Small Business Administration (SBA) CAPLines provide small businesses with affordable financing up to $5 million for recurring cash flow needs. With an SBA CAPLine, or SBA line of credit, interest rates are typically around 5 to 10 percent. Plus, you can use an SBA line of credit repeatedly as it’s repaid. You can expect funding to take 45 to 90 days plus.
If you’re in need of a fast line of credit, a better option than an SBA CAPLine might be a small business line of credit from OnDeck. With OnDeck, you can get funding for up to $100,000 in as few as one to three days. You can apply and get approved in minutes using OnDeck’s simple online application.
What Is an SBA CAPLine?
An SBA CAPLine is a type of SBA line of credit that allows businesses to access up to $5 million in funding that can be used as often as it’s repaid. Contrary to popular belief, the SBA doesn’t actually issue SBA CAPLines. Instead, the SBA provides your lender with a guarantee that it will cover a portion — 75 percent to 85 percent — of any losses that result from you not paying as agreed.
Rather than a one-size-fits-all approach, the SBA offers four CAPLine programs that are meant to fill different cash flow needs. This includes seasonal funding, financing for specific contracts, funding to construct residential or commercial real estate, and general working capital financing. To qualify for an SBA CAPLine, the general requirements are similar to an SBA 7(a) loan.
The basic qualifications required for an SBA line of credit are:
- Credit score: 680-plus for all primary business owners (check your score for free)
- Debt-to-equity: 3 to 4 times maximum; meaning you can’t have more than $3 or $4 of debt for every dollar of equity
- Ability to repay: Debt service coverage ratio (DSCR) of at least 1.25 times
- Collateral & guarantees: Collateral (personal and business) is always required plus a personal guarantee from all owners with 20 percent or more
SBA CAPLines at a Glance
|Seasonal||Businesses that need short-term funding to fill seasonal or cyclical cash flow gaps|
|Contract||Businesses that manufacture goods or provide services on contract|
|Builders||Homebuilders and contractors who need funds to renovate or construct residential or commercial real estate|
|Working Capital||Businesses that need funding to convert short-term assets (like unpaid invoices) to cash|
Who an SBA Line of Credit Is Right For
SBA lines of credit are good for prime borrowers — 680-plus credit score — in need of affordable financing to fill recurring or specific cash flow gaps. This is because interest rates are typically in a range of 5 to 10 percent, plus you can access the funds repeatedly as you pay it off. What’s more, you can use the SBA CAPLine for as long as 10 years without having to apply again.
While an SBA CAPLine is a great way to get the cash flow funding you need, it can take 45 to 90 days or more to fund. If you need up to $350,000 quickly, applying for an SBA 7(a) loan with SmartBiz can be much faster than an SBA line of credit. SmartBiz streamlines the application process and can get you approved online in minutes. Funding can happen in as soon as 30 days.
What Is the Purpose of Each SBA CAPLine?
The four SBA CAPLine types provide seasonal funding, financing for specific contracts, funding for residential or commercial construction projects and general working capital financing. Each of the SBA CAPLines are similar in that they provide businesses with access to funding that can be used again. However, the intended purpose for each SBA line of credit varies.
Basic information about the purpose for each of the four types of SBA lines of credit are:
1. Seasonal SBA Line of Credit Purpose
A seasonal SBA CAPLine provides businesses with up to $5 million in funding for seasonal increases in accounts receivable, inventory or related labor costs. To qualify, in addition to the standard 7(a) requirements, your business needs to have been in operation for at least 1 years, and you need to demonstrate a pattern of seasonal activity.
If you manufacture or sell seasonal products or services, you would benefit from a seasonal SBA CAPLine. Let’s say you manufacture barbecue grills. You can use the SBA line of credit to purchase materials and pay for labor costs. Once the grills are built, the SBA CAPLine enables you to offer accounts receivable (A/R) terms to your customers. As the selling season ends and A/R is collected, the cash flow you receive can be used to pay off the SBA line of credit.
2. Contract SBA Line of Credit Purpose
A contract SBA CAPLine provides businesses with up to $5 million in funding to purchase materials and pay for labor associated with the contract. To qualify, in addition to the standard 7(a) requirements, your business needs have demonstrated experience, profitability and ability to perform the work and complete the designated contract, subcontract or purchase order.
If you complete projects or perform other work on contract, you would benefit from a contract SBA line of credit. Let’s say your company is hired under contract to build a widget. You can use the contract SBA CAPLine to get the funds you need to buy materials for the widget and pay for labor costs. Once the widget is built, you can use the funds received from your customer to repay the amount borrowed on the SBA line of credit.
