Is an SBA Line of Credit Right for You?
SBA lines of credit are available through the Small Business Administration’s (SBA) CAPLines Program. The SBA guarantees fixed and revolving lines of credit of up to $5 million, made by partner banks and other direct SBA lenders. Business owners can secure the line with business or personal assets and use the money for short-term or seasonal capital needs.
Many people know about the SBA’s long-term business loans, but fewer are familiar with the SBA’s line of credit offerings. But if you’re in need of flexible financing to solve your working capital or cash flow needs, then an SBA line of credit might be perfect for you.
These lines of credit have all the advantages of traditional SBA loans— low-interest rates, manageable monthly payments—but allow for more flexible use of capital.
In this guide, we’ll walk through everything there is to know about SBA loans vs lines of credit, and where to find the best alternatives if you’re not able to qualify for the SBA program. To begin, here’s a summary of the four main types of SBA credit lines.
The SBA 7(a) loan program is by far the most popular option from the SBA. Fundera does not offer SBA line of credits on our marketplace (more on that below), but if you would like to see if you qualify for an SBA loan or other types of line of credits, get started below.
The 4 CAPLines SBA Line of Credit Options
Most people associate the SBA with traditional small business SBA loans, not with lines of credit. But, a line of credit can be an invaluable financial tool for a small business that is facing a shortfall of working capital, seasonal/cyclical gaps in cash flow, or a big project with an uncertain budget.
The SBA makes lines of credit available through the CAPLines program. As part of this umbrella program, there are four types of lines of credit.
These are the four SBA line of credit options:
Seasonal Line of Credit
The Seasonal SBA Line of Credit can be used to pay for seasonal increases in inventory, accounts receivables, or higher labor costs as you try to meet the demand of the busy season. You can qualify for a credit line of up to $5 million.
How to Qualify for the Seasonal SBA Line of Credit
The qualification requirements for the seasonal SBA line of credit are similar to traditional SBA loans. You have to meet the SBA’s definition of small business and be a for-profit business. You also should have strong credit and business financials.
On top of the standard SBA loan requirements, the business should be in operation for at least one year and be able to demonstrate a definite pattern of seasonality. For example, your financial statements should reveal clear spikes and declines in revenue at different times of year.
Terms of a Seasonal SBA Line of Credit
The maximum maturity date on these lines is 10 years, which means full repayment is due within 10 years. However, the lender will require periodic payments of principal and interest that you’ll need to pay by the end of each busy season.
The seasonal SBA line of credit is usually collateralized by the inventory or the accounts receivable of the business. And if that’s not sufficient, the lender might ask you to submit personal assets as collateral.
Note that you cannot use this line of credit as a cash cushion or to cover operational costs during your slow season. Rather, this line of credit is for financing more customer demands and orders during the busier times of year.
Rates of a Seasonal SBA Line of Credit
Interest rates on these lines of credit are the same as SBA loan interest rates on standard SBA 7(a) loans. Currently, they range from 6% to 8%.
Working Capital Line of Credit
The Working Capital SBA Line of Credit is for businesses that need money to cover general operating expenses. Examples including buying inventory, hiring additional employees, and covering unexpected expenses. Lenders must structure this line of credit as a revolving line of credit.
How to Qualify for a Working Capital SBA Line of Credit
The requirements for qualifying for this line of credit are the same as a 7(a) loan. The only additional requirement is that you must be a business with accounts receivable or physical inventory (most businesses meet that requirement).
Terms of a Working Capital SBA Line of Credit
The maximum term for this SBA line of credit is 10 years, and the credit limit is determined by your business’s sales volume and typical sales cycle, and the value of your collateral. The inventory or accounts receivables generally serve as the collateral, but other business assets (e.g. office space, equipment, etc.) and personal assets can also be used as collateral.
The SBA Contract Loan CAPLine is for small business owners who need materials, supplies, or labor to meet their obligations under a contract or purchase order.
How to Qualify for an SBA Contract Loan
To qualify for a Contract CAPLine, you must show that your business has performed contracts or purchase orders in the past. You business must be profitable. You must also possess the technical expertise to be able to complete the contract on time and at a profit.
Terms of an SBA Contract Loan
A Contract Loan can be as high as $5 million, depending on the scope of your contract or purchase order. You can use a Contract CAPLine to finance one contract or multiple contracts.
The maximum repayment term on a Contract Loan is 10 years. When you use the money towards a specific contract or project, you must pay back those funds when your client pays you.
Rates of an SBA Contract Loan
The interest rate on Contract CAPLines is the same as the rates on a regular SBA 7(a) loan. This line of credit can be revolving or fixed.
