SBA Business Line of Credit: What is the CAPLines Program?

SBA Business Line of Credit: What is the CAPLines Program?

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In addition to term loans, the Small Business Administration also provides a line of credit program, called CAPLines. CAPLines can only be used for certain purposes, such as working capital or seasonal needs. We break down what CAPLines is and how to qualify.

What is SBA CAPLines?

The Small Business Administration’s CAPLines Program allows small businesses to acquire lines of credit, fixed or revolving, for meeting cyclical and short-term working capital needs. These loans are extended by SBA-approved lenders and partially guaranteed by the SBA (usually 75% to 85% of the loan amount). In general, CAPLines loans must be fully collateralized by borrower assets, including accounts receivable, purchase orders, inventory, property liens, and other assets. If company assets don’t fully collateralize the loan, owner(s) must pledge personal assets, including a lien on residential real estate.

Once approved, you have a specified amount of time to pay back the credit line, although certain programs allow for extensions. Interest rates can be fixed or variable, and are determined from prevailing rates plus a spread that varies by the size of the loan. You can draw upon the CAPLines credit as required, and if the line is revolving, you can draw again from repaid credit.

The SBA CAPLines umbrella covers four different loan programs. Each program has its own qualification standards in addition to the standard SBA eligibility criteria. The four programs are:

1. Contract Loan. Proceeds must finance one or more specific contracts, purchase orders, or subcontracts, including administrative and general expenses. To qualify, you must show a track record of profitably completing similar contracts, be able to perform the specific work required, and have the financial resources to finish on time and at a profit. You repay the line upon receipt of payment for your contract activity.

  • Additional collateral requirements: First lien position on the contract and its proceeds.

2. Seasonal Line of Credit. The line is used to finance seasonal increases of inventory, accounts receivable, and, in some cases, labor costs. This line is not intended to be used for maintaining activity during slow seasons. Your business must have operated for at least one year and have demonstrated seasonal activity patterns. The line must be repaid at the end of the season when revenue is received. The loan amount is based on cash-flow projections.

  • Additional collateral requirements: None.

3. Builders Line. Used for financing direct expenses for construction or substantial renovation of eligible residential or commercial buildings for resale. You must be a homebuilder/contractor with the necessary technical and managerial skills, and show a successful performance record in completing comparable projects. At least one supervisory employee must be on-site throughout the project. Renovations must be significant (more than one-third of your property’s value) and prompt.

  • Additional collateral requirements: First or second lien on the subject property. May require a release clause to transfer clear title to the eventual buyer.

4. Working Capital Line of Credit. Used for short-term operating and working-capital needs. Cannot be used for floor planning or for paying certain delinquent taxes, such as withholding, state sales, and similar trust funds. Your business must have inventory and/or generate accounts receivable. This line of credit must be revolving, and the lender can structure the principal payments.

  • Additional collateral requirements: First lien on accounts receivable and inventory. In some cases, the lender must ensure a 1:1 collateral coverage via assignment of your other personal or business assets.

SBA CAPLines Rates and Terms

The following table lists the most important rates and terms for the SBA CAPLines Program:

Maximum Loan Amount$5 million, of which up to $3.75 million is guaranteed by the SBA.
Maximum Repayment Term
  • 5 years for Builders Line
  • 10 years for the other three programs
RenewabilityFor maturities of less than 10 years, lines are renewable as long as the repayment period is not greater than 120 months.
Maximum Interest Rates6.75% - 9.25% (based on Prime Rate and spread of 2.25% to 4.75%). Rates can be fixed or variable.
  • One-time guarantee fee:
    • 2.00% to 3.75% of guaranteed portion on loans with maturities greater than 12 months, depending on loan amount.
    • 0.25% of guaranteed portion on loans with maturities of 12 months or less.
  • Renewal fees apply for short-term loans extended beyond 12 months.
  • Other borrower fees can include:
    • Packaging and other service fees
    • Extraordinary servicing fees
    • Out-of-pocket expenses (e.g., appraisal fees, environmental reports, etc.)
    • Late payment fees
    • Subsidy recoupment fees
    • Assumption fees
Borrower Equity
  • 15% for loans of up to $150,000
  • 25% for loans of $150,000 or more
Prepayment PenaltyNone
Personal Guarantee RequiredYes, for any individual with 20% or more ownership. At least one owner must provide unlimited full guarantee or sign a note as a borrower.

SBA Eligibility Criteria

You must satisfy certain requirements, including limits on the number of employees or average annual receipts, which vary by industry. You must also meet the criteria for the specific CAPLines program for which you are applying (listed above). Other standard requirements for applying for an SBA loan include:

  • You must do business in the U.S.
  • You must use the funds for a sound business purpose.
  • Your business must operate, or plan to operate, at a profit.
  • You have invested a reasonable amount of equity into the business.
  • You have first tried to use personal and other financial resources.

Application Process

To acquire a CAPLines loan, you must fill out SBA Forms 1919 and 1920, as well as the lender’s Credit Memorandum and other application forms, and provide information on the purpose of the loan, business financials (including income statements, balance sheets, and cash-flow statements), certificates, licenses, tax returns, leases, and more. Specific SBA worksheets are used to disclose details and reconcile changes with respect to accounts receivable and inventory.

Following are the program-specific application requirements:

  • Contract Loan. You must provide a project cost schedule illustrating all line item costs for direct labor, material, and overhead resulting from the contract. In addition, you must provide a copy of the contract and a current annual income statement with changes in financing, investing, and operating cash flows that confirm there are sufficient cash flow to repay the loan.
  • Seasonal Line of Credit. You must provide monthly historic documentation of seasonality, and a month-to-month cash-flow forecast for the upcoming 12 months.
  • Builders Line. You must provide a monthly cash flow projection for all your work. You must also provide letters from a mortgage lender, real estate broker, and architect/engineer verifying the availability of mortgage money, a compatible real estate market, and the ability to perform inspections/certifications, respectively. The SBA lender may instead submit these letters if it has its own real estate lending department with qualified appraisers and engineers.
  • Working Capital Line of Credit. The lender must provide a Borrowing Base Calculation (the amount of money you can borrow) or a collateral basis calculation (how much is supported by collateral).

The SBA usually makes a decision within 21 days of receiving the completed loan application. Given the paperwork requirements, you should expect the entire process to take one to three months, depending on the lender’s practices and specific documentation requirements.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.