3. Builders SBA Line of Credit Purpose
A builders SBA CAPLine provides contractors and home builders with up to $5 million in funding to build or renovate residential or commercial buildings. To qualify, in addition to the standard 7(a) requirements, your business needs have demonstrated experience, profitability and ability to perform the work and complete the project.
If you build homes, or you’re a contractor for other commercial or residential real estate projects, you would benefit from a builders SBA CAPLine. Let’s say you build new homes. You can use the SBA line of credit to pay for the construction costs associated with the homebuilding project, such as site preparation, framing, landscaping and so on. Once the house is sold, you can use the funds received to pay back the amount you borrowed.
4. Working Capital SBA Line of Credit Purpose
A working capital SBA CAPLine provides small businesses with up to $5 million in funding to convert short-term assets like pending invoices into cash throughout the year. To qualify, in addition to the standard 7(a) requirements, your business must generate accounts receivable and/or have inventory.
If your business manufactures goods or sells products/services on the invoice, and you don’t have a specific selling season, you would benefit from a working capital SBA CAPLine. Let’s say you operate a nail salon. You can use your SBA line of credit to purchase supplies as well as to pay for labor and other operating costs. As cash flow comes in from the services you provide, you can use it to pay down your SBA CAPLine.
SBA Line of Credit Interest Rates
The maximum interest rates your lender can charge for a CAPLine are set by the SBA. SBA CAPLine rates are fixed or variable, tied to base rates like the prime rate and rise and fall with market conditions. While base rates are still at decade lows, they’ve been as high as 8.25 percent in the past 10 years. Interest rates on SBA CAPLines are in between traditional and online loans.
The current SBA loan rates you can expect to pay on an SBA line of credit vs. alternatives are:
- SBA CAPLine rates: ~5 to 10% based on current Federal Reserve rates
- SBA 7(a) rates: ~ 5 to 10% based on current Federal Reserve rates
- Traditional loans: ~ 5% to 7%
- Online loans: ~ 10% to 30%+
SBA Line of Credit Fees
The SBA also establishes the maximum amounts your lender can charge in fees. One of the biggest fees you can be charged is an SBA guarantee fee of 2 percent to 3.5 percent. This is essentially the fee paid to the SBA in exchange for a promise or guarantee by the SBA to cover a portion — 75 percent to 85 percent — of your lender’s losses in the event you default on your loan.
You can also be charged other SBA fees such as:
- Packaging fee: ~ $2,000 to $4,000; varies by lender, and cannot exceed the amount charged for similarly sized non-SBA-guaranteed loans
- Extraordinary servicing fee: Not to exceed 2 percent, except for a working capital SBA line of credit, which can exceed 2 percent because of the extra servicing required
- Third-party expense reimbursement: All direct costs related to the loan like title fees, appraisal fees, environmental report fees, attorney fees and business valuation fees
With the exception of the guarantee fee, the typical SBA CAPLine fees are similar to what you would pay with a traditional loan. The guarantee fee is essentially the price you pay to get a loan that your lender wouldn’t otherwise be willing to make. For most of the other fees, the SBA is clear that your lender can’t charge you more than what they charge for traditional loans.
Interest rates with an SBA line of credit are the same as with an SBA 7(a) loan. If you need only $350,000, an SBA 7(a) loan with SmartBiz can be much quicker than an SBA line of credit. SmartBiz can get you prequalified online in minutes and funded in as soon as 30 days.
SBA Line of Credit Repayment Terms & Structure
The repayment terms for SBA lines of credit are tied to the seasonal cycle of your business, expected completion date for your contract or project completion date. In order for you to get an SBA line of credit, there needs to be a clear path to the CAPLine being paid off from the cash flow associated with the line, such as if you sell the project or collect funds from the contract.
The maximum SBA line of credit repayment terms and maturities are:
- Contract, seasonal & working capital: Up to 10 years
- Builder SBA line of credit: Up to 5 years
The SBA line of credit structure varies for each type of SBA CAPLine:
- Contract: Revolving or nonrevolving, meaning you can borrow against one or multiple contracts, subcontracts or purchase orders; you’ll make interest-only payments and repay the contract CAPLine when payment for the contract is made to your business
- Seasonal: Revolving and you’ll need to repay the seasonal CAPLine in full when your business receives payment from the seasonal activity you financed, such as if you sell your inventory and collect your A/R; otherwise, you’ll make interest-only payments
- Working capital: Revolving with the possibility of regular principal payments if required by your lender; if regular principal payments aren’t required, you’ll make regular interest-only payments
- Builder: Revolving or non-revolving, meaning you can borrow against one project or multiple projects; you’ll make interest-only payments and will repay the CAPLine in full within no more than 3 years of completing or selling the project, whichever is sooner
If you only need up to $350,000, SmartBiz can help you get funded with an SBA 7(a) working capital loan in 30 days or less. This is quicker and easier than what you can expect with a CAPLine. Plus, getting prequalified takes only minutes by completing SmartBiz’s online application.
