SBA Line of Credit: What It Is and How to Qualify
An SBA line of credit can help your business stay nimble enough to overcome short-term gaps between your income and expenses. That can be especially important for many businesses such as real estate developers and seasonal retailers. Unlike regular business lines of credit, SBA lines of credit may be cheaper — but there are a few things you should know to make sure it’s the right fit.
SBA line of credit vs. SBA loan: What’s the difference?
The SBA has programs for both loans and lines of credit. If you apply for an SBA loan, you’ll get all of your loan funds upfront, if approved, and repay that loan over the course of several months with fixed payments.
An SBA line of credit, on the other hand, allows you to borrow funds as needed — up to the limit of your line of credit — over a set period of time. You can choose when to borrow money, meaning you won’t pay interest on cash you don’t yet need to borrow. As a result, your monthly payment may change over time.
Should I use an SBA line of credit or SBA loan?
If you have a set purchase in mind, such as a piece of equipment or real estate, then a loan is typically a better option. Loans tend to come with lower interest rates and a set payment period that can help you plan your business finances more easily.
However, many businesses need to borrow smaller amounts on a more frequent basis in order to stay responsive to changing business conditions, like shifts in demand for your products or taking on new contracts. A business line of credit gives you peace of mind that you can afford those expenses when they come up without going through the hassle of applying for another business loan.
Types of SBA lines of credit
Most business owners are aware of SBA loans, but may not know that the SBA also offers many types of business lines of credit for different purposes:
SBA Express Line of Credit
If you’re seeking only a relatively small SBA line of credit — $500,000 or less — you may prefer working with an SBA Express lender because you can get approved faster than with a lender that is not SBA approved. SBA Express lenders are given a little more leeway by the SBA to handle these loans using their own processes, making for a smoother experience for you. Plus, if you’re applying for a line of credit under $50,000 total, you may not even need any collateral.
If your business operates on a seasonal basis, such as a plant nursery or souvenir shop, a seasonal CAPLine can help you iron out some of the naturally occurring fluctuations in your income. In order to qualify, you’ll need to have been operating for at least 12 months, and you can only use the funds for seasonal expense changes related to hiring new workers, purchasing new inventory or handling accounts receivable.
Contract CAPLines are intended for businesses that need funding to fulfill specific contracts, such as manufacturers that build orders to custom specifications. You’ll need to demonstrate that you have the technical expertise to fulfill the contract in question, as well as go through the complete contract life cycle from bidding to fulfillment. If awarded, the funds can only be used for the specific contracts outlined — not for general business expenses unrelated to that project.
Contractors may be eligible for a Building CAPLine, allowing them to finance the construction costs of residential and commercial property, whether building new from scratch or making significant upgrades to older buildings. Funds can be applied to all applicable on-site costs, including hooking up new utilities, professional landscaping, labor and materials.
A Working CAPLine can be used as a general-purpose SBA line of credit for working capital expenses, such as buying inventory and paying rent. Working CAPLines may be easier for credit-challenged businesses to obtain. They also require a little more intensive monitoring of your collateral and, for that reason, they may come with extra fees that other SBA lines of credit don’t charge.
Interest rates, fees and terms for SBA lines of credit
All loans under the SBA 7(a) program – including lines of credit — require your lender to pay an upfront funding fee to the government that they can pass onto you, the borrower. These fees are based on the “guaranteed amount,” meaning the portion of the loan that the SBA is backing — not the total loan amount. The SBA guarantees 85% of the total amount for loans of $150,000 and under, and 75% of the total amount for loans above $150,000.
