This article is part of a larger series on Business Financing.
Small Business Administration (SBA) CAPLines (SBA lines of credit) provide businesses with up to $5 million for recurring cash flow needs. The SBA offers four CAPLine programs that are meant to fill different business needs, including seasonal funding, specific contract financing, funding to construct residential or commercial real estate, and general working capital financing.
SBA CAPLines, or SBA lines of credit, are good for prime borrowers in need of affordable financing to fill recurring or specific cash flow gaps. This is because interest rates are typically in a range of 5.5% to 10%, and you can access the funds repeatedly as you pay off what you borrow. Additionally, you can use an SBA CAPLine for as long as 10 years without having to apply again. Funding generally takes around 90 days.
Lendio connects you to more than 75 loan providers, offering SBA loans and non-SBA financing. Its competitive marketplace can get you pre-qualified in a matter of days with a quick application online, providing you with choices on the best line of credit options available for your business.
SBA CAPLine Eligibility Requirements
As the SBA promises to cover some of your lender’s losses if you are unable to pay your loan, the SBA puts eligibility guidelines in place. The primary SBA loan requirements for SBA CAPLine eligibility are:
- Activity and 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
- US citizenship status: Business owners need to be US citizens, legal permanent. residents, or meet other citizenship requirements 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 less than $5 million in annual revenue and fewer than 500 employees
- Financing must be needed: You can only get approved for an SBA financing if you can’t get financing from another source without it causing your business undue hardship
- Minimum credit score: 680 for all primary business owners
- Time in business: At least one year
- Debt service coverage ratio (DSCR): At least 1.25x
- Personal guarantee: Required from all owners with at least 20% ownership in the business
The general requirements to qualify for an SBA line of credit are the same as those used for the SBA 7(a) loan program.
Early in the process, it’s important to understand whether or not you meet the basic SBA line of credit eligibility requirements. 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.
Types of SBA CAPLines
There are four types of SBA lines of credit. All four CAPLines have a $5 million maximum credit limit, and each of them has a specific, targeted intent.
Type of CAPLine
Short-term funding to fill seasonal or cyclical cash flow gaps
Businesses that manufacture goods or provide services on a contract
Funding to renovate or construct residential or commercial real estate
Access to financing to cover ongoing business expenses
Seasonal SBA CAPLine
The seasonal SBA CAPLine provides businesses funding for seasonal increases in accounts receivable (A/R), inventory, or related labor costs. For example, if 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 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.
To qualify, in addition to the standard 7(a) requirements, your business needs the following:
- To have been in operation for at least one year
- To demonstrate a pattern of seasonal activity
- To not be refinancing existing debt
Contract SBA CAPLine
A contract SBA CAPLine provides businesses with up to $5 million in funding to purchase materials and pay for the labor associated with the contract. 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.
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 bid and project costs accurately 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
Builders SBA CAPLine
The builders SBA CAPLine provides contractors and home builders with up to $5 million in funding to build or renovate residential or commercial buildings. Builders and construction companies 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.
To qualify for a builders CAPLine, 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
- The 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
Working Capital SBA CAPLine
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. A nail salon can use an 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.
In addition to the standard 7(a) requirements, your business must generate A/R and/or have inventory. You are allowed to use a working capital SBA line of credit to refinance existing short-term revolving 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―A/R 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 CAPLine Interest Rates
The maximum interest rates your lender can charge for a CAPLine are set by the SBA. SBA loan rates are tied to the prime rate, and interest rates on SBA CAPLines are in between traditional and online loans. The maximum SBA loan rates you can expect to pay on an SBA line of credit are:
Repayment Term Less Than 7 Years
Repayment Term Greater Than 7 Years
Less Than $25,000
Prime rate + 4.25%
Prime rate + 4.75%
$25,000 to $50,000
Prime rate + 3.25%
Prime rate + 3.75%
More than $50,000
Prime rate + 2.25%
Prime rate + 2.75%
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. 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—for example, if you sell the project or collect funds from the contract.
The SBA CAPLine term and structure vary for each type:
- Contract: Up to 10 years in term, revolving or non-revolving, meaning you can borrow against one or multiple contracts, subcontracts, or purchase orders—you’ll make interest-only payments and repay the line of credit when payment for the contract is made to your business.