SBA Line of Credit Eligibility Requirements
Since the SBA is promising to cover some of your lender’s losses if you don’t pay, the SBA line of credit requirements specify that only some businesses are eligible. The SBA CAPLine requirements related to eligibility focus on your business location as well as the characteristics of your business and any owners.
The six primary SBA loan requirements for SBA lines of credit eligibility are:
- Activity & management: Your business generally needs to be actively managed and operated
- Organizational structure: Businesses need to have a for-profit organizational structure
- Location: Only businesses located in the United States and its territories are eligible for SBA 7(a) loans
- U.S. citizenship status: Business owners need to be U.S. citizens, legal permanent residents or meet other citizenship requirements in order to be eligible for SBA 7(a) loan financing
- Small business size: Your business needs to be small, as defined by the SBA; while it varies by industry, a business is generally considered small if it has $750,000 to $38.5 million or less in annual revenue and fewer than 150 employees
- Financing must be needed: You can only get approved for an SBA 7(a) loan if you can’t get financing from another source without it causing your business an undue hardship
Understanding if you meet the basic SBA line of credit eligibility requirements early in the process is important. You’ll be able to focus on finding a lender that can potentially help you, and it will make the loan process less frustrating. If you don’t meet these basic eligibility criteria, there are many other lines of credit financing options available.
SmartBiz is our recommendation for the quickest and most streamlined SBA loan. SmartBiz offers SBA 7(a) working capital loans up to $350,000, which can be quicker and easier than an SBA line of credit. SmartBiz’s online loan application can have you prequalified in minutes and funded in 30 days or less.
SBA Line of Credit Qualifications
Similar to a traditional bank loan, the SBA line of credit qualifications are focused on evaluating the creditworthiness of your business and its owners. To qualify for an SBA CAPLine up to $5 million, you generally need good credit (at least a 680 credit score), low debt-to-equity (3 to 4 times maximum), good cash flow (1.25 times or higher DSCR), some experience and collateral (personal and business).
When evaluating if you qualify for an SBA line of credit, your lender will consider your:
- Business size: Your business needs to be small; this generally means it has $750,000 to $38.5 million or less in annual revenue and fewer than 150 employees
- Credit score: 680-plus for all primary business owners (check your credit score for free)
- Time in business: At least 1 year to qualify for a seasonal SBA line of credit
- Sufficient equity: Typically a maximum debt-to-equity ratio of 3 times for new businesses or 4 times for established businesses is acceptable; you need to have $1 in cash invested in your company for every $3 to $4 in loan funds
- Ability to repay: A debt service coverage ratio (DSCR) on your business of 1.25 times of better is generally considered sufficient to demonstrate your ability to repay your debt obligations; on a case-by-case basis a DSCR as low as 1.15 times may be considered
- Personal guarantee: Required from all owners with at least 20 percent of the business
The general requirements to qualify for an SBA line of credit are the same as used for the SBA 7(a) loan program. However, there are also some specific eligibility requirements for each of the SBA CAPLine types. This is because each of SBA line of credit is meant to fill a different financing need.
The additional qualifications for each of the four types of SBA line of credit are:
1. Seasonal SBA Line of Credit Qualifications
A Seasonal SBA CAPLine provides up to $5 million for seasonal increases in accounts receivable, inventory or related labor costs. You cannot use a seasonal SBA line of credit to refinance debt. Furthermore, you cannot use the funds as a way to maintain a consistent activity level during the slow periods of your business cycle, such as avoiding laying people off if there isn’t work.
To qualify for a Seasonal CAPLine, in addition to the 7(a) requirements your business needs:
- At least 1 year of operations
- A demonstrated pattern of seasonal activity to justify the need for the SBA line of credit
2. Contract SBA Line of Credit Qualifications
A contract SBA CAPLine provides up to $5 million to purchase materials and fund labor associated with assignable contracts, subcontracts and purchase orders. You can also use the SBA line of credit to pay for any general and administrative expenses you can allocate to the specific contract. You cannot use a contract SBA line of credit to refinance existing debt.
