February 9, 2016
By Walter H. McLaughlin
Senior Vice President, Banner Bank
SBA Hot Topic Tuesday — SBA Express: A Winning Approach to Smaller Loans
There is a common misconception that it takes as much time and effort to put together a $1 million deal as it does a $100,000 loan. Therefore, a number of lenders believe there isn’t enough value in smaller loans to spend their time and energies on, especially during a growing economy.
As a result, the average commercial loan has increased following the depths of the Great Recession, and SBA lending certainly wasn’t immune to that phenomenon. In FY 2010, approved SBA 7(a) loans surpassed $12.4 billion, with 28,347 loans of $150,000 or less. During FYE 2013, dollar volume hit $17.85 billion—a 44% increase—yet small loans declined by 12% over that same period.
Keenly aware that smaller loans are a critical part of its stated mission to “aid, counsel, assist and protect the interests of small business concerns,” the SBA has taken steps to reverse those trends over the past few years. Applications were simplified, credit underwriting and processing were streamlined, and guaranty fees were waived for loans up to $150,000.
Those efforts paid off, as small loans spiked to 37,705 in FY 2015. Leading the charge was resurgence in a type of loan sometimes viewed as an afterthought within the SBA’s suite of products: SBA Express.
SBA Express: A Line, a Loan or Both
Although each lender must decide how much risk an SBA guaranty mitigates, it should be viewed as a credit enhancement that expands the institution’s credit box. Not by a lot, mind you, as excessive risk invites problems down the line, but enough to make a meaningful impact. That’s true whether the guaranty is 50% or, as in the case of Export Express, up to 90%.
If your borrower requires a line of credit of $350,000 or less ($500,000 under Export Express) in which the administrative costs of monitoring via borrowing base certificates don’t compute, an SBA Express line can be a cost-effective solution. The products are flexible enough to be offered as either lines of credit, term loans or both (i.e. a three-year line followed by a four-year term-out). While seven years is the maximum number of years for a line, other eligible purposes can qualify up to the SBA’s statutory maximum of 25 years.
It’s important to note that the guaranty for Export Express jumps up to 90% for loans/lines up to $350,000, and 75% up to $500,000. However, at least 70% of the line must be used for export-related purposes.
Lower Cost, Higher Margins and Less Risk = Greater Profits
Although eligibility requirements for the standard 7(a) and Express Loans are the same, how your institution underwrites and administers the Express loans is largely up to you. That flexibility helps keep costs down while the 50% guaranty cuts the risk neatly in half.
As for allowable rates and fees, the lender may collect packaging fees under the same rules and guidelines as standard 7(a), and charge initial loan fees similar to non-SBA commercial loans. Interest rates can range up to 6.5% over the base rate for loans $50,000 or less and 4.5% above the index for loans up to the Express maximum.
Express Lending Done Right
Last year, Banner Bank issued 200 SBA Express loans throughout its footprint, averaging nearly $100,000 per approval. Loan decisions are made via a hybrid of credit scoring and old-fashioned human judgment, with loan funding typically within ten days after an application is received.
Eric Schmid, Banner’s Vice President in charge of Small Business Underwriting, had this to say about the Banner Bank approach: “While some requests enter the decisioning process already identified as candidates for SBA Express backing, many do not. Before declining a credit request our underwriters take into consideration whether SBA Express can provide adequate mitigation to reach an approval. If so, we pursue it; creating a win for the client and the bank.”
The end result is more loans to qualified borrowers, mitigated risk to the bank, and all while generating solid fees, interest income and deposit relationships. It sounds like there are plenty of wins to go around for everybody.