SBA raises lending limit for potential PPP successor

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The Small Business Administration has acted on another key provision of the coronavirus stimulus package by temporarily increasing the maximum size of SBA Express loans.

Overshadowed by the massive Paycheck Protection Program, SBA Express has been a steady source of small-business capital since its creation in 1995. While PPP offers loan forgiveness, it also requires borrowers to spend 75% of the funds on payroll and a limited number of other expenses.

SBA Express, while lacking any chance of forgiveness, gives borrowers more flexibility to cover a wider range of expenses. With its lending limit increased from $350,000 to $1 million, the program could become a critical tool for businesses looking to rebound as the pandemic passes, lenders said.

“Many businesses, when they start to come up for air and get back on their feet, will find their balance sheets depleted and their liquidity drained,” said Steve Smits, chief credit officer at the $5.3 billion-asset Live Oak Bancshares in Wilmington, N.C. “They’re going to need some dry powder.”

The program has enjoyed some popularity with lenders in the past because it allows them to use their own forms and procedures, apply in-house collateral standards and make the final credit decision. In exchange, the guarantee amount is reduced to 50%, instead of the typical 75% for loans made under the SBA’s 7(a) program.

Express loans can also be structured as a line of credit.

“You’re going to see a lot of businesses that had bootstrapped, that had maintained a certain liquidity level or came to expect a certain cycle of revenue,” Smits said.

“They’re going to realize they need to revamp themselves,” he added. “For the foreseeable future, I think they’re going to need to lean on tools that are available to help them build their balance sheets back up. A line of credit … could be a meaningful piece of the puzzle.”

A beefed-up Express program could also be attractive to fintechs that want to become more involved with SBA lending after participating in the Paycheck Protection Program.

Funding Circle, a London fintech, sees SBA Express as a solid addition to its existing product line.

“SBA Express is going to be really important because it best matches our process and customers,” said Ryan Metcalf, Funding Circle’s head of U.S. regulatory affairs and social impact.

Though it has some attractive qualities, it is unclear how much traction SBA Express will gain as small businesses regroup.

The program had seen reduced use since the 2016 fiscal year, though lenders said the biggest issue was the low cap that had been in place for more than a decade. Most borrowers need more than $350,000 to accomplish what they want to do with an Express loan.

“It certainly wasn’t a product we led with,” Smits said.

“We had less than 1% of our portfolio in SBA Express loans,” he added. “We used it predominantly for small working-capital loans to seasonal businesses" or those "that had accounts receivable that … needed to manage their cash cycle.”

That’s why lenders are expected to aggressively lobby Congress to make the $1 million limit permanent, rather than let the cap revert to $350,000 in early 2021.

Metcalf and Smits said they would also like to see the SBA increase the guaranteed amount to 85% through 2021.

“I don’t think the program needs to have the enhanced guarantee in perpetuity," but "I think having that additional guarantee over a period of time is important,” Smits said.

An SBA spokeswoman wasn’t immediately available to comment.

Still, lenders believe SBA Express could get more consideration with the higher cap, even with its current 50% guarantee rate.

It might take several months, perhaps even a few quarters, before small-business lending outside of the Paycheck Protection Program ramps back up.

The approval rate for small-business loan applications at banks with more than $10 billion in assets was 8.9% in April, according to Biz2Credit. The approval rate at community banks was 11.8%. (The data excluded the Paycheck Protection Program.)

“Historically, you generally see an uptick in demand for SBA lending when you’re coming out of a downturn, just because of the credit enhancement,” Smits said. “I expect we’ll see that again.”

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SBA Small business lending Coronavirus Paycheck Protection Program