What is an SBA Line of Credit?

Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

Small businesses have many funding options available to them, from conventional loans to revenue-based financing to their owners’ personal assets. One of the leading business loan types are those backed by the United States Small Business Administration (SBA). SBA loan programs are partially guaranteed by the SBA, meaning that, should a borrower default on a loan, the government will reimburse a lender for a significant percentage of the loan amount. This protects lenders and can help businesses gain access to capital. In 2023, the SBA provided more than $33 billion in loans to more than 57,000 small businesses.

The SBA’s 7(a) loan program is the most popular, but it’s a conventional term loan option that may not be right for all businesses. Sometimes, small business owners just need quick access to working capital without taking on long-term debt. That’s why many opt for more flexible financing solutions like business lines of credit, and why the SBA has recently announced the 7(a) Working Capital Pilot program.

Key Takeaways:

The SBA’s 7(a) Working Capital Pilot program offers government-backed lines of credit of up to $5 million for small businesses.

SBA lines of credit offer faster, more flexible access to cash to fund day-to-day operations and larger scope business initiatives.

SBA lines of credit carry an annual fee and maximum interest rates of the prime rate plus 3% to 6.5%.

In this article

• What is an SBA Line of Credit?
• What’s the difference between SBA Lines of Credit and SBA Loans?
• Types of SBA Lines of Credit
• Comparing Types of SBA Lines of Credit
• How to Apply for an SBA Line of Credit
• Conclusion

What is an SBA Line of Credit?

The 7(a) Working Capital Pilot program is the SBA’s newest service, and it functions similarly to a traditional business line of credit. Once a business is approved for a line of credit amount, it may draw upon the credit line whenever it needs an influx of cash. Interest is only charged on the drawn-upon funds. These monitored lines of credit operate within the 7(a) loan program and provide small businesses with fast, flexible funding.

While “working capital” is in the program name, SBA lines of credit can be used for a wide variety of business purchases, including:

• Acquiring, refinancing, or improving real estate and buildings
• Short- and long-term working capital
• Refinancing current business debt
• Purchasing and installation of machinery and equipment, including AI-related expenses
• Purchasing furniture, fixtures, and supplies
• Changes of ownership (complete or partial)
• Multiple purpose loans, including any of the above

Because of this flexibility and the fact that you only pay interest on what you use, lines of credit are an excellent resource for businesses with short-term goals with quick returns. For instance, launching a new product, advertising in a new market, or increasing production volume to meet a surge in demand are all good uses of an SBA line of credit.

What’s the difference between SBA Lines of Credit and SBA Loans?

Both SBA lines of credit and SBA loans are types of financing for small businesses that are backed by the SBA. Since they significantly lower the risk to a borrower, both tend to have stricter qualification requirements than conventional loans. However, there are a few key differences.

There are several types of SBA loans designed for different business purposes and goals, but ultimately they are all term loans. This means that a lender provides a lump sum payment to a borrower and the borrower must repay the loan principal, plus interest, over a negotiated period of time. These lump sum payments are best for businesses that are looking to create long-term, sustainable growth by investing in key foundations of the business.

An SBA line of credit works a little differently. While a borrower may be approved for a $50,000 line of credit, they don’t actually receive all of that money in a lump sum. Rather, they may draw on this revolving line of credit and repay the money as they go. For instance, if a small business owner draws $10,000 to pay for an advertising campaign in a new market, she would be charged interest on that $10,000 until she paid the money back. Likewise, until the initial withdrawal is paid back, she would only be able to draw an additional $40,000. Once the $10,000 is paid back, she can access the full $50,000 again. This flexible funding makes lines of credit great for businesses that need working capital to complete short-term goals without taking on long-term debt.

Types of SBA Lines of Credit

While the 7(a) Working Capital Pilot program is new, the SBA has a few existing lines of credit programs already. The SBA Express Line of Credit and CapLines programs cater to specific types of businesses that can benefit from an infusion of flexible working capital. Both can be revolving or non-revolving, meaning they can function as more traditional loans with a term repayment plan, or as lines of credit that are more pay as you go.