To qualify for a Contract CAPLine, in addition to the 7(a) requirements your business needs:
- Demonstrated ability to profit from similar contracts in the past
- Demonstrated ability to accurately bid and project costs as well as perform the work required under the contract
- To possess both the technical knowledge and financial ability to complete the contract during the timeline required and with a profit
3. Builders SBA Line of Credit Qualifications
A Builders SBA CAPLine provides up to $5 million to build or renovate residential or commercial buildings. The SBA line of credit needs to be used for direct costs associated with the project. This includes such things as labor, supplies, materials, permits and inspection fees and landscaping costs. You cannot use a builders SBA line of credit to refinance existing debt.
To qualify for a builders CAPLine, in addition to the 7(a) requirements your business needs:
- To be a contractor or a homebuilder — specifically, NAICS codes 236220, 236115, 236116 and 236118
- Demonstrated experience managing and profitably performing construction or renovation work as well as promptly paying suppliers and subcontractors
- Ability to physically perform the construction or renovation work, or manage the construction or renovation job with at least one employee on site during the entire project
- Demonstrated ability to accurately bid and project costs of comparable size and type to the proposed project
4. Working Capital SBA Line of Credit Qualifications
A working capital SBA CAPLine provides up to $5 million in financing for businesses to convert short-term assets like pending invoices into cash. In addition to the standard 7(a) requirements, your business must generate accounts receivable and/or have inventory. You are allowed to use a working capital SBA line of credit to refinance existing short-term revolving debt.
A working capital SBA CAPLine may be used to refinance existing short-term debt when:
- Existing debt is paid off: You must terminate the existing debt after it’s paid off with the working capital SBA line of credit, which means you can’t use it again
- Risk isn’t transferred to the SBA from your other lender: The risk of loss can’t be transferred from your existing lender to the SBA; if your existing loan is in trouble, you can’t pay it off with the SBA line of credit; you also can’t pay for back taxes
- You have sufficient collateral: Your assets used as collateral for the SBA line of credit (accounts receivable and/or working capital) must provide sufficient coverage to support the debt that’s being refinanced plus any other debt
- Your lender approves the refinance: Your lender must specifically acknowledge and approve using the working capital SBA line of credit for the refinance; you can’t use the line of credit to pay off debt without getting approval from your lender
SBA Line of Credit Collateral Requirements
All SBA lines of credit require business collateral, plus you’ll provide a personal guarantee. However, the specific collateral varies by the type of SBA line of credit and is tied to the purpose of the facility. Making sure you meet the collateral requirements is an important step when determining if an SBA CAPLine is right for your specific financing needs.
The collateral required for each of the four types of SBA CAPLines are:
1. Seasonal SBA Line of Credit Collateral Requirements
There are no specific collateral requirements for seasonal CAPLines. Rather, you can expect your lender to require the same type of collateral — business or personal — as required for an SBA 7(a) loan. The SBA requires your lender to take the maximum amount of collateral available, which means you may need to pledge personal collateral if your business doesn’t have enough.
2. Contract SBA Line of Credit Collateral Requirements
With a contract SBA CAPLine, you’ll need to provide your lender with a first lien assignment of the contract, subcontract or purchase order as well as the resulting proceeds. This will be accomplished by your lender taking a uniform commercial code (UCC) filing on the contract.
Where a complication could arise is if another lender already has a first position lien filing on your assets. You should mention any other debt to your lender early in the process, so this can be addressed if needed.
3. Builder SBA Line of Credit Collateral Requirements
With a builder SBA CAPLine, your lender cannot take any less than a second lien position on the real estate property that you are constructing or renovating. Further, they can only accept a second lien position if the reason for your first loan was to purchase the property. The SBA will limit you to an 80 percent loan-to-value (LTV) ratio on the combined total of the first and second liens, based on the fair market value of the project.
4. Working Capital SBA Line of Credit Collateral Requirements
With a working capital SBA CAPLine, your lender will take a UCC lien filing on all of your working or trading assets. These include your accounts receivable, inventory and the proceeds from the collection or sale of them. Your lender will need to be in a first position, meaning you can’t have any other loans where these same assets serve as collateral.
Similar to a builder CAPLine, your lender may limit the amount you can borrow against the assets you pledge as collateral. This is so there is a sufficient cushion should you fail to repay, and your lender has to liquidate your assets to pay off your loan. The amount of collateral coverage will be based upon how your lender allows you to make advances.
The two funding options and how they affect your collateral are:
- Require you to submit a borrowing base certificate (BBC): A BBC is a report that provides detail on the accounts receivable and inventory used as collateral. If you’re required to submit a BBC, your lender will use this to make sure you have enough collateral before approving any advances. You’ll need to submit it monthly.
