Our Guide to SBA Lines of Credit
This type of financing is similar to the SBA’s 7(a) Loan program in that the SBA guarantees all or a portion of your debt. Unlike traditional SBA term loans, though, SBA lines of credit are designed to help you meet short-term and cyclical working capital needs.
Broadly speaking, SBA lines of credit are structured like a traditional line of credit. However, they have unique terms, eligibility requirements, and application processes. Plus, there are actually four different types of SBA lines of credit in the CAPLine Program.
To find out if an SBA line of credit is right for you and which of the four types is right for your business, you need to do your homework.
This article is your cheat sheet to the SBA line of credit approval process. In the sections below, we’ll summarize the four types of SBA CAPLines, their qualification criteria and the terms you should expect. Lastly, we’ll highlight the pros and cons of SBA lines of credit in general.
The Four Types of SBA Lines of Credit:
1. Seasonal CAPLine: Short-Term Funding for Cyclical Cash Flow Gaps
This SBA business line of credit is non-revolving and must be repaid at the end of the season when payment is made to the business. You can use proceeds only to pay for the seasonal increases in inventory and accounts receivable. In some cases, you can use this funding to cover additional seasonal labor costs.
Maximum amount and term: The maximum guarantee from the SBA on this line of credit is $3.75 million. However, you can get a Seasonal CAPLine of up to $5 million, with just a portion of the debt guaranteed by the SBA. The maximum term cannot exceed 10 years.
Eligibility requirements: Seasonal CAPLines have the same qualification criteria as standard 7(a) loans, plus two more:
- You need to have been in operation for at least one calendar year.
- You must be able to demonstrate a definitive pattern of seasonal activity
2. Contract CAPLine: Overhead Funding for Contract-based Sales
This SBA line of credit may be revolving or non-revolving. It’s designed for the performance of an approved contract, subcontract, or purchase order. You can use the funds for overhead expenses related to completing the contract. Payment is due when payment for the contract or purchase order is made to the business.
Maximum amount and term: Contract CAPLines have a limit of $5 million and may not exceed 10 years.
Eligibility requirements: Contract CAPLines have the same qualification criteria as standard 7(a) loans, plus three more:
- You must have proof of having operated profitably on similar contracts.
- You must be able to bid and perform the work required by the contract.
- You need to have the financial and technical capacity to complete the work on time and at a profit.
3. Builders CAPLine: Funding for Construction Projects
Builder CAPLines are intended for construction contractors and home builders. These lines of credit may be used to cover labor, supplies, materials, and other costs related to construction. You must pay back all funds within 36 months of completing the project, or at the time of sale, whichever is earlier.
Maximum amount and term: Builders CAPLines have a limit of $5 million and may not exceed 5 years.
Eligibility requirements: Builder CAPLines have the same qualification criteria as standard 7(a) requirements, plus the following:
- Your company must be a construction contractor or homebuilder.
- You must have at least one supervisory employee on the job site.
- Your company must have a demonstrated record of successful performance on comparable projects.
4. Working CAPLine: Short-term Funding for Working Capital
Working CAPLines are meant to cover short-term working capital and operating needs. However, you can’t use them to pay delinquent taxes or for floor planning expenses. Unlike other SBA CAPLines, the Working CAPLine must be revolving.
Maximum amount: Working CAPLines have a limit of $5 million and may not exceed 10 years.
Eligibility requirements: Working CAPLines have the same qualification criteria as standard 7(a) loans. However, you must also have accounts receivable of inventory.
The Pros and Cons of SBA Credit Lines
Pros of SBA Credit Lines
The best part about SBA lines of credit is that they’re partially or fully guaranteed by the SBA. This reduces risk for your lender which makes the SBA line of credit interest rate very competitively priced. Also, depending on the type of SBA CAPLine, you can use the proceeds for a variety of expenses.
Finally, SBA lines of credit typically have less stringent credit requirements than other kinds of loans. As long as your SBSS Score is 155 or higher, you’ll make it past the initial pre-screening process. Yet even if your score is below 155, you’ll still have a chance to qualify for this type of business financing.
Cons of SBA Credit Lines
Since they’re so affordable compared to other options, SBA credit lines are in high demand. This makes your chances of getting approved low. Moreover, the application process is typically more complicated for SBA-guaranteed debt like an SBA CAPLine.
On top of all that, SBA CAPLines tend to have stringent rules about how and when you use funds. So while they are quite affordable, an SBA CAPLine isn’t the most flexible type of financing.
Conclusion: Is An SBA Line of Credit Right for You?
There’s no substitute for SBA-guaranteed debt. That guarantee removes risk and expenses for both you and your SBA lender. Still, there are other indirect costs to SBA lines of credit. The application process is lengthy and your approval is far from guaranteed.
If you have time, a strong financial record, and one of the SBA CAPLines fits your needs, it may be worth it to apply. Otherwise, you can consider alternatives like equipment financing, merchant cash advances, or invoice financing.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.