• 7(a) Working Capital: The newest line of credit program set within the 7(a) loan program, these flexible lines of credit may be approved for up to $5 million and used for a wide range of business purposes.
• SBA Express Line of Credit: Businesses with a more dire need for funding may get approved for an Express Line of Credit of up to $500,000 within 36 hours. Turnaround time to actually access the money will depend on the lender.
• Seasonal CAPLine: Businesses that earn most of their revenue during a specific season may use Seasonal CAPLines to finance increases of accounts receivable, inventory, and labor costs.
• Contract CAPLine: Designed for invoice- and contract-based businesses, Contract CAPLines help finance costs associated with one or more specific contracts.
• Builders CAPLine: General contractors and other construction-related businesses may use a Builders CAPLine to finance construction or rehabilitation of a residential or commercial property for resale.
• Working CAPLine: Most similar to the 7(a) line of credit, Working CAPLines are asset-based lines of credit designed for businesses and business owners with bad credit who may not be able to otherwise get approved. It requires continual servicing and monitoring of collateral.

Comparing Types of SBA Lines of Credit

Do I Qualify for an SBA Line of Credit?

As with all SBA 7(a) loans, qualifying for a 7(a) Working Capital line of credit is more difficult than qualifying for business lines of credit not backed by the SBA. The SBA’s primary eligibility requirements require a business to:

• Operate an eligible business for profit in the U.S.
• Be small under SBA Size Requirements
• Unable to obtain the desired credit on reasonable terms from non-Federal, non-State, and non-local government sources
• 12 full months of operations prior to filing application
• If supporting an acquisition, acquiring borrower must have a history of 12 full months of operations prior to filing application
• Businesses must:
  • Produce timely and accurate financial statements, accounts receivable and accounts payable agings, and inventory reports.
  • Provide annual financial statements to lender and submit to a full credit analysis as part of any renewal.

There are also a range of financial qualification requirements, including:

• Business owner’s personal credit score above 680 preferred (640 minimum)
• Ability to provide collateral for requests above $25,000
• No recent recent bankruptcies, foreclosures, or tax liens

Qualifying for CAPLines, however, is significantly easier. There is no minimum credit score or collateral requirement, although the better your business’s financial profile, the more likely you are to qualify for a higher loan amount. The only primary qualification requirements are that you operate an eligible business in the United States that is defined as small under SBA size requirements.

How to Apply for an SBA Line of Credit

Applying for an SBA line of credit may be a little more complicated than applying for a conventional business line of credit, but not much. The application process will depend on the lender, the amount you’re looking for, and what kind of documentation the lender needs in addition to the SBA. Generally, the process looks like this:

1. Determine your needs: Before you even get into the research phase, figure out how much you’ll actually need from a revolving line of credit. You want flexible capital that will help your business grow, but you don’t want to draw on it so heavily that you can’t pay it back in a timely manner.
2. Shop lenders: There are many SBA-approved lenders out there, so it’s up to you to find a bank, credit union, or online lender that offers competitive rates and terms that will work for your business.
3. Gather your paperwork: You’ll need to agree to a credit check, plus provide financial documentation like annual reports, income statements, profit and loss statements, as well as basic information like the company name and tax ID.
4. Apply: Most lenders offer online application processes, even for SBA loans. Depending on the lender, you may be able to do the entire application online or have to go in-person to meet with a loan servicer.
5. Wait for approval: Finally, you’ll just have to wait for approval by the SBA, and then for the lender to underwrite the line of credit before giving you access to funds.

Conclusion

A line of credit gives businesses quick access to funds when they need it, without the burden of interest charges on long-term debt. The SBA offers several types of lines of credit, including the new 7(a) Working Capital Pilot program. Each program offers advantages for different types of businesses and provides cash infusions when needed to help entrepreneurs navigate tough times and take advantage of business opportunities.

FAQs

What is the SBA?

The United States Small Business Administration (SBA) is a federal agency that aims to help small businesses grow and succeed. Its loan programs partially guarantee loan amounts, lessening the risk to lenders, making them more likely to approve small business loans.

What is a line of credit?

A line of credit is a cross between a loan and a credit card. A lender approves you for a maximum credit limit, which you can draw upon as cash when you need it. You don’t pay interest on the maximum credit amount, you only pay interest on the amount that you use. As long as you pay back the credit, you can access the full amount whenever you need.

How can you use a line of credit?

Small business owners can use a line of credit however they like. When you draw on the credit amount, you’ll get a cash deposit to your linked business bank account and may use that money for whatever business purpose you need.

What lines of credit does the SBA offer?

The SBA offers several types of lines of credit. The CAPLines program offers lines of credit to manage specific business needs: Seasonal, Builders, Contract, and Working Capital. The SBA also offers an Express Line of Credit for emergency purposes and a Working Capital Pilot program within the 7(a) loan program.

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