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SBA Line of Credit: What It Is and How to Get One

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The U.S. Small Business Administration (SBA) offers lines of credit of up to $5 million through the CAPLines program to help small businesses succeed.

An SBA line of credit shares the benefits of other types of SBA loans, like comparable interest rates, but are more flexible and are best for short-term cash flow needs. If your business needs working capital funds or faces seasonal fluctuations, an SBA line of credit may be a good option to consider.

What is an SBA line of credit?

An SBA line of credit is a short-term financing option that provides businesses with funds that you can draw upon as needed. Businesses can qualify for SBA lines of credit up to $5 million. They can have maximum repayment timelines up to 10 years long, though Builders CAPline lines of credit have maximum repayment timelines of five years.

Unlike an SBA loan, which provides a lump sum of money upfront, you only pay for the funds you use. You can withdraw funds from a line of credit as needed, and you only pay interest on the amount that you borrow, not the total amount of credit available to you.

Types of SBA CAPLines

Most SBA lines of credit are part of the SBA CAPlines program, which offer fixed or revolving lines of credit that are intended to help businesses meet various short-term funding needs.

Revolving lines of credit work similar to a credit card; when you pay off the balance, your borrowing power increases and you can withdraw from the full funding allowance. For example, if your business has a $10,000 line of credit and uses $2,000 for expenses, but then pays off the full balance, you can withdraw up to $10,000 again during the draw period. Other SBA CAPLines offer fixed lines of credit. This means that while you’ll still only pay interest on the outstanding balance, you cannot withdraw funds that you have already paid back. If you have a $10,000 line of credit and use $2,000 and pay off the balance, you will still only have $8,000 available left to draw from.

The SBA Express loan program also offers a line of credit. As of Oct. 1, 2021, the maximum amount offered in this program is $500,000, so the credit limit is lower than the CAPLines program. But, if your business needs access to a revolving line of credit quickly, the quick, 36-hour turnaround may make this an appealing option.

SBA loans vs. lines of credit: What’s the difference?

SBA lines of credit are technically a form of 7(a) SBA loan, and like a traditional SBA loan, they are made through partner banks.

However, lines of credit operate differently than a standard loan. With a 7(a) loan, your business will receive the entire amount of the loan in one lump sum upfront, and then you’ll pay back the full loan with interest back over a set term with monthly payments. For loans with maturity longer than 15 years, prepayment penalties may apply.

While both offer funding up to $5 million, a standard 7(a) loan requires a down payment but CAPLines do not.

Types of SBA lines of credit

The SBA CAPline program is essentially an umbrella program that offers four different types of lines of credit based on how it will be used.

Type of SBA line of credit Who is it for? Maximum repayment time Revolving or Fixed?
Seasonal CAPLine Borrowers who need loans to finance seasonal increases of inventory, increased labor costs, or accounts receivable 10 years Either
Contract CAPLine Businesses who want to finance direct labor and material cost associated with specific contracts 10 years Either
Building CAPLine Businesses who want to finance the labor and material costs for a general contractor or builder who is constructing or renovating commercial or real estate buildings 5 years Either
Working CAPLine Businesses who need financing for recurring or short-term needs and who are willing to convert short-term assets into collateral and cash 10 years Revolving

Interest rates and fees

Interest rates and fees for SBA CAPlines are the same as SBA 7(a) loans.

Lenders for SBA lines of credit charge a fee on the guaranteed part of the loan. Like other 7(a) loans, the fees vary by amount of the credit line: 

  • For lines of credit $150,000 or less, the fee is 2%. 
  • For lines between $150,001 to $750,000, the fee is 3%. 
  • For lines greater than $750,000, the fee is 3.5% for up to $1,00,000, plus an additional 3.75% of the guaranteed amount above $1 million.
  • SBA Express loans do not have a fee. 

Interest rates also vary, depending on the amount of the credit line. 

