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SBA Express loans are part of the Small Business Administration's popular 7(a) loan program. These loans have smaller borrowing maximums compared with standard SBA 7(a) loans, but can be approved and funded much faster. They're designed to have a more streamlined qualification process. Here's what you need to know about these loans and the process of applying for one.
SBA Express loans are made through third-party lenders and are partially guaranteed by the Small Business Administration. Specifically, the SBA guarantees 50% of the loan amount, and the lending bank is at risk for the rest.
The goal is for the SBA guarantee to motivate banks to provide business financing to small business owners who otherwise might have a difficult time getting it. Think of it this way -- if you get a $200,000 Express loan, the maximum the bank can lose if you don't pay is $100,000 (50%). Meanwhile, the bank gets to collect interest on the full amount.
However, the guarantee is significantly lower than the 75%-85% guarantee the SBA offers for standard 7(a) loans, and in exchange for the lower guaranteed percentage, banks are allowed to use their own approval procedures (not the SBA's). This allows loans to be made in a more streamlined manner, hence the term "Express loans."
SBA Express loans have repayment terms as long as 10 years (25 years if used for real estate). Lenders can use their existing collateral requirements for borrowers who apply for more than $50,000, and there is no collateral requirement for loans below this amount. Borrowers who own more than 20% of the business are required to sign a personal guarantee for the loan. Unlike most other SBA loans, Express loans can be either term loans or lines of credit that can be used if and when a business needs them.
Qualification requirements for an SBA Express loan
There are a few criteria that need to be met in order to receive an SBA Express loan:
Funding needs of $500,000 or less
Good credit (personal and business)
At least two years in business (Note: You can acquire a business with an SBA Express loan, but this rule applies to the existing business.)
Strong cash flow from the business, and the documentation to back it up
Meet the SBA's definition of a small business
This isn't an exhaustive list, and it's worth mentioning that SBA loans (even Express loans) require quite a bit of paperwork. In addition to standard business loan documents, such as your business' financial statements, SBA loans require some SBA-specific paperwork before they can be processed.
How much can you borrow with an SBA Express loan?
The maximum loan amount you can borrow with an SBA Express loan is $500,000, but the amount you can be approved for depends on a few factors. These can include your business' revenue, the industry and geographic area where you operate, and how long you've been in business, for example.
Loans can be structured as a term loan (where you borrow a specific amount and make monthly payments for a certain amount of time), or as a business line of credit. Terms can be up to 10 years for term loans and lines of credit, although term loans used to purchase real estate can have repayment terms as long as 25 years. The SBA has a maximum allowable interest rate, which is based on the prime rate, but within those maximums, interest rates can be negotiated between borrowers and lenders.
Other types of SBA loans you might want to consider
If you need more than $500,000, you can use a standard SBA 7(a) loan, which has a maximum of $5 million. There are pros and cons with using a standard 7(a) instead of an Express loan.
On a positive note, the guarantee percentage is higher, so 7(a) loans represent a lower risk to the lender. However, because of the higher guarantee, they require the SBA's approval, so the processing time can be significantly longer than with an Express loan.
Where can you apply for an SBA Express loan?
SBA Express loans are made through banks and third-party lending platforms, not by the Small Business Administration itself. The SBA maintains a directory of approved lenders, and it could be a good idea to check out some of your favorite business banks and lenders to see if they offer SBA loans. When you choose a lender, you'll have to apply and provide documentation on your business as well as yourself (the exact documentation requirements vary by lender).
Since there are plenty of individual lenders that offer SBA Express loans, it can be a smart idea to shop around a bit. Get personalized rate quotes from at least a few different lenders, as the rates offered on SBA loans aren't standardized. The SBA issues an interest rate cap, but banks are free to offer lower rates -- and many of them do.
Is an SBA Express loan right for you?
If you need $500,000 or less in business funding and can't obtain competitive financing terms elsewhere, an SBA Express loan can be a good option. Just be aware of the usage restrictions, collateral requirements, and personal guarantee.
SBA Express loans have a significantly lower guarantee percentage, meaning that more of a lenders' funds are at risk, and they tend to take a cautious approach because of it. On the other hand, SBA Express loans have streamlined procedures, so from a paperwork perspective, they can be easier.
There are few restrictions when it comes to the usage of SBA Express loan proceeds, as long as they are used within the business. Just to name a few, you can use an SBA Express loan to:
Buy inventory
Build up your working capital
Buy real estate for your business (such as an office or retail location)
Buy an existing business
Buy machinery, fixtures, furniture, or equipment
While you are allowed to use an SBA Express loan for real estate, it's important to note that you can't use one to acquire an investment property. For example, if you own several successful convenience stores, you could potentially use an SBA Express loan to buy a building to open another location. However, you cannot use it to buy a building that you intend to rent out to another business to open a store.
The Small Business Administration doesn't set a minimum credit score for its loans. However, the banks that originate SBA Express loans may have their own credit scoring requirements, both personal and business. On the personal side, SBA lenders generally want to see a FICO® Score at least in the mid-600s and no charge-offs, collections, or other highly adverse information.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
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Ashley Maready