Here’s an in-depth look at SBA Caplines
A small business loan guaranteed by the U.S. Small Business Administration (SBA) is one of the most advantageous financing methods available to small businesses. Why? The SBA guarantees the loans against the risk of default, which lessens lender risk. The SBA guaranty allows lenders to offer better and more generous terms on SBA loans than they do for conventional business loans. (A conventional loan is one not backed by the U.S. government.) The SBA sets a maximum interest rate for participating lenders, so SBA loans have interest rates comparable to or lower than conventional business loans. SBA financing also typically comes with more flexible fees, lower down payments, and longer repayment periods, which can make your loan payments more affordable.
SBA loan programs are targeted to different types of business needs. If you’re looking for short-term and cyclical working capital financing, you’ll find four distinct SBA CAPLines programs, each designed for a specific business purposes. Here’s an overview of each SBA CAPLine program.
CAPLines Programs: An Overview
The Contract Loan Program
What happens if your business wins contracts, subcontracts, or purchase orders (POs) but needs items you don’t have cash available for, such as raw materials or staff expansion? You can face challenges in successfully completing the work. The Contract Loan program was designed with challenges like this in mind. This working capital loan provides financing for general expenses incurred in completing contracts, subcontracts, or POs, including overhead and administrative costs.
Contract Loan CAPLines are available for up to $5 million. The loan term can last up to 10 years, but is usually based on the length of the contract. The loan can be disbursed before the work related to the contract commences.
To get a Contract Loan CAPLine, your business will need to show a past ability to complete similar contracts, subcontracts, or POs profitably. You’ll need to demonstrate an ability to bid, undertake, and complete the type of work specified by the contract and demonstrate both financial wherewithal and the competence and knowledge to complete the work specified.
The Seasonal Line of Credit Program
If your business is seasonal, requiring significantly more products, services, or labor at certain times of the year, you might qualify for a Seasonal Line of Credit CAPLine. This program can provide funding for increasing inventory, accounts receivable, or materials and labor costs.
To qualify for a seasonal line of credit CAPLine, your business must have been operating for at least a year. You’ll also need to show the seasonal pattern in your application. Your application will be reviewed to match the amount of funding requested with the costs of the seasonal business. You cannot use the proceeds for needs or activities related to your off-season.
The maximum line of credit available is $5 million, while the maximum guarantee is $3.75 million. The maximum loan term is 10 years.
To get a seasonal CAPLine, you can’t have other seasonal line(s) of credit. You can have outstanding loans and lines of credit for working capital; it just can’t be seasonal.
The Builders Line Program
The Builders Line Program is available to small contractors or developers who are building or rehabilitating property (residential or commercial), intending to sell it when completed, but not knowing the specific third-party purchaser when the work begins.
This renovation loan may only be used for “substantial” renovations according to the SBA’s criteria. That means rehabilitation expenses equal to or above 33% of the purchase price or fair market value.
This SBA loan program can be approved for as much as $5 million. Most loans have a term of three years, but the maximum is five.
Builders Line financing must be related to construction, including labor, supplies and materials, and equipment rental. Costs related to construction, such as permits, building inspection, landscaping, and more, are all eligible.
If you’re buying real estate to develop, Builders Line loan proceeds can cover the price of land as long as it isn't more than 20% of the overall project expense.
As much as 5% of the loan total can be used for community improvements, as long as those improvements bring advantages to the property being built or renovated.
To be successful in obtaining this loan, your company needs to show the ability to manage and perform the work. You’ll need to complete or manage the job with at least one supervisor on the job site for the length of the construction period. You’ll also need to show planning and a history of bidding on and completing similar projects.
The Working Capital Line of Credit Program
The Working Capital Line of Credit CAPLine offers short-term working capital of up to $5 million. This program is targeted toward businesses that themselves provide credit to their customers or whose major asset is inventory. The funds are to be used for working capital and operations only.
The Working Capital Line of Credit has a maximum loan term of 10 years and a maximum loan amount of $5 million.
You will need to report inventory or accounts receivable amounts to your lender, as disbursements are usually pegged to these numbers. You repay the CAPLine from sale of inventory or payment of accounts receivable. Lenders can charge fees for servicing and oversight of the collateral with this CAPLines program.
Businesses interested in this product should talk to an SBA lender about the structure of disbursements and repayment.
SBA Loan Requirements: General Overview
For all CAPLines, your business must meet the usual requirements for a standard SBA 7a loan.
- Be U.S.-based.
- Be a small business, as determined by U.S. government standards. These vary by sector and industry, and are determined by several factors, including gross annual income, cost of goods sold, and number of employees.
- Be a for-profit rather than a non-profit organization.
- Have a reasonable amount of equity invested.
- Demonstrate a need for financing.
- Use the funds for a sound business purpose.
An SBA CAPLines program loan can be an excellent source of business funding if your business meets both program and overall SBA requirements.