Builders Line of Credit
A Builders SBA Line of Credit is for businesses that construct or renovate residential or commercial buildings for resale. Businesses can qualify for as much as $5 million and use the money for labor, supplies, materials, equipment rental, and landscaping.
How to Qualify for a Builders SBA Line of Credit
This SBA line of credit is for builders and contractors only. Specifically, this financing product works when you need to build or renovate a residential or commercial building. You need to have demonstrated experience successfully bidding on and completing construction or renovation projects.
Terms of a Builders SBA Line of Credit
The maximum term on a builders line of credit is 5 years, as opposed to the other CAPLines that have 10-year terms. When you use funds for a specific project, you must pay back those funds within 36 months of completing the renovation or selling the property, whichever is the shorter time period.
The lender will use the property that you are constructing or renovating as collateral for the line of credit.
Rates of a Builders SBA Line of Credit
The interest rate on these lines of credit are the same as a standard SBA 7(a) loan. These lines of credit can be revolving or fixed, depending on the lender and your qualifications as a borrower.
How SBA Lines of Credit Work
Just like any other business line of credit, an SBA line of credit can be fixed or revolving. A credit line provides access to a pool of cash that you can draw on as needed for business reasons. And you only have to pay interest on the cash that you actually draw from your account. The difference between fixed and revolving credit lines lies in what happens when you make payments.
With a fixed line of credit, your overall credit keeps decreasing every time you withdraw money from your credit line. But with a revolving credit line, the credit limit gets replenished every time you pay back what you borrowed plus interest (kind of a like a credit card).
Note that the SBA itself doesn’t issue loans or lines of credit. Instead, they guarantee business loans offered by partner banks and SBA lenders. For lines of credit, the SBA guarantees 75% or 85% of the loan amount. By providing a guarantee, the SBA removes some of the bank’s risk when working with small business owners. As a result, the bank can offer low interest rates and favorable terms for the borrower.
SBA Line of Credit Requirements
The qualification standards for an SBA credit line are almost identical to the qualification requirements for standards SBA 7(a) loans. There are a few additional requirements for the line of credit, depending on which of the four CAPLines programs you’re applying for.
Here are the general requirements to qualify for an SBA line of credit:
- The business must be for-profit and an eligible type of business
- The business must meet the SBA’s size standards
- The business must show good character in ownership (typically through personal information given)
- The business owner must have good personal and business credit (lenders generally expect you to have a minimum of a 660 personal credit score)
- The business owner must have previous business management experience (typically shown in resume and business plan)
- The business must demonstrate an ability to repay the financing (typically shown through bank statements, personal and business tax returns, profit & loss statements, balance sheets, etc.)
- The business must pledge inventory, accounts receivables, purchase orders, pending contracts, or property as collateral for the financing.
This is a long list of conditions, but don’t worry if you don’t meet each of these requirements. Business owners who are unable to qualify for an SBA credit line have several alternative options, which we cover in the guide.
SBA Line of Credit Rates
SBA Line of Credit Interest Rates
Loans and lines of credit with less than 7 years’ maturity:
- Less than $25,000: Prime rate + 4.25%
- $25,001 to $50,000: Prime rate + 3.25%
- Over $50,000: Prime rate + 2.25%
You can check the current prime rate by going here. As of March 16, 2020, the prime rate is 3.25%.
Sba Line of Credit Fees
You should also be aware that, like a 7(a) loan, an SBA line of credit from one of the 4 CAPLines programs comes with a guarantee fee. The SBA charges lenders a guarantee fee for the risk that the SBA takes on in guaranteeing a portion of the loan. Lenders typically pass this fee on to the borrower.
Here’s how the SBA guarantee fees stack up:
- For lines of credit of $150,000 or less, the guarantee fee is 2%.
- For lines of credit between $150,001 and $700,000, the guarantee fee is 3%.
- For lines of credit over $700,001, the guarantee fee is 3.5% (additional 3.75% fee on guaranteed amounts over $1 million)
- For short-term funding with a repayment term of one year or less, the guarantee fee is just 0.25% of the guaranteed amount.
These fees are assessed on the guaranteed portion of the loan, not on the full loan amount. The SBA guarantees up to 85% of the loan. For example, a lender might extend you a $100,000 working capital line of credit. The SBA will guarantee $85,000 of that loan. The fee will be 2% of $85,000, which is $1,700.
Lender cannot charge a higher fee on SBA-guaranteed loans and lines of credit than on similar non-SBA guaranteed products.
SBA Line of Credit Terms
Each of the SBA credit lines have a maximum maturity date of 10 years, with the exception of the Builders Line, which has a maximum maturity date of 5 years.
