The Small Business Administration (SBA) is known for specific small business loans, like the EIDL and the 7(a), but the SBA also offers business lines of credit. In this article, we discuss what an SBA line of credit is, how to get a line of credit through the SBA, the types of credit options, and the terms.
What is an SBA Line of Credit?
An SBA line of credit operates similarly to a credit card. You are approved for a specific amount and you draw from it whenever you need to. When you take from a line of credit, you can pay that portion back before taking out more, thus replenishing your available credit. One benefit of a business line of credit is that you only pay interest on the amount that you draw.
What is the CAPLines Program?
The CAPLines program is the SBA’s line of credit program. Unlike a fixed loan such as the 7(a) loan program, lines of credit are flexible, meaning that businesses get access to credit of up to $5 million, but only pay back what they withdraw, plus interest.
If you aren’t sure exactly what your capital needs are or don’t want to take on a fixed lump sum loan, a line of credit may make sense for you. SBA lines of credit are offered through partner lenders — not the SBA itself — but the SBA backs them between 75% and 85%, making them far less risky for lenders. You can find a lender through the agency's lender match page.
The CAPLines eligibility model is very similar to the 7(a) loan and is designed for profitable, stable businesses that are looking for lower-interest and lower-risk financing. The maximum interest rate for SBA lines of credit is the prime rate plus 4.75% (lower than many commercial lines of credit).
To be eligible, you must prove that you are a for-profit business operating in the U.S. and are unable to secure financing elsewhere. You can learn more about the SBA’s general eligibility requirements on their website, but we will break down specific eligibility requirements for the CAPLines program below.
What are the 4 Lines of Credit the SBA Offers?
The SBA offers four types of lines of credit through the CAPLines program. Here are the different types of credit options and who is eligible for them.
Working Capital Line of Credit
The working capital line of credit is designed to be used for all kinds of operating expenses, including inventory, hiring employees, and more. To be eligible for a working capital line of credit, you’ll need to prove that you generate accounts receivable or have inventory as collateral, and agree to a loan term of 10 years or fewer.
Seasonal Line of Credit
The seasonal line of credit is designed for companies that have higher expenses during certain times of the year, like those who sell more inventory during the holidays and need extra labor or equipment. The seasonal line of credit program was created to help meet higher capital needs during busy periods, not to help businesses survive slow periods.
The seasonal line of credit is a good option for business owners who know what their seasonal patterns are and want to avoid taking on a lump sum of debt. To qualify for a seasonal line of credit, you will need to prove that you have been operational for at least one year and demonstrate a predictable pattern of seasonal activity.
Contract Line of Credit
The contract line of credit is a line of credit to be used to meet the expenses of a particular contract. It can’t be used for long-term purchases, like purchasing permanent assets or working capital. For those, a 7(a) loan or a working capital line of credit might make more sense.
In order to be eligible for a contract line of credit, you’ll need to prove that you can complete the project required by the contract on time and generate a profit in addition to the general eligibility requirements. Allowable expenses include labor, materials, and other costs related to the execution of your contract.
Builders' Line of Credit
A builders’ line of credit is intended for those in the construction industry — like general contractors. It can be used for labor, equipment and materials, permits equipment rental, and other costs, but it cannot be used to buy real estate.
In addition to the general qualification requirements for SBA lines of credit, to be eligible for a builder's line of credit you must be a contractor or home builder in construction with demonstrable managerial and technical prowess. You also must have at least one of your supervisory employees on-site or perform the work yourself, demonstrate a plan for prompt and significant renovations, and show that you have completed a comparable project in the past.
Are There Alternatives to SBA Lines of Credit?
If a line of credit seems like a viable option for you, but you are unable to qualify for a line of credit through the SBA, there are private lending alternatives. Two of our partners, BlueVine and FundBox, offer competitive lines of credit.
- BlueVine. BlueVine offers lines of credit from $5K up to $250K. To qualify for a 6-month repayment term with BlueVine, you will need a FICO score of 600, must be in operation for at least 6 months, and have $10,000 in monthly revenue.
- Fundbox. Fundbox offers business lines of credit up to $150K with 12 or 24 weeks (3-6 months) terms. To qualify for a line of credit with Fundbox, you need a FICO score of 600, be in operation for six months, have $100,000 in annual revenue, and have a business checking account to link to.
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