  • For credit lines of $25,000 or less, the interest is the prime interest rate + 4.25%, if the term is less than seven years, or prime plus 4.75% if more than seven years.
  • For credit lines of $25,000 to $50,000, the interest is the prime interest rate + 3.25%, if the term is less than seven years, or prime plus 3.75% if more than seven years.
  • For credit lines of $50,000 or more, the interest is the prime interest rate + 2.25%, if the term is less than seven years, or prime plus 2.75% if more than seven years.

How to get an SBA line of credit

In order to qualify for an SBA line of credit, you must meet the SBA 7(a) loan criteria. This includes:

  • Being a for-profit business
  • Operating in the U.S.
  • Being in good standing with any other government loans

In addition, applicants for CAPlines may need to meet additional criteria specific to each program. These include the following:

  • Seasonal CAPLine: Businesses must be in operation for one full calendar year and able to demonstrate seasonal activity. The loan can only be used to finance seasonal increases in costs.
  • Contract CAPLine: Businesses must be able to demonstrate the ability to operate profitably based on the successful completion of similar products and be able to bid and perform the type of work the contract requires. You must also demonstrate that you have the financial and technical ability to complete the contract on time and for profit.
  • Building CAPLine: Applicants must be construction contractors or home builders with demonstrated technical and management ability, and certify that you’ll have at least one supervisory employee on the job site throughout the construction period. You also need to have prior successful performance in bidding on and completing comparable projects.
  • Working CAPLine: Businesses with accounts receivable or have inventory. You can use these funds for short-term working capital.

Alternatives to SBA lines of credit

Since SBA lines of credit are funded by banks, credit score and application requirements may be too stringent for your business to qualify. If you don’t, there are alternatives to SBA lines of credit that you may want to consider.

These include the following:

  • Line of credit from online lenders: Other lenders, including online lenders, extend lines of credit. In some cases, their application criteria may be less strict. It is important to note that more relaxed requirements, however, may result in higher interest rates as there’s more potential risk to the lender, so it’s important to shop around.
  • Business credit card: Business credit cards work exactly like personal credit cards; you’re given a set balance, and you can draw from it at any point. You’ll pay interest only on the withdrawn balance. A business credit card is like a revolving line of credit, but it’s available indefinitely instead of with a term limit.
  • Working capital loan: Working capital loans are a good alternative to Working CAPLines, as they’re lump-sum loans designed to cover everyday costs that look at existing assets as potential collateral.
  • Merchant Cash Advance: This is not a loan but instead a cash advance that you’ll pay back alongside a certain percentage of future debit and credit card sales until the initial amount and a set fee are paid off. The repayment period is typically short at two years or less, but it can offer fast funding that can help cover tight seasons or important costs like payroll.
  • Invoice factoring: Invoicing factoring allows business owners to sell invoices to a third-party company in exchange for a cash advance. You might receive 70%-90% of the unpaid invoice, so it can cause a significant hit in profit. It’s a good option to consider when you need some funds quickly to get by, such as construction companies that need advanced payments for home sales that will take time to finish.

SBA line of credit FAQs

What is the minimum credit score needed for an SBA line of credit?

While the SBA does not specify a minimum credit score to receive a line of credit, most business mentors recommended having a credit score of 600 or higher.

What are the types of lines of credit?

There are four commonly-used types of lines of credit the SBA:

  • Working CAPLines
  • Builders CAPLines
  • Seasonal CAPLines
  • Contract Loans

You can also obtain a line of credit through the SBA Express loan program.

How do I qualify for an SBA line of credit?

To qualify for an SBA line of credit, you must meet the following criteria:

  • Being a for-profit business
  • Operating in the US
  • Being in good standing with any other government loans

Depending on the line of credit you’re applying for, you may also need to meet additional requirements.

How is an SBA line of credit different from an SBA 7(a) loan?

SBA lines of credit are types of SBA 7(a) loans, but they’re not paid out in a single lump sum and instead allow users to withdraw funds as needed.

 

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