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SBA Line of Credit: How to Find the Best

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The U.S. Small Business Administration (SBA) is a government entity created in 1953 to provide small businesses with information, advice and access to capital. According to the SBA website, the main mission of the agency is to “…start, build and grow businesses.”

As a result of this focus, the SBA guarantees a number of loan programs to help banks lend money to small businesses. The SBA reduces the risk of banks lending to small businesses so that they can have access to the capital they need to operate and grow. As a loan guarantor, the SBA is not a direct lender, but rather connects businesses to SBA partner-lenders that can meet their funding needs.

A few of the SBA-guaranteed funding options include:

  • 7(a) Loans– Up to $5 million for expansion
  • 7(a) Small Loans– Up to $350,000 for expansion
  • SBA Express– Up to $350,000; can be used as revolving lines of credit or term loan
  • SBA Veteran Advantage– Up to $350,000; can be used as revolving lines of credit or term loan for eligible veterans
  • CapLines– Up to $5 million for working capital, contract, seasonal and builders
  • Community Advantage– Up to $250,000 for mission-focused lenders
  • International trade– Up to $5 million for need related to international trade
  • Export Working Capital Program– Up to $5 million for exporting
  • Export Express– Up to $500,000 for exporting
  • 504 Loans– Up to $5.5 million for long-term, fixed-asset loans
  • Non-7(a) Loans Microloans– Up to $50,000 for machinery, fixtures, leasehold improvements, working capital, etc.
  • SBIC loans- Loans from small business investment corporations

The four types of CAPlines, or SBA lines of credit

Loan Amount Term Interest Rate Eligibility
Seasonal line of credit Up to $5 million Maximum of 10 years Up to prime + 4.25% In operation for one year; pattern of seasonality
Working capital line of credit Up to $5 million Maximum of 10 years Up to prime + 4.75% Must generate account receivables or inventory
Contract loan Up to $5 million Maximum of 10 years Up to prime + 4.75% Demonstrate ability to complete similar contract profitably
Builders Up to $5 million Maximum of 5 years Up to prime + 4.75% Be a builder or developer

Rates accurate as of Nov. 2, 2018

Seasonal line of credit

This line of credit (LOC) was created to give businesses access to capital in order to finance seasonal increases of accounts receivables and inventory. In some cases, the loan may cover increased labor costs for busier seasons of a company’s operations.

These loans can’t be used to support operations during slower times of the year. Although the loan amount can be up to $5 million, the actual loan amount will be based on cash flow projects and be related to the costs of the season buildup of inventory and/or receivables.

In addition to meeting the 7(a) standard loan requirements (see below,) a business must be in operation for at least one calendar year and be able to prove that they have a definite pattern of seasonal activity to qualify for a seasonal line of credit.

  • Rates: same as 7(a); up to 4.25% + prime
  • Terms: 10 years
  • Minimum/maximum amounts: Up to $5 million
  • Fees: Up to 3.75% on guaranteed portion of the loan
  • Use of funds: Operational capital for seasonal spikes in business activities

Working capital line of credit

This line of credit is for businesses with short-term working capital needs. The line of credit can’t be used to pay delinquent withholding (payroll) taxes or similar payments owed to trusts like state sales tax. Funds cannot be used for floor planning either.

Because this loan is designed to help with short-term operating capital, the funds shouldn’t be used to acquire any new assets. If loan proceeds are used to purchase fixed assets, the lender is required to refinance the portion of the business line of credit used to acquire the assets within 90 days of discovering the purchase.

In order to qualify, a business must meet 7(a) Loan requirements, generate accounts receivables or have inventory.

  • Rates: same as 7(a); up to 4.75% + prime
  • Terms: 10 years
  • Minimum/maximum amounts: Up to $5 million
  • Fees: Up to 3.75% on guaranteed portion of the loan
  • Use of funds: Short-term operating capital

Builders line of credit

This loan is designed to help companies in the construction business. Because this loan is strictly for contractors, developers and builders, there are more qualifications a business must meet in order to be eligible for this loan.

In addition to meeting 7(a) Loan requirements, loan applicants must:

  • Be construction contractors or homebuilders with proven technical and managerial skills
  • Perform the construction/renovation work or manage the job with at least one supervisory employee on the job site throughout construction or renovation process
  • Plan for “prompt and significant” renovations
  • Show prior successful performance in bidding on and executing similar projects

The loan fund can only be used for direct expenses related to the construction or renovation costs of a specific eligible project like residential or commercial buildings for resale. These costs can include labor, supplies, materials, equipment rental, direct fees like building permits and inspection fees, utility connections, construction of septic tanks and landscaping. Land costs may be eligible if they don’t exceed 20 percent of the project cost.

This loan may be collateralized by the asset or assets involved in the renovation project. For example, if a mortgage was used to obtain the structure, then the lender may take no less than a second lien position against the same asset that secured the first mortgage.

  • Rates: same as 7(a); up to 4.75% + prime
  • Terms: 5 years
  • Minimum/maximum amounts: Up to $5 million
  • Fees: Up to 3.75% on guaranteed portion of the loan
  • Use of funds: Short-term operating capital

Contract loan

This line of credit is designed for businesses that need to finance a business agreement that would result in more revenue and profit for a business. This includes funds need to fulfill purchase orders, work orders or any other type of contract which calls for providing services and/or products in exchange for money. The funds can also cover overhead and administrative expenses related to executing these contracts.

In order to qualify, the loan application has to meet standard 7(a) Loan requirements and:

  • Demonstrate an ability to operate profitably based on completion of similar contracts
  • Have the ability to bid and perform the specific type of work required by the contract(s)
  • Have the financial capacity and expertise to complete the contract on time and at a profit

The SBA only allows loan proceeds to go toward one contract at a time. It doesn’t allow a borrower to finance another contract other than the one implicated on the loan application. Loan funds also cannot be used to pay any back taxes owed for payroll or similar trust taxes like sales taxes.

Qualifications for an SBA line of credit

For lines of credit guaranteed by the SBA’s CAPlines program, businesses will have to meet 7(a) Loan requirements plus a few others based on the type of SBA line of credit they are applying for.

Under the 7(a) Loans program, businesses must:

    • Be a for-profit entity
    • Be engaged in, or have plans to do business in, the U.S. or its territories
    • Have owner equity in the business
    • Use other financial resources, including personal assets, before seeking financial assistance from an SBA partner

For CAPlines, the SBA may also require loans to be collateralized with a personal guarantee, business assets or both. This means the loan is backed by assets the bank could seize should the loan go into default. Holders of at least 20 percent ownership in the applying business must guarantee a CAPline loan.

Additionally, banks want to know how you will repay your line of credit. They will base their decision on financial reports that depict how strong your business’s sales, inventory turnover, and costs. So, you will have to know important metrics regarding your business’s finances to be eligible for a CAPline. You should prepare these reports with an accountant to increase your chances of getting approval from an SBA lending partner.

How to apply for an SBA line of credit

You can apply for an SBA line of credit by going to the SBA Lender Match page. Once you are there, you can click “Find Lenders” and complete the information that follows. After you’ve entered your details, you’ll be presented with options for SBA lenders that could meet your funding requirements.

The bottom line

If you are a small business operating at capacity and have exhausted all other financial resources, including any personal resources at your disposal, it might be time to consider an SBA line of credit. These lines of credit can help your business grow when you don’t have any other options for business financing.

This financial product is reserved for business owners who can prove their needs and qualifications according to SBA guidelines. You’ll have to keep good records of your business’s financial performance and make a case that you are well-qualified and extremely likely to pay your SBA line of credit according to your loan agreement.


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