- Assume you’ve fully advanced the SBA line of credit: If your lender doesn’t require a BBC, you’ll need to provide enough collateral (business and personal) to cover 100 percent of the approved loan amount. Cyclical businesses may not have enough assets when the loan is approved, meaning you might provide more collateral than with a BBC.
Businesses Ineligible for an SBA Line of Credit
Some businesses are ineligible for an SBA line of credit as per the SBA eligibility requirements. Since the SBA is promising your lender it will cover some of your loan — 75 to 85 percent — if you don’t pay, some businesses are considered too risky by the SBA or a conflict of interest might exist. If you find out you’re ineligible, there may be other financing options available.
The businesses considered ineligible under the SBA eligibility requirements are:
- Nonprofit businesses
- Businesses engaged in lending like bail bond companies and financing companies
- Passive businesses like apartments, land developers and landlords
- Life insurance companies — excludes most independent agents
- Businesses located in foreign countries
- Businesses owned by illegal aliens
- Multi-level marketing businesses
- Businesses engaged in a significant amount of legal gambling
- Businesses engaged in any type of illegal activity at the federal, state or local level
- Private clubs or businesses with exclusive membership
- Government-owned entities
- Businesses focused on promoting religion or religious beliefs — excludes bookstores
- Businesses associated with individuals of questionable character like owners in prison
- Businesses partially owned by the lender
- Businesses selling products or services of a sexual nature
- Business owners with a prior or current default on a federal loan — includes student loans
- Businesses with significant political or lobbying activities
- Speculative businesses like stock trading or research and development
If you aren’t eligible for an SBA line of credit, a provider like OnDeck might be a good alternative. With OnDeck, you can receive funding of up to $100,000 in as few as one to three days. You can apply and get approved in minutes using OnDeck’s simple online application.
How to Apply for an SBA Line of Credit
The process of applying for an SBA CAPLine will vary by lender. It will basically match the process used for SBA 7(a) loans and typically takes 45 to 90 days or more. You’ll complete an application and submit lots of paperwork. To make applying easier, we’ve developed a free SBA loan document checklist. Also, for more information, please check out our article on How to Apply for an SBA Loan.
In addition to the documentation required for an SBA 7(a) loan, you’ll need to provide the following information for each of the four SBA CAPLine:
1. Seasonal SBA CAPLine Documentation Requirements
With a seasonal SBA line of credit, you’ll need to provide month-by-month cash flow projections demonstrating your seasonal borrowing need and month-by-month cash flow history for at least the prior 12 months. These will be used by your lender to determine the loan amount to approve for you, and your loan amount will be based on how much your projections show you need.
2. Contract SBA CAPLine Documentation Requirements
With a contract SBA line of credit, you’ll need to provide information about the contract, subcontract or purchase order that’s being financed. Not only will this documentation be used by your lender to figure out the maximum amount to lend to you, but it will also be used to figure out how quickly you need to pay back the funds.
The additional documents you need to provide for a contract SBA CAPLine are:
- Project cost schedule: This schedule should detail all labor, material and overhead costs associated with the contract, subcontract or purchase order being financed excluding your profit; you need to make sure all costs are individually detailed out
- Current annual profit and loss statement: Your lender will use your profit and loss statement to confirm if you can repay the amount you are borrowing; you should provide detail on any increases or decreases that are related to the contract being financed
- Copy of the contract being financed: Lastly, you need to provide a copy of the contract, subcontract or purchase order you’re asking the SBA to finance with the SBA line of credit
3. Builders SBA CAPLine Documentation Requirements
With a builders SBA line of credit, you’ll need to provide information about the project you’re planning to finance using the SBA CAPLine. As with the other CAPLine types, your lender will use this information to determine how much to lend to you and to figure out how quickly you’ll be required to repay the funds.
The additional documents you may need to provide for a builders SBA CAPLine are:
- Month-by-month cash flow projection: You’ll need to provide a month-to-month cash flow projection for all the work you’re planning to perform on the project financed by the SBA line of credit
- Prequalification letter from your buyer’s lender: If you are building a property that is being sold to someone under contract, such as if you’re constructing a presold home, you need to provide a letter from his or her lender showing that permanent financing is available
- Broker’s price opinion about the market condition: If you’re building speculative property, such as a home that’s not yet sold, you may need to provide a letter from a real estate broker showing the building and proposed price is appropriate for the area
- Agreement from architect or engineer to provide inspections: You may need to get a letter from an architect, engineer or appraiser agreeing to make inspections and certify the work is complete before your lender will make any disbursements to you
4. Working Capital SBA CAPLine Documentation Requirements
With a working capital SBA line of credit, you’ll need to provide information used by your lender to calculate your borrowing base certificate (BBC). This will likely include your A/R aging report, accounts payable (A/P) aging report and inventory report. Your lender will most likely also ask you to calculate a BBC “formula” and provide this information monthly to make sure your collateral is sufficient.
