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    SBA Line of Credit: How It Works and How to Qualify?

    SBA Line of Credit

    Many small business owners may find themselves dealing with issues related to the regular business cycle, such as drops in business and black swan events. These issues can significantly suppress or slow down a businesses’ revenue. Requesting revolving lines of credit is one of the strategies that small business owners will use to mitigate cash flow problems when they occur. 

    Entrepreneurs who face difficulty getting approved for other borrowing tools, can be eligible for short-term lines of credit offered by the Small Business Administration’s (SBA) lending partners. This article explains what an SBA line of credit is, the credit line options offered by the SBA, and which online lender can help you get this type of loan.  

    What is an SBA Line of Credit?

    The Small Business Administration offers several lines of credit for qualified entrepreneurs. There are a variety of business lines of credit to apply for based on the type of business a company is engaged in. Lines of credit, put simply, give small businesses access to credit when cash flow or business revenue tightens up. 

    Revenue slow downs may occur for a number of reasons such as seasonal demand for a good or service, unexpected expenses or upgrades that need to be done but will create financial strain to a business if not planned for.

    The SBA CAPLine Programs

    The CAPLine Program administered by the Small Business Administration helps connect businesses with the right lines of credit for their business needs. It’s important to note that not all businesses are eligible for CAPLine lines of credit and that entrepreneurs seeking this type of revolving credit should confirm that their business is eligible for a CAPLine.

    Currently, there are 4 CAPLine programs available to borrowers. 

    • Seasonal CAP-Different times of year impact business cash flow. For example, businesses may need to borrow more in order to prepare for the winter holiday season. Or, some businesses may be impacted negatively during a specific time of year.  The Seasonal CAPLine addresses the seasonal impact of demand on business earnings. 
    • Contract CAPline-Borrowers who utilize this line of credit typically are connected to projects that have been assigned to additional service providers. This line of credit assists contractors with overhead expenses, additional hiring needs, and increased inventory if that’s a part of the business model. 
    • Builders CAPline-Construction focused businesses can borrow up to $5 million. One important aspect of eligibility for this line of credit is the ability to prove that the business has successfully bid for and worked on construction based projects prior to the borrowing request that they’re making. 
    • Working CAPLine-This line of credit is accessible to entrepreneurs who would have a difficult time meeting traditional lending requirements for their business. The goal with this line of credit is to meet the business's short-term cash flow needs. 

    How Does an SBA Line of Credit Work?

    For many businesses, an SBA line of credit is a much needed lifeline for a business. In order to apply for a line of credit, there are a few steps that an applicant must take in order to begin the request process. 

    • It’s important to note that an SBA line of credit can be requested if an applicant is unable to be approved for financing by other means. 
    • Applicants must produce proof of good personal credit. Currently, the minimum ideal credit score for an applicant seeking a CAPLine is 660. However, it’s important to remember that these minimum credit scores can change based on internal criteria that the SBA may be considering. 
    • In some cases, applicants may also need to show that they have a healthy business credit rating as well. Many entrepreneurs may be unfamiliar with what a business credit score is and what they can do to grow a healthy business credit rating. 
    • Each CAPline has slightly different eligibility requirements. These eligibility requirements are influenced by the specific CAPLine applied for, applicant credit health and the amount being requested. 
    • The business must be owned by United States citizens. American citizens would be individuals who were born in the United States or are legal citizens of the United States allowed to do business within the country.

    What are SBA Line of Credit Rates and Fees?

    Before submitting your application for a revolving line of credit, it’s important to understand the fees and credit rates that will have a direct effect on the long-term cost of your loan. Interest rates for SBA CAPLines vary based on the amount borrowed and the product being used.  

    Currently, SBA CAPLine interest rate terms are the same as SBA 7(a) loans products. Borrowers are encouraged to do their due diligence and review all terms when applying for any financial product as terms may change. 

    Basic SBA Line of Credit Terms

    While SBA CAPLines are similar in many respects to SBA 7(a) Loans, these are the terms specifically linked to these short-term lines of credit. Credit terms specifically related to the lending institution’s terms for each CAPLine. 

    • Depending on the specific CAPLine granted there is a range between 5-10 years for repayment.
    • Current fees are capped at 3.5% to service these lines of credit.
    • Interest rates are capped at 8.25% but may be as low as 5.75% depending on the borrower’s credit health and other factors that lenders look at when making a lending final lending decision. Typically, the lower the interest the stronger the borrower’s overall financial picture. 
    • Borrowers should speak with their lenders to disseminate whether or not there are prepayment penalties assessed for CAPLines and when or if those penalties may be assessed. 

    Documentation Needed to Apply for a CAPLine

    Oddly enough, it’s a bit challenging to find CAPLine specific information on the Small Business Administration website. It’s important for borrowers to speak with an SBA representative to check loan documentation requirements. Below are a few of the documents that must be submitted with a CAPLine application.

    • Business profit and loss statements - These statements give lenders an accurate idea of the overall financial health of the business that is seeking to borrow from them. A business that is operating at a constant loss, may be considered ineligible for a loan. 
    • Proof that your business is operating with a focus on making a profit-This seems obvious, but the SBA is focused on supporting for-profit organizations.
    • Are in healthy financial standing with other lenders-If your business has other loans or is arrears with services needed to run the business, it’s likely that an SBA affiliated lender will question the financial health of the borrower. 
    • Income tax returns for the owners of the business. Borrowers may need to provide several years worth of back tax returns. 
    • Provide a borrower information form. This information may include, but isn’t limited, to the following: 
        • Full legal name and current personal and business address
        • Previous employment details. These details include the previous scope of work, length of time employed and wages earned.
        • Personal and professional references
        • Profit/Loss statements for their business for previous years of operation.
        • Co-owner supporting documentation. 

    Having a clear idea of what the SBA is looking for prior to borrowing may impact business decisions specific to data collection, how an entrepreneur is organizing business specific paperwork and understanding what the SBA and other lenders consider an ideal borrower.

    Conclusion 

    For many entrepreneurs an SBA loan or line of credit can be a much needed lifeline for their business cash flow. However, it’s important to keep in mind that these lines of credit are difficult to qualify for and require quite a bit of documentation and financial vetting in order to be approved for a loan. 

    There are some other financing alternatives to consider for entrepreneurs who aren’t ready to apply for an SBA CAPLine loan or don’t qualify for one for whatever reason. 

    One such alternative is Fora Financial. It is a fintech-based lending company specializing in short-term loans and lines of credit for businesses. 

    Fora Financial offers small business borrowers access to SBA loans and the resources they need to prepare for the process.