Here are the fees based on the guaranteed portions of the line of credit:
|$150,000 and under
|2% of the guaranteed amount
|$150,001 to $700,000
|3% of the guaranteed amount
|$700,001 to $5,000,000
|3.5% of the guaranteed amount (up to $1,000,000), plus 3.75% of the guaranteed amount over $1,000,000
For example, if you take out a $50,000 line of credit, the SBA will guarantee 85% of your loan. The fee is 2% of that guarantee, meaning that the total upfront funding fee that your lender can charge you is $850.
|Maximum interest rates
|$50,000 and under
|Index + 6.5% (15% as of December 2023)
|$50,001 to $250,000
|Index + 6.0% (14.5% as of December 2023)
|$250,001 to $350,000
|Index + 4.5% (13% as of December 2023)
|$350,001 and over
|Index + 3.0% (11.5% as of December 2023)
Individual lenders are free to charge whatever they want for interest rates, within limits set by the SBA. Those maximum interest rates fluctuate based on market conditions and are based on an index: either the U.S. Prime Rate or an SBA Optional Peg Rate.
How to apply for an SBA line of credit
Rather than giving out lines of credit directly, the SBA partners with local lenders who handle the business side of things with you, the business owner. You can find these lenders on your own, or by using the SBA’s Lender Match tool which helps you find potential lenders who may be interested in working with you.
Getting approved for SBA funding can often be tougher than with private lenders, although the results are generally worth it. You’ll need to put together a strong application in order to increase your odds of approval, complete with things like a business plan, financial projections, collateral details and more. In addition to being required for your application, including these details helps to make sure you’re clear on your business funding needs and how they fit into the larger picture.
When you’re ready, see if the lenders you’re matched with offer preapproval or prequalification. This can give you a better idea of costs and chances of approval. While the SBA sets the maximum rates and fees, banks are free to charge less in order to compete with other SBA lenders, and you can use this to your advantage to find cheaper SBA lines of credit. Find the lender with the best offer and submit your application.
Make sure to stay in touch with your lender through the approval process in case they need any additional paperwork or documentation, which can help speed up approval for your line of credit as well.
Alternatives to a SBA business line of credit
It generally takes more time and effort to get an SBA line of credit, and not all businesses qualify — especially if your business is newer or you have bad credit. If that’s the case, consider these other options:
Business line of credit
Business lines of credit aren’t just available from SBA-approved lenders. Many banks, credit unions and online lenders offer business lines of credit completely separate from the SBA programs.
These lines of credit may be easier to apply for and may vary more in terms of how they work, meaning that you may be able to find a better fit for your company’s needs. On the other hand, the rates and terms that private business lines of credit typically come with are less favorable to borrowers.
Business credit cards
If you need funds to make business purchases for everyday operations such as inventory, travel and professional services, a business credit card may be a better option. Although you can use them to finance purchases, it’s best to use them as a convenient payment method and a way to earn rewards.
Credit cards are available from a wide range of banks, but typically carry very high interest rates, which you can avoid entirely by paying off your balance in full each month. This will also help establish a positive credit history, too.
Working capital loans and lines of credit
A working capital loan is a general name used to describe any type of loan used to pay for your business’s day-to-day expenses, including things like retail stock and payroll. They’re meant as short-term financing solutions to cover brief gaps between your income and expenses, as opposed to a larger loan used to make a major investment in your business.
Working capital loans are available from many different sources (you can even use most SBA loans to pay for working capital). Working capital loans from non-SBA lenders are typically easier to get but may come with higher loan costs.
Similarly, a working capital line of credit will provide you with financing for day-to-day expenses without a fixed loan payment.
Businesses that operate by sending invoices — and then waiting weeks or even months for them to be paid — can speed up the process and smooth out cash flow issues by using an invoice factoring service. This is considered an alternative business service and can be confusing for business owners to understand and compare to traditional financing options.
Rather than using an easy-to-understand APR, invoice factoring companies use different terms and pricing structures, such as a “factor rate” and “recourse” or “non-recourse” financing. It’s best to do a lot of research before engaging in one of these services.
Merchant cash advance
Merchant cash advances are another alternative small business lending product. It operates under a similarly mysterious shroud to invoice factoring due to its unusual financing and price structure, which confuses many business owners and can obscure the fact that these can be very expensive ways to borrow money.
At its core, a merchant cash advance operates by having a lender buy your future cash receivables, typically in a retail business. You’ll get a lump sum of cash upfront now in exchange for a pre-set price, typically ranging from 10% to 50% of your cash advance amount. You repay those costs with weekly or even daily payments as a percentage of your sales until the debt is repaid.