We recommend SmartBiz for the most streamlined SBA loan process since they eliminate the need for you to deal with complicated SBA forms. SmartBiz offers SBA working capital loans up to $350,000, with loan terms of 10 to 25 years and rates starting at 5.75 percent. You can get prequalified online in minutes and funded in 30 days.
How to Access Funds with an SBA Line of Credit
When your SBA line of credit is approved, your lender will walk you through the process of requesting and receiving funds. This will also be specified in your loan documentation. How you access funds from your SBA line of credit varies depending upon the type of SBA CAPLine you receive.
The ways you can get access to funds for each of the four SBA CAPLine products are:
1. Seasonal SBA Line of Credit Funds Access
With a seasonal SBA CAPLine, you can request advances at any time during your seasonal period for the cash you need to pay for labor, materials or inventory. You can also request advances to support your accounts receivable. Your last draw needs to be in time to allow you to pay off the draws and let your line of credit “rest” at a $0 balance for 30 days at season end.
2. Contract SBA Line of Credit Funds Access
With a contract SBA CAPLine, before any advances are made, your lender will need to make sure the contract has been formally assigned to them. They’ll document this by taking a UCC filing on the contract. Once the contract has been assigned, you can receive advances as needed to pay for costs associated with fulfilling the contract.
3. Builder SBA Line of Credit Funds Access
With a builder SBA CAPLine, you’ll receive advances as the construction project is completed and improvements are made to the property. Before an advance is approved, your lender will get certification from an inspector, architect or appraiser that construction was complete as planned and that the percent complete supports the amount requested.
4. Working Capital SBA Line of Credit Funds Access
With a working capital CAPLine, you’ll likely be allowed to request advances up to a specified percentage of the accounts receivable and inventory taken as collateral. To do this, your lender may require you to submit a borrowing base certificate using a form they provide before they’ll give you a draw. This is essentially a “formula” that shows that you have enough collateral to cover the amount you want to borrow.
The borrowing base formula you’ll be required to calculate will look something like this:
|1.||Eligible Accounts Receivable (A/R)||$1 million||From your A/R aging, less items your lender says you can’t to borrow against (like A/R older than 90 days)|
|2.||Times Advance Rate||80%||This is less than 100% to give your lender a cushion if you don’t pay|
|3.||Equals A/R Borrowing Base||$800,000||This is the amount you can borrow against your A/R|
|4.||Eligible Inventory||$500,000||From your inventory report, less any items your lender says you can’t borrow against (like defective goods, inventory held on consignment, packing material)|
|5.||Time Advance Rate||50%||As with A/R, this is less than 100% to give your lender a cushion if you don’t pay|
|6.||Equals Inventory Borrowing Base||$250,000||This is the amount you can borrow against your inventory|
|7.||Total A/R & Inventory Borrowing Base||$1,050,000||This is the total amount of your A/R and Inventory you’re allowed to borrow against (line 3 plus line 6)|
|8.||Maximum Approved CAPLine Amount||$2 million||This is the total amount of the CAPLine your lender has approved. It represents the maximum amount you can borrow if you have enough collateral|
|9.||Outstanding Draws||$100,000||This is the amount you’ve already borrowed on your SBA line of credit|
|10.||Amount Available to Borrow||$950,000||This is the additional amount you can borrow, which is the lesser of your maximum approved CAPLine amount (line 8) or line 7 minus line 9. If you have more outstanding draws than you have available collateral (like line 10 is negative), then you’ll be required to make a payment equal to the overage|
If the borrowing base formula shows that you have enough collateral, then you can receive advances up to the amount that’s available for you to borrow. If you don’t have enough collateral to cover the amount you already have outstanding, then you’ll need to make a payment equal to the overage. This makes monitoring how you use the SBA line of credit very important.
SBA CAPLines are a great way to get up to $5 million, but the process of getting approved can be complicated. If you need up to $350K in working capital, a simpler approach is getting an SBA 7(a) loan from SmartBiz. You can get prequalified online in minutes and funded in 30 days.
