12/14/2010 01:50 pm ET Updated May 25, 2011

SBA Puts the Kibosh on an Important Small Business Lending Program

(Updated after the government's official announcement on 12/15/10)

The U.S. Small Business Administration announced on Dec. 15, "The agency will end its existing Community Express pilot loan program on April 30 (2011)."

The program has been widely used by small-business owners in need of small amounts of working capital ― currently up to $25,000 in most locations and increased to $50,000 in Historically Underutilized Business Zones, called "HUBZones."

Even though SBA initially created the Community Express Loan Program to target women and minority applicants, it was offered to both minority and majority owned small-business concerns. The lenders making them relaxed their underwriting requirements, relied heavily on credit scoring and streamlined processing. As a result, loans could be approved within one week.
Because of the small loan sizes and acceptance of lower credit scores, community express lenders made loans to applicants that were not able to get credit elsewhere.

SBA created the pilot program 10 years ago and it was never made permanent. That enabled them to end it with a stroke of the pen. Even so, Superior Financial Group and Borrego Express Capital Lending, the only two lenders that make these loans nationwide and took the risk of developing the infrastructure necessary to make these very-small loans profitably.

According to SBA's announcement, it will replace Community Express with two new programs on March 15. One is called "Small Loan Advantage and the other is "Community Advantage." Both programs will go up to $250,000 and carry SBA's basic 7(a) program guaranty structure -- 85 percent for loans up to $150,000 and 75 percent for those greater than $150,000. But the loan application process will be more streamlined than basic 7(a).

Notably, however, neither of these replacements will be made available through Borrego or SFG since both are non-bank, SBA-approved lenders. Instead, Small Loan Advantage will only be made by the nation's largest banks that are in the agency's "Preferred Lender Program." These banks have historically made larger loans that are 50 percent guaranteed up to $350,000 under the Express Loan Program, and 75 percent guaranteed up $5 million with basic 7(a).

Meanwhile, Community Advantage will be made available through "Community Development Financial Institutions, Certified Development Companies and non-profit microlending intermediaries," according to SBA's announcement. Presumably these organizations are sensitive to the needs of their local constituency and will provide technical assistance along with their financing.

But to make a meaningful number Community Advantage loans, the lenders will have to sell their loans on the secondary market to replenish their funds. And according to SBA's spokesman David Hall, "(They) will have to apply for authority to sell loans on the secondary market." Furthermore, "We'll be evaluating those requests based on a number of factors but primarily how well-capitalized they are."

In my opinion, SBA is not offering enough of a carrot to get large banks in SBA's Preferred Lender Program to change their culture of making larger loans.

On the other hand, helping the underserved is in the DNA of community-based institutions. But it will take a while for them to understand SBA's 7(a) program and they will not make enough loans to have the enormously beneficial impact that Community Express lenders had on the small-business community nationwide.

Small-business owners have reason to be a bit less merry this holiday season.

Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at