In need of some short-term funding? Check out the SBA 's capital umbrella program CAPlines that offers asset-based lines of credit and revolving lines of credit to small businesses.
While SBA loan guarantee programs traditionally focused on helping small businesses obtain long-term financing, entrepreneurs' need for cyclical short-term capital shortages is very real. To help, the SBA offers its umbrella program CAPlines.
Capitalizing on CAPlines
CAPlines provides SBA loan guarantees on working capital loans and lines of credit. Repayment is tied to the your business's cash cycle, rather than an arbitrary time schedule as dictated in most conventional loans.
A cash cycle is the time period between the business's acquisition of inventory or service contract, and the business's receipt of payment for the sale of the good or service.
Assume a small business builder needs working capital to buy materials for a specific construction project. A short-term commercial loan might require periodic payments that have no relationship to the timing of the cash payments he anticipates on his project. A CAPlines credit line could allow him to make his purchases and the repayment would be scheduled to coincide with the payments he receives on the specific project.
What CAPlines Finance
CAPlines loan guarantees can be obtained for:
- seasonal needs
- specific contracts
- building contractor's needs
- general business purposes (e.g., operating capital, inventory purchasing and consolidation of short-term debt)
You'll need adequately secured accounts receivable and/or inventory in order to qualify. Depending upon the borrower's needs, the loans can be structured as:
- a straight line of credit (similar to a term loan, with 1-5 year maturity)
- a revolving line of credit
- a fixed line of credit (usually very short-term with repayment tied to a specific contract or project)
- a seasonal line (a short-term line, perhaps as short as 30 day, to allow a business operating capital for a forthcoming seasonal upswing)
However, only one line of credit can be outstanding at any time.
Asset-Based Lines of Credit
lines of credit are available through the an SBA loan guarantee on a
term commitment, up to five years, for a revolving line of credit to a
How Asset-Based Lines of Credit Work
Borrowers are allowed to draw and repay as their cash cycle dictates,
up to the approved amount of the account, throughout the term of the
loan. you cannot simply draw down the line of credit by borrowing the
maximum amount and make only interest payments until maturity (often
called an "evergreen"
line). A working capital loan of this nature would have to be
structured as a term loan rather than an asset-based line of credit.
Under the current CAPlines program, the SBA divides asset-based lines of credit into two categories:
- small asset-based lines (under $200,000)
- standard asset-based lines ($200,000 or more)
The auditing and cash management requirements for lines of credit less
than $200,000 are eased to reduce the costs of monitoring these loans.
Banks are also permitted to charge up to a 2 percent fee for loan
servicing. Despite the improvements, however, the expense of properly
administering and policing an SBA guaranteed line of credit continues to
deter most conventional lenders from extending small lines.
Meeting Asset-Based Lines of Credit Requirements
The general eligibility requirements for SBA loan guarantees and maximum interest rates
apply to CAPlines revolving loans. The loan maturity maximum is five
years, but certain paydown provisions (a reduction to a zero balance in a
line of credit's outstanding balance during the course of a specified
time period, e.g., 30 days in a 12-month period) may apply. For
asset-based lines of credit, the amount advanced against an eligible
receivable usually approximates 80 percent of the face value of any
receivable due within 90 days. Advance rate for inventory is typically
50 percent of the inventory considered readily sellable.
On most CAPlines loans, the SBA can guarantee up to $1,000,000 or 75
percent of the loan amount, whichever is less. If the loan is less than
$100,000, the guarantee can be up to 80 percent. Advances on a line of
credit can usually be made at any time prior to maturity, provided that
you are not in default. The loans must be secured and collateral usually
consists of liens on all inventory and accounts receivable; although
additional collateral, including the pledge of outside assets and
personal guaranties, also may be required.
CAPlines: Seasonal, Contract, and Builders Lines of Credit
These SBA-guaranteed short-term loans are designed to help small
businesses get past cash crunches attributable to seasonal changes in
business volume. The loans are used to finance increases in assets, such
as receivables and inventory, required as a result of seasonal upswings
To qualify for a seasonal line of credit guarantee, a small business must meet the general criteria for SBA loan guarantees.
In addition, the business must have been in operation continuously for
one year immediately preceding the application date, and it must have
established a definite pattern of seasonal activity.
The term of the seasonal line of credit loan cannot be more than 12
months from the date of the SBA's first disbursement. Only one seasonal
line of credit loan can be outstanding at any one time and each loan
must be followed by a debt-free period of at least 30 days. These
restrictions do not apply to agricultural enterprises.
Understanding CAPlines Contract Lines of Credit
Businesses eligible for this program are small construction,
manufacturing and service contractors and subcontractors who provide a
specific product or service under an assignable contract. The business
must have been in operation for the preceding 12 months, and must meet
SBA's other size and policy requirements.
