SBA Line of Credit: What Is an SBA CAPLine Loan - How It Works - How to Qualify

If you want to borrow money, lenders will need a guarantee that you can pay it back. If you don't have any assets or capital to use as a guarantee then it can be difficult to obtain financing. This is where the SBA comes in and acts as your guarantor that the loan you want will be paid back if you are not able yourself. 

This allows people to borrow money for their business needs that otherwise lenders wouldn't even consider. The SBA does not provide the money but rather ensures a lender that the money being borrowed will be returned. SBA CAPLine is typically best if you need short-term working capital.

Patience is key - the SBA loan process can take time. Show courage - you can improve your credit score with effort. Persevere - if you want to succeed - keep going. Demonstrate diligence - don’t shy away from hard work.

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. The SBA also administers various other types of SBA loans. It’s important to note that not all businesses are eligible for CAPLine lines of credit. 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 CAPLine - different times of year impact business cash flow. For example, businesses may need to borrow more to prepare for the winter holiday season. Or, some businesses may be negatively affected 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 are typically 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 proving that the business has successfully bid for and worked on construction-based projects before the borrowing request they're making.
• Working CAPLine - this line of credit is accessible to entrepreneurs who would have difficulty meeting traditional lending requirements for their business. This line of credit aims to meet the business's short-term cash flow needs.

How Does an SBA CAPLine Work?

For many businesses, an SBA line of credit is a much-needed lifeline for a business. To apply for a line of credit, an applicant must take a few steps to begin the SBA loan application process.

Here are the key steps:

• It’s important to note that an applicant can request an SBA line of credit if an applicant cannot be approved for financing by other means.
• Applicants must produce proof of good personal credit. 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. You should know what makes a good business credit score and ways to improve your business credit score.
• Each CAPline has slightly different eligibility requirements. The specific CAPLine influences these eligibility requirements applied for, applicant credit health, and the amount the applicant requests.
• United States citizens must own the business. American citizens would be individuals born in the United States or are legal citizens of the United States allowed to do business within the country.

What are SBA CAPLine 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 directly affect the long-term cost of your loan. Interest rates for SBA CAPLines vary based on the amount borrowed and the product used.

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

Basic SBA CAPLine 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 are specifically related to the lending institution’s terms for each CAPLine.

Here are key SBA CAPLine terms:

• 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 might be as low as 5.75%, depending on the borrower’s credit health and other factors that lenders look at when making a final lending decision. Typically, the lower the interest, the stronger the borrower’s overall financial picture.
• Borrowers should speak with their lenders to determine 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. Borrowers need to speak with an SBA representative to check loan documentation requirements.

Below are a few of the documents that applicants must submit with a CAPLine application:

• Business profit and loss statements - these statements give lenders an accurate idea of the business's overall financial health that is seeking to borrow from them. A business 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 focuses on supporting for-profit organizations.
• Are you in healthy financial standing with other lenders - if your business has other loans or is in arrears with services needed to run the business, an SBA-affiliated lender will likely question the borrower's financial health.
• Income tax returns for the business owners - 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.

You should have a clear idea of what the SBA is looking for before considering borrowing. An understanding of what the SBA wants may impact:

• Business decisions specific to data collection
• How an entrepreneur organizes business-specific paperwork
• Your understanding of 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 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. 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.