years when commercial real estate collateral is involved, although the program includes a three-year prepayment penalty when the amortization period is at least 15 years.
Business owners seeking SBA Express financing may be eligible for financing of up to $500,000 for most business needs. And many SBA Express lenders focus on loans of less than $50,000. These loans can be priced in the range of the prime rate plus 6.5%. They include a standard monthly repayment and same-day funding may be possible.
What makes an SBA Express loan so much faster than a standard 7(a) loan is that for Express loan sizes of less than $350,000, the SBA does not require that the lender underwrite financial statements or tax returns. Many Express loans can be funded with just a handful of required SBA forms completed by the borrower.
This paperwork includes Form 413 (personal financial statement), Form 1919 (borrower information form), a few additional forms and a quick verification with the IRS that tax returns have been filed. Additionally, for SBA Express loan sizes of less than $25,000, the SBA does not require that any collateral be secured, enabling same-day funding via an experienced SBA lender.
Loans funded by an SBA-approved lender under the standard 7(a) program are guaranteed by the U.S. government for up to 85% of the total amount financed. This means that if the borrower defaults on the loan (and assuming the lender followed all required protocols when making the loan), the SBA will reimburse the lender for up to 85% of the funded amount. This guarantee drops to 75% for standard 7(a) loan sizes that exceed $150,000.
With Express loans, however, the SBA only guarantees up to 50% of the loan size, so if the borrower defaults, the lender will receive a much smaller reimbursement. The interest rate that a lender can charge for an SBA Express loan is the same as for a regular 7(a) loan — up to prime plus 6.5% — but the administrative and infrastructure demands needed to process and fund a high volume of loans for less than $500,000 is often too demanding to be worth many lenders’ time and effort.
Again, on a loan size of $25,000 or more, the SBA requires collateral. A loan that is more than $350,000 in size requires full underwriting using tax returns and financial statements, so the streamlined benefits deteriorate as the loan sizes get larger.
Many SBA lenders will consider that if they are going to spend the time and the resources on a small-balance loan, they might as well run it through the standard 7(a) program and get the government guarantee of up to 85% for better protection in the event of default. After all, funding one fully collateralized $1 million loan with an 85% guarantee takes fewer resources and is less risky than funding 40 uncollateralized loans for $25,000 with 50% guarantees.
As a result of these requirements, lenders that offer SBA Express loans (especially for sizes below $25,000) are those that have the framework, technology, staff and experience to process a high volume of loans quickly and efficiently. Additionally, due to the reduced guarantee of 50%, the lenders that undertake the Express program also tend to have a strong balance sheet, a good standing with the SBA (usually preferred lender status), and a track record of low defaults and favorable portfolio performance.
Notably, the SBA has a “credit elsewhere” rule, which basically means that a borrower who is applying for SBA financing of any kind is doing so because a conventional, non-SBA financing option is unavailable. Also, because loans may not be collateralized or fully reimbursed in the event of default, SBA Express financing may not be available to businesses and business owners with a less-than-prime profile.
SBA Express lenders may only conduct underwriting based on the personal credit score and experience of the business owner, the operating history and repayment history of the business, and the result of a small-business score provided by the SBA. Because of these requirements, qualifying parameters may be more conservative and include the following:
- A business credit score that is 700 or higher
- An operating history of at least two years
- Filing of all required tax returns
- No history of late payments, defaults, bankruptcies or foreclosures
Some SBA lenders may consider more liberal qualifying parameters for their SBA Express programs, but additional collateral or security for these loans is likely to be required. Additionally, it is important when obtaining any SBA financing to work with a preferred lender, which is the highest status level offered to a lender by the SBA. It enables the lender to directly approve SBA-eligible transactions. A lender that does not have preferred status must submit transactions directly to the SBA for approval, which can add significant time to the financing process and, in some cases, cause additional documentation or collateral to be required.
SBA Express financing is an accessible option for borrowers who are seeking fast funding at affordable and competitive terms. Express programs tend not to be as abundant as standard SBA 7(a) loans due to the reduced guarantee offered by the agency, as well as the logistical requirements and experience needed by the participating SBA Express lender. But it is still a great tool for mortgage brokers to help small businesses that are seeking quick cash for their operations. ●