All applicants must be current on payroll taxes and have in operation
a depository plan for the payment of future withholding taxes. (Such a
plan protects SBA and the participating lender from the Federal Tax Lien
Act of 1966, which holds lenders liable for unpaid income taxes when
loan proceeds are used for payroll purposes.)
Loan proceeds may be used only to finance the labor and materials
necessary to comply with the terms of the contract. The SBA permits a
loan maturity of up to five years for a contract line of credit. But
bear in mind the private lender may require a sub-note that requires
repayment from a specific contract within 12 months from the date of
first disbursement, except in cases of a large contract, which may be
approved for up to 18 months.
Collateral will include an assignment of contract proceeds and may
also include the pledge of other company assets (or outside assets) and
secured personal guaranties. Applicants can apply to the lender prior
to, or after, a contract has been received. Detailed information on the
bid or contract must be available at the time of application.
Understanding CAPlines Builders' Lines of Credit
Short-term loans and lines of credit are available to building
contractors to finance the construction or renovation of residential and
commercial buildings for sale. Eligible businesses include construction
contractors and home builders that meet SBA size and policy standards. In addition, eligibility for this program requires construction contractors and homebuilders to:
- Have already demonstrated the managerial and technical ability
to build or renovate projects comparable in size to those for which they
are seeking SBA financing.
- Submit three letters to SBA (or to the participating lender). A letter must come from:
- a mortgage lender doing business in the area affirming that
permanent mortgage financing for qualified purchasers of comparable real
estate is normally available in the projects area
- an independently licensed real estate broker with three
years of experience in the project area (the letter must state whether a
market for the proposed structure exists and whether it is compatible
with other buildings in the neighborhood)
- and an independent architect, appraiser or engineer,
confirming availability of construction inspection and certification at
intervals during the project (the writer of this third letter cannot be
affiliated with the applicant in any way)
- The cost of construction inspections must be paid by the applicant and can be paid from the loan proceeds.
The total maturity of the loan cannot exceed five years, but each
separate project should not exceed 36 months plus a reasonable estimate
of the construction or renovation period. Loan proceeds may be used
solely for the direct expenses of acquisition, immediate construction
and/or significant rehabilitation of the residential or commercial
Principal repayment may be required in a single payment when the
project is sold. Interest payments, however, are required at least twice
a year and must be paid from the applicant's own resources, not from
loan proceeds. Interest rates are negotiated with the lender but may not
exceed SBA's maximum interest rates under its regular guarantee loan
Loans for the project must be secured by not less than a second lien
on the property to be constructed or renovated. The total amount of the
first and second liens on a property cannot exceed 80 percent of the
contractor's anticipated selling price. The first lien must include
provisions for transferring clear title to the purchaser of each parcel.
The SBA will not take a second position in a subdivision that is
subordinate to a lien requiring the entire loan to be paid in full
before any property is released.
SBA Microloans and Stabilization Loan Program
Small businesses needing small-scale financing and technical assistance for startup or expansion may be able to obtain up to $35,000 through short-term loans of public money called "microloans." The average loan size is about $13,000. These loans are administered through responsible nonprofit groups, such as local economic development organizations or state finance authorities, that are selected and approved by the SBA. The SBA loans the money to the nonprofit organization which then pools the funds with local money and administers direct loans to small businesses.
These loans are administered much like a line of credit and are intended for the purchase of machinery and equipment, furniture and fixtures, inventory, supplies and working capital. The funds are intended to be dispersed with close monitoring of the recipient and a self-employment training program may accompany the loan. The maximum maturity for a microloan is six years. The loan cannot be used to pay existing debts.
The microloan program has received a fair amount of political attention as a model for government-sponsored assistance to local businesses, but the overall money allocated to this program is relatively limited. However, the 2009 Stimulus legislation added $50 million in funding through September 2010 and added $24 million in technical assistance grants as well.
The 2009 Stimulus legislation also created a new Business Stabilization Loan Program. This law provides deferred-payment loans of up to $35,000 to viable small businesses that need the money to make payments on an existing, qualifying loan for up to six months. These loans will be 100 percent guaranteed by SBA. Repayment would not have to begin until 12 months after the loan is fully disbursed. The law provides $255 million for this new program, which is intended to help small businesses have time to re-focus their businesses in order to succeed in the long run through these difficult economic times.
A representative from one SBA-approved intermediary stated that their total annual allocation was $40,000 and those funds were gone within two months. Because your timing in applying for these loans may be important in some areas, checking with local sources prior to your actual need for the money may be the best plan for staking a claim to these limited funds.
Check the SBA's website for more detailed Microloan information.
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