Pros & Cons of SBA CAPLines
An SBA line of credit is a great way for small, for-profit, U.S. businesses to get up to $5 million in financing to fund their long-term capital needs. However, as with any type of financing, there are pros and cons associated with getting an SBA CAPLine. We’ve addressed the biggest pros and cons to assist you in making an informed financing decision.
The primary pros and cons of an SBA CAPLine are:
Pros of SBA CAPLines
The pros of the SBA CAPLine program are:
- You can get access to up to $5 million in funding: With an SBA line of credit, you can get access to working capital financing up to $5 million; this should be a sufficient amount for most small businesses
- Interest rates are relatively low: The maximum interest rate your lender can charge is set by the SBA; this means interest rates on SBA lines of credit remain relatively low; while higher, the typical maximum SBA interest rate of up to 10 percent compares favorably to the typical interest rate of up to 7 percent you might pay with a traditional lender
- Repayment terms are long: With an SBA line of credit, you can get repayment terms of as long as 10 years; most traditional lenders offer terms that are much shorter for lines of credit, possibly as short as one year
Cons of SBA CAPLines
The cons to the SBA CAPLine program are:
- It can take a long time to get approved: Getting approved and funded for an SBA line of credit can take 45 to 90 days or more; this is a long time if you need the funds fast; if you need the funds in a matter of days, you might consider a fast business loan instead
- You need to have good credit: To get approved for an SBA line of credit, you need to have good credit like a personal credit score of 680 or more; if you have credit problems, you might consider a business loan with no minimum credit score required instead
- Collateral is required: No matter the SBA line of credit you choose, collateral of some type, either business or personal, will be required; if you don’t have collateral or just don’t want to provide it, then you might consider an unsecured business loan instead
Where to Get an SBA CAPLine
Many people believe the SBA issues loans, but that’s not the case. Rather, SBA loans and lines of credit are issued by traditional banks, credit unions, community development organizations, nonprofit institutions and online lenders. We’ve provided information on three of the best SBA lenders here. For more options, read our article on the 100 best SBA lenders.
Some of the best SBA lenders that may provide CAPLines among their product suites are:
1. Wells Fargo Bank
Wells Fargo is a good option for most small businesses since SBA lending is offered nationally to a wide range of borrowers. Wells Fargo Bank consistently approves many SBA loans, both in terms of numbers and amounts. Since Wells Fargo has offices in so many locations, finding a loan officer should be easy. Having a local SBA lender is always a plus.
How to Apply with Wells Fargo Bank
To apply for an SBA line of credit Wells Fargo, you’ll need to go into a branch and talk to a business banker. Wells Fargo will collect documentation from you to determine if you meet the SBA’s eligibility and qualification requirements. The process typically takes between 30 to 60 days, if all documentation is accurate and provided up front.
2. Chase Bank
Chase Bank is a great option for startups and newer businesses. While many SBA lenders require at least 2 years of business history to offer SBA financing, Chase offers SBA lending regardless of how long you’ve been operating. If your business is newer, it probably makes a lot of sense to consider Chase Bank for an SBA line of credit.
How to Apply with Chase Bank
To apply for a Chase SBA line of credit, you’ll need to meet with a business banker at your local Chase Bank branch. The funding speed for Chase SBA loans varies by the branch at which you apply, and is sometimes delayed at busier branches. You can expect Chase SBA lines of credit to close in about 45 to 60 days.
3. Live Oak Banking Company
Live Oak Banking Company provides SBA lines of credit and loans nationally. Live Oak Bank is also known for having specific industry expertise and offering an efficient process. As a business owner, it can be much easier to qualify for an SBA line of credit, particularly larger ones, if you work with a lender who specializes in and is familiar with your industry.
How to Apply with Live Oak Banking Company
With Live Oak Banking Company, you’ll apply for an SBA facility online. Live Oak has a team of SBA lending experts available to provide guidance and support, should you need it. You’ll often get a loan proposal within 24 hours of submitting all the necessary documentation. While specific funding speeds aren’t available, 45 to 90 days is likely a reasonable expectation.
Alternatives to an SBA Line of Credit
An SBA line of credit is a great way for small businesses to access up to $5 million in short-term or seasonal working capital financing. However, it may not work for all borrowers. If you need funding in less than 45 days, then you might need to consider an alternative. Further, if your personal credit score is less than 680, then you might not qualify.
Some alternatives to an SBA line of credit are:
SBA 7(a) Loan
An SBA 7(a) loan is a good option for prime borrowers — 680+ individual credit score — needing up to $5 million in long-term working capital or real estate financing. If you aren’t going to need to borrow the funds again and again, as with a CAPLine, then an SBA 7(a) loan is probably the best product. Finding a good SBA lender is key, so check out some of the best SBA lenders.
