In the market for a Small Business Administration (SBA) loan? If your business needs money to prepare for seasonal increases in sales, keep the lights on or complete a project, you might want to consider the CAPLine program over a term loan. It can provide your business with continuous access to the funds you need for ongoing costs.
How does an SBA line of credit work?
An SBA line of credit (LOC) works like most other business LOCs: You get access to a credit limit of up to $5 million, which you can draw from as you need. You repay only what you withdraw, plus interest. The difference is that the SBA backs part of the loan, making it less of a risk for the lender.
Businesses can apply for a revolving or fixed line of credit. With a revolving LOC, your credit limit renews after your business repays the funds it withdraws, similar to a credit card. So if your business has a credit limit of $5 million and withdraws and repays $1 million, you’d still have access to the full $5 million until your term is up. With a fixed LOC, your business can access up to $5 million in total funds — it doesn’t renew after you repay the loan.
What is CAPLine?
CAPLine is the SBA’s lines of credit program that includes four LOCs: Seasonal CAPLines, Contract CAPLines, Builder’s CAPLines and Working Capital CAPLines. Each program comes with limits as to how your business can use and repay the funds. But they generally share the same rates, terms and basic eligibility requirements.
SBA CAPLine rates and terms
Maximum interest rate
Prime + 4.75%
75% to 85%
Want details on how CAPLine rates work? Read our article on SBA loan rates to find out what you might qualify for and how they’re calculated.
SBA CAPLine basic eligibility requirements
Each CAPLine program has its own eligibility criteria, but your business must meet the SBA’s general eligibility requirements first. These include operating as a for-profit business located in the United States. Your business also must meet the SBA’s complicated size requirements and prove that you’re unable to get credit elsewhere.
We break down the SBA’s basic eligibility requirements in our guide to SBA loans.
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The 4 types of SBA lines of credit
While the basics are the same across all SBA CAPLine programs, each specifically limits how you back your loan and use the funds.
1. Seasonal CAPLines
Seasonal CAPLines are designed to help businesses keep up with seasonal increases in sales. This can include stocking up on inventory before the holiday season, hiring temporary staff to keep up with demand or any other costs that come along with an uptick in profits.
The point of a Seasonal CAPLine is to let your business take full advantage of the busiest time of year. You can’t use the funds for working capital expenses during the off season.
How it works
Business owners can apply for a Seasonal CAPLine during the off season and use the funds to prepare for the busy season. You start monthly repayments as soon as money begins coming in from seasonal sales. After the season is over, you have 30 days to pay off the rest of your loan balance.
How much your business can borrow depends on your cashflow projections. Lenders typically ask for a month-to-month cashflow projection for the next year along with your application.
You also must be in business for at least 12 months and able to show a clear pattern of seasonal activity, on top of the other SBA eligibility requirements. Your business can back the loan with inventory and accounts receivables.
2. Contract CAPLines
Contract CAPLines are designed to help small businesses cover the cost of filling a contract. This can include administrative and overhead costs, as long as they’re directly related to a specific contract or group of them.
Like with Seasonal CAPLines, your business can’t use a Contract CAPLine to cover general business expenses like working capital or refinancing debt. You also can’t use the funds to cover the costs of filling a contract that isn’t included in your original agreement.
How it works
How much your business can borrow depends on the costs involved with completing one or more specific contracts, based on a project cost schedule. Your business typically gets access to the credit line while you’re completing the contract — not before. And you repay the loan after you’re paid for the job.
To be eligible for a Contract CAPLine, your business must have a track record of turning a profit after completing similar contracts. You also need to show that you’re able to bid and make accurate cost projections, and have the expertise to finish the project on time and at a profit.
The SBA requires you to take out a UCC lien on each contract you want to finance. If your business already has a lien against the contract, you’re not eligible for a CAPLine until it’s canceled. Your lender might also ask for additional collateral based on how it treats non-SBA business lines of credit.
During the application process, you’ll provide a copy of the contract you want to finance, a project cost schedule and your business’s annual income statement.
3. Builder’s CAPLines
Builder’s CAPLines are designed to cover the cost of building or renovating real estate that you intend to resell for a profit. These include supplies, building materials, equipment, labor, utilities, landscaping, building permits and inspection fees. And Builder’s CAPLines can cover one or multiple projects.
If you hire a subcontractor, the credit line can also cover their profits. Plus, you can use up to 20% of the CAPLine to buy land and up to 5% for public improvements — like repaving a sidewalk outside of the building. You can’t use the funds to cover any business costs, however.
How it works
Your business can take out a fixed LOC based on the costs of completing one project or a revolving LOC based on multiple projects. Before you can get your CAPLine, your business must take out a lien on the property. After you receive your funds, you start repayments on interest every six months.
After the project is complete or sold, you have 36 months to repay everything you borrowed. Unlike other programs, Builder’s CAPLines last up to five years only.
The SBA requires your business to take out a UCC lien on the property you’re constructing or renovating. Unlike with Contract CAPLines, your business can have another lien against the property in some cases.
The SBA requires borrowers to submit documents that include:
- A month-to-month cashflow report for the project.
- A letter from a mortgage lender stating it’s possible to get a mortgage for the type of property you’re building.
- A letter from a real estate broker stating your project fits in the neighborhood and the current market.
- A letter from an architect, engineer or appraiser agreeing to regularly inspect the property.
4. Working Capital CAPLines
Working Capital CAPLines are for businesses that need help covering overhead expenses in the short term — this is the loan you’d apply for if you’re struggling through the off season. It’s also the only type of CAPLine that you can use to refinance debt.
Business owners can use the funds to pay for some fixed assets like equipment, though you’re required to refinance that portion of the loan within 90 days.
How it works
You can take out a line of credit equal to your business’s working capital needs for a set period of time. Lenders can either use their own method or follow an SBA formula to calculate your working capital needs:
(last year’s net sales/365) x (the number of days your business needs financing) = estimated working capital costs
Your business can get a Working Capital CAPLine at any time, which you pay back over the length of your term. If your business doesn’t repay all the funds before the term is up, your lender might allow you to renew your LOC — with or without an SBA guarantee — or pay it off in installments. Otherwise, it collects on any assets your business used to back the loan.
You’ll need to meet the SBA’s general eligibility requirements and have accounts receivables to qualify. You’re also required to back your Working Capital CAPLine with either a lien on your business assets or a specific piece of collateral equal to your credit limit. If you borrow more than $1 million, your lender will visit your business to verify your assets.
Alternatives to the CAPLine program
Lines of credit through the CAPLine program aren’t as flexible as other options — and they could take time to get.
If you’re pressed for time, consider these alternatives:
- Local banks. With a higher approval rate than SBA lenders, local banks are often more flexible about how you can use your business LOC.
- Community development financial institutions. CDFIs offer low-cost financing to businesses owned by or catering to underserved communities. They also have a high approval rate and fewer restrictions on credit lines.
- Online business lenders. While they can offer higher rates than the SBA, you can often get your funds faster. Many digital lenders also let you access your credit line through an app or with the swipe of a card.
The SBA CAPLine program could be useful for businesses that need help covering seasonal costs, filling a contract, renovating a building or accessing working capital. However, its tough requirements and involved application process mean it might not be ideal for all businesses.
To explore your options and compare other lenders, read our guide to business loans.
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