The maturity date is the date by which you must repay the lender in full. But, there are smaller payments that might be due along the way. For instance, if you’re using funds from a Seasonal CAPLine to finance a specific contract, you must pay back the lender once your busy season is over.
Every month, you’ll receive a statement showing your minimum payment (just like a credit card bill). You can pay the minimum amount, but to save on interest, you can pay more than the minimum or the full amount you’ve borrowed to date.
Again, Fundera does not offer any SBA line of credits within our marketplace, but if you would like to see if you qualify for an SBA loan or other types of line of credits, get started below.
The Best SBA Line of Credit Alternatives
As you read up on SBA lines of credit, be sure to remember one crucial detail: Banks issue SBA loans and lines of credit. And bank financing is very tough to qualify for, even if you do have the SBA’s guarantee attached to it.
But if your local bank declines your application for an SBA business line of credit, that doesn’t mean you’re out of options. Lots of online alternative lenders offer lines of credit. These options are certainly costlier than SBA financing, and you won’t be able to get nearly as much capital. However, they offer you the same flexibility of use and repayment and are a lot easier to qualify for.
Here are three popular online line of credit lenders:
Kabbage Line of Credit
- Line amounts: $2,000 to $250,000
- Repayment term: 6 or 12 months (paid back monthly)
- Cost: Monthly fee on your balance
- Qualification requirements: 1+ year in business and $50,000+ in annual revenue
Kabbage is the one of the most accessible, fast line of credit lenders. It takes just minutes to apply online for a revolving line of credit from Kabbage Lending, and Kabbage doesn’t even set a minimum personal credit score to qualify (they’ll look at your personal credit score, though). You’ll need to have 12 months of business under your belt and a minimum of $50,000 in annual revenue to qualify.
The maximum line of credit amount with Kabbage Lending is $250,000, with repayment terms of either six months or 12 months. Each month, you pay back a portion of the principal plus a fee.
Kabbage Lending charges a flat monthly fee of 1.5% to 10% on your outstanding loan amount. For the first two months of repayment, your monthly fee is 1.5% to 10% of the total amount you borrowed (if your term is set to 6 months). If your repayment term is set to 12 months, you’ll pay a fee of 1.5% to 10% on the total amount borrowed for up to six months. For the remaining months (no matter what your loan term is), you pay 1% on the total amount you borrowed.
When you work out these fees to an APR (annual percentage rate), it works out to about 25% to 100% APR. While Kabbage Lending is a more expensive product, it could be a good stepping stone to finance your business while building your credit score. You can start with this product, make timely payments, and graduate to an SBA line of credit down the road.
OnDeck Capital Line of Credit
- Line amounts: $5,000 to $100,000
- Repayment term: 6 months (paid back weekly)
- Cost: Weekly fee on your balance
- Qualification requirements: 600+ credit score, 1+ year in business, and $100,000+ in annual revenue
OnDeck offers both short-term loans and revolving lines of credit for a variety of funding needs. Like Kabbage Lending, it’s much easier to qualify for this financing compared to an SBA line of credit.
A line of credit with OnDeck goes up to $100,000 and features a very short repayment term of six months. The APRs on an OnDeck line of credit are less expensive than what you’d get with Kabbage Lending, starting as low as 8.5%.
To qualify, you’ll need a 600 personal credit score, one year in business, and at least $100,000 in annual revenues.
BlueVine Line of Credit
- Line amounts: $5,000 to $250,000
- Repayment term: 6 or 12 months (paid back weekly)
- Cost: Weekly fee on your balance
- Qualification requirements: 600+ credit score, 6+ months in business, and $10,000+ in monthly revenue
BlueVine is a lender that offers invoice financing and revolving lines of credit for small businesses. As with OnDeck and Kabbage Lending, it’s easy to apply online for a BlueVine line of credit, and you can get funding within just a day or two.
The line of credit product ranges from $6,000 to $250,000. Similar to Kabbage Lending, the borrower has to pay back the money within a six-month or 12-month term. To qualify, you must have a personal credit score over 600, at least six months of business history, and monthly revenues of $10,000 or more.
The BlueVine line of credit is structured with weekly repayments. There’s a fee that BlueVine tacks on to your principal. APR on the BlueVine line of credit ranges from approximately 18% to 62%. Cost wise, this puts BlueVine in between Kabbage and OnDeck.
As a reminder, Fundera does not offer SBA line of credits in our marketplace, but if you would like to see if you qualify for an SBA loan or other types of line of credits, get started below.
The Bottom Line
The SBA has a great line of credit program. With low interest rates and repayments terms of up to 10 years, any small business owner would be lucky to qualify. But the SBA isn’t the only option around. If you’re seeking flexible capital but can’t qualify for an SBA line of credit, several (faster and easier to qualify for) alternatives are available.