SmartBiz streamlines the application and lending process by partnering with top SBA lenders. With SmartBiz, you don’t need to deal with any complicated SBA forms as they take care of that for you. The online prequalification process for SBA 7(a) loans up to $350,000 is quick and simple, taking only minutes to complete. Your SBA loan can be funded in 30 days or less.
Small Business Line of Credit
A small business line of credit is a short-term financing option with high-interest rates and a very fast funding speed, typically one to three days. With the best small business lines of credit, very little documentation is needed, and applications can be completed in minutes. Qualifying can also be easier than with an SBA loan as borrowers with lower credit scores might be approved.
With OnDeck, you can get a small business line of credit up to $100,000 in as soon as one to three business days. You’ll apply online and won’t need to provide any additional paperwork. You can get approved with a credit score as low as 600 if you’ve been in business for at least a year. Get prequalified in minutes online.
Invoice financing is a way for businesses to overcome cash flow gaps by borrowing against their accounts receivable. With some of the best invoice financing companies, you can apply online in minutes and get funded in amounts up to $5 million in a matter of days. This is good if you need quick access to funds or if you have credit problems, which is OK with some providers.
With BlueVine, you can get approved for an invoice financing line of credit up to $5 million with a personal credit score as low as 530. The application process takes minutes and simply requires you to connect BlueVine to your accounting software. Apply online and get funded in as soon as the next business day.
Other Types of SBA Loans
While the SBA CAPLine program is a great option for many borrowers, it might not always fit your needs. The good news is the SBA has many other available programs. These programs range from financing to help micro businesses start or expand to term loans for working capital to commercial real estate loans.
The other SBA loans that may be potential alternatives to an SBA CAPLines are:
SBA Line of Credit Alternatives
|SBA 7a Loan||$5,000,000||Prime + 2.25% to 4.75%||Borrowers needing funds for long term working capital needs or commercial real estate|
|Express Loan||$350,000||Prime + 4.5% to 6.5%||Borrowers needing funds faster than possible with a traditional SBA 7a loan|
|Community Advantage||$250,000||Prime + 6%||Businesses in underserved communities in need of working capital|
|504 Loan||$14,000,000||4.95% to 5.18%||Borrowers wanting to finance owner-occupied (51%+) commercial real estate|
|Export Loan||$5,000,000||No SBA Maximum||Export-heavy businesses needing short-term working capital|
|Export Express||$500,000||Prime + 4.5% to 6.5%||Businesses wanting to expand their goods or services export business|
|Microloan||$50,000||8% to 13%||Very small businesses needing funds to start or expand a business|
|Disaster Loan||$2,000,000||4% to 8%||Businesses of all sizes and private nonprofits needing recovery funds in declared disaster areas|
SBA Line of Credit Frequently Asked Questions (FAQs)
This article has provided a lot of information about SBA line of credit rates, terms and requirements. However, some questions are asked more frequently than others, which we’ve tried to address here. If we haven’t answered your question about the SBA CAPLine program, feel free to share it with us in the FitSmallBusiness forum, and we’ll provide an answer.
Some of the most frequently asked questions about SBA lines of credit are:
What Is the Maximum SBA Line of Credit Amount?
Through the SBA CAPLine program, which is also referred to as SBA lines of credit, your business can get up to $5 million in financing. You can use this financing for your short-term and seasonal working capital needs. Your loan amount will be based on the actual or projected cash flow needs of your business.
Does an SBA Line of Credit Require Collateral?
Yes, with an SBA line of credit your lender will require you to pledge collateral. This will depend on the specifics of your loan approval, but you might need to provide business and personal collateral sufficient to cover at least 100 percent of the loan amount. Individuals with 20 percent or more ownership interest will also provide a personal guarantee.
What Do I Need to Do to Apply for an SBA Line of Credit?
To apply for an SBA line of credit, you’ll generally follow the same process as used for an SBA 7(a) loan. This will include providing a significant amount of information and completing an application. SBA applications can be complicated, and so it’s best to follow step-by-step application instructions to make sure you don’t miss anything.
The Bottom Line
An SBA CAPLine is a type of SBA loan that will allow your business to get a line of credit up to $5 million for short-term or cyclical working capital financing. There are four different SBA lines of credit that can help you if you have seasonal needs, want financing for a specific contract, are a builder or just need general working capital.
Getting an SBA 7(a) may be a quicker option to an SBA line of credit if you need financing up to $350,000. With SmartBiz, you can get prequalified online quickly and easily in just a few minutes. Funding can happen in 30 days or less.