- Seasonal: Up to 10 years in term, 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: Up to 10 years in term, 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: Up to five years in term, revolving or nonrevolving, 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 three years of completing or selling the project, whichever is sooner.
SBA CAPLine Fees
The SBA also establishes the maximum amounts your lender can charge in fees. One of the largest fees you can be charged is an SBA guarantee fee that can be as high as 3.75% of the line of credit that is approved. This fee is paid to the SBA in exchange for a promise or guarantee by the SBA to cover up to 85% of your lender’s losses in the event you default on your loan.
You can also be charged other 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%, except for a working capital SBA line of credit, which can exceed 2% 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
SBA Line of Credit Collateral Requirements
SBA lines of credit require business collateral as well as a personal guarantee. Specific collateral requirements vary by line of credit type:
- Seasonal: Standard collateral—business or personal—is required with this CAPLine, similar to what is required on an SBA 7(a) loan.
- Contract: You’ll need to provide your lender with a first lien of assignment on the specific contract, subcontract, or purchase order as well as the resulting proceeds. The lender will assign 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.
- Builder: Your lender cannot take any less than a second lien position on the property that you are constructing or renovating, and they can only accept a second lien position if the reason for your first loan was to purchase the property. The SBA limits you to an 80% loan-to-value (LTV) ratio on the combined total of the first and second liens, based on the fair market value of the project.
- Working capital: The lender will take a UCC filing on all of your A/R, inventory, and the proceeds from the collection or sale of them. There can’t be any other loans where these same assets serve as collateral. Your lender may limit the amount you can borrow against the assets you pledge as collateral to provide a sufficient cushion for the lender should you fail to repay.
How to Apply for an SBA CAPLine
The process of applying for an SBA CAPLine will vary by lender, though it is similar to the application process for SBA 7(a) loans and typically takes around 90 days from application to funding. You’ll complete an application and submit lots of paperwork. To make applying easier, we’ve developed a free SBA loan document checklist.
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 CAPLines:
Seasonal SBA CAPLine Required Documents
The additional documents you need to provide for a seasonal SBA CAPLine are:
- Month-by-month cash flow history for the last 12 months
- Month-by-month cash flow projections for the next 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.
Contract SBA CAPLine Required Documents
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 (P&L) 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.
Builders SBA CAPLine Required Documents
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―for instance, if you’re constructing a presold home―you need to provide a letter from their 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 the 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.
Working Capital SBA CAPLine Required Documents
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). Your lender will most likely also ask you to provide this information monthly after approval to make sure your collateral is sufficient. This includes:
- Your A/R aging report
- Accounts payable (A/P) aging report
- Inventory report
How to Access Funds with an SBA CAPLine
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. Accessing funds from your SBA CAPLine varies depending upon the type you receive.
Seasonal SBA Line of Credit Funds Access
With a seasonal SBA CAPLine, you can request advances at any time during your seasonal period to pay for labor, materials, or inventory. You can also request advances to support your A/R. Your last draw needs to be in time to allow you to pay off any advances and allow your line of credit to “rest” at a $0 balance for 30 days at season end.
Contract SBA Line of Credit Funds Access
Before any advances are made, your lender will need to have the contract 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.
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 completed as planned and that the percent complete supports the amount requested.
Working Capital SBA Line of Credit Funds Access
With this CAPLine, you will likely be allowed to request advances up to a specified percentage of the A/R and inventory used 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. The borrowing base is a formula that shows that you have enough collateral to cover the amount you want to borrow.
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 this SBA line of credit very important.
Pros & Cons of SBA CAPLines
An SBA line of credit is a great way for small 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.
|Access to up to $5 million in recurring financing||Approval times are lengthy|
|Repayment terms of up to 10 years (5 years on builders CAPLine)||Credit score of at least 680 is typically required|
|Competitive interest rates||Collateral requirements|
Lendio provides SBA-backed loans through several SBA-preferred lenders. Its 15-minute application process can get you prequalified quickly, offering you many options for loans and lines of credit for your business needs.
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 need general working capital.