SBA CAPLines are SBA lines of credit that help a small business improve short-term cash flow. The SBA CAPLines have four types of credit: 1) Seasonal CAPLine, 2) Contract CAPLine, 3) Builders CAPLine, and 4) Working CAPLine.

Brad Nakase, Attorney

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When does a small business need an SBA CAPLine?

Clarice is the owner of a seasonal business that sells winter clothing. Because of her focus on ski gear, parkas, scarves, and boots, Clarice’s business flourishes in the winter months, typically between October and March. However, because Clarice does not sell as much during the summer months, she needs to increase her winter sales to make up for season down periods. She would like to expand her inventory to include equipment, such as skis, snowboards, and snowmobile rentals. However, she will need a loan to help her grow her business. Clarice has heard that SBA CAPLine loans can be very helpful for small businesses such as hers. However, she wonders how these loans are different from other kinds, and if they are the right choice for her company.

The Small Business Administration (SBA) offers a variety of loan programs for American small business owners and entrepreneurs. One of the SBA’s most popular financing options are known as CAPLines. This article will discuss the four different SBA CAPLines programs, including a description of CAPLine, what makes a business owner eligible for one of these loans, how the funding may be spent, and how a business owner may apply successfully for one of the special loans.

So, first, let us review what exactly an SBA CAPLine loan is. The Small Business Administration’s CAPLine program offers small business owners fixed or revolving lines of credit. These lines of credit may be worth up to $5 million, and are meant to help business owners meet their short-term and cyclical working capital needs. As mentioned above, there are four different kinds of SBA CAPLine loans for a small business to consider, and which we will review in the following section.

What Are 4 Types SBA CAPLines?

  1. Contract Loan

This type of CAPLine loan covers the expenses of one or more particular contracts, subcontracts, or purchase orders. Also, this loan’s coverage includes overhead and administrative costs involved in carrying out contracts.

  1. Seasonal Line of Credit

If a small business owner runs a seasonal business, then this type of CAPLine loan can be used to cover costs that are required to maintain the business’ seasonal operations. A business owner should make sure to remember that this kind of loan may only be used to fund seasonal increases in inventory, accounts receivable, and costs of labor.

It is not possible to use a seasonal SBA line of credit to keep the business running during slow parts of the year. A business owner should keep this in mind before applying for the loan. If the owner of a seasonal business is looking for financing during the off-season, then he or she should look for other financing options.

For example, perhaps the owner of a Christmas tree company receives plenty of customers during the winter season. During this period, if he needs help sourcing his trees or buying trimming equipment, then the SBA’s seasonal line of credit would come in handy. However, if the owner needs help keeping the business running through the summer, when there is no demand for Christmas trees, he should not apply for this loan.

  1. Builders Line

The funding from this type of loan can be used to cover the following types of business costs:

  • Building materials and supplies
  • Labor
  • Rental equipment
  • Building permits and inspections
  • Utility connections
  • Landscaping
  • Septic tank construction

So long as the cost of the land does not exceed 20% of the project cost, it may be eligible for loan coverage.

For example, let’s say a tech company is building a new campus for its employees. By applying for a builders line of credit, the business owner can afford construction equipment, such as bulldozers, cranes, and bobcats. He can also afford to hire a contractor and a team of laborers to perform the construction work, as well as electricians to establish the building’s wiring.

  1. Working Capital Line of Credit

This type of CAPLine loan has to be used for short-term working capital and operation needs. A small business owner cannot use the money from the loan to pay off late taxes or trust funds. Also, the proceeds from this loan cannot be used to cover floor planning.

What Are the Requirements for an SBA CAPLine Loan?

When it comes to applying for an SBA CAPLine loan, there are some general requirements that a business owner must meet in order to be eligible. These requirements include the following:

  • The company must be a small business according to the SBA’s definition
  • The business owner must prove that he or she can repay the loan
  • The company must be a for-profit business
  • The company must do business in the United States and have a physical location on U.S. soil
  • The business owner must prove that he or she has invested time and money into the business
  • The business owner must show that he or she has not been successful in getting funds from other lenders

Any further requirements will depend on the lender that a small business owner chooses. If the small business owner meets the following requirements, then his or her chances of being approved for an SBA loan are much better:

  • The business owner has a credit score of at least 620
  • The company has been in business for at least two years
  • Annual revenue of at least $100,000

Also, a business owner should be aware that each type of SBA CAPLine loan has its own eligibility requirements:

Contract Line of Credit

To successfully apply for this type of loan, a small business owner must meet the following criteria:

  • Prove one’s ability to earn a profit based on fulfillment of similar kinds of contracts
  • Show that one can perform the kind of work laid out in the contract
  • Demonstrate that one has the technical and financial ability to fulfill the contract on time and make a profit

Seasonal Line of Credit

To successfully apply for this type of loan, a small business owner must meet the following criteria:

  • Show that one’s business has been in operation for at least one complete year
  • Provide evidence that one’s business has generated seasonal activity

Builders Line of Credit

To successfully apply for this type of loan, a small business owner must meet the following criteria:

  • One must be a construction contractor or home builder with the demonstrated ability to fulfill contracts
  • One must perform the renovation or construction with at least one supervisor present on the job site during the construction
  • One must deliver significant and prompt renovations or construction jobs
  • One must prove previous success in completing projects of similar scope

Working Capital Line of Credit

To successfully apply for this type of loan, a small business owner must meet the following criteria:

  • One must have business inventory or generate accounts receivable

How Does a Small Business Owner Apply for an SBA CAPLine Loan?

Once a small business owner has determined whether he or she is eligible for an SBA CAPLine loan, they should follow the proceeding steps in order to apply for a loan:

  1. Select an SBA Loan Provider

A small business owner who is seeking financing via a loan should spend time finding a well-known and respected SBA loan provider. A business owner may choose to work with a traditional financial institution or choose to hire a broker. Prior to choosing an SBA Loan provider, a business owner should make sure that he or she meets the lender’s specific requirements. This ensures that one does not waste their time applying for a loan only to be quickly rejected.

  1. Organize the Paperwork

A business owner should be sure to keep their loan paperwork organized. In order to be prepared, a business owner should look at the SBA’s complete checklist of application paperwork.

  1. Fill Out the SBA Loan Application

The specifics of an SBA loan application will vary depending on the particular lender a small business owner chooses. That said, most lenders tend to ask for basic information about the business and the reason, or purpose, for the loan request. The SBA may also ask about the following:

  • Executive summary
  • Business profile
  • Ownership structure
  • Management experience
  • How financing will be used
  • Explanation of how the owner plans to repay the loan

Part of the application process involves completing SBA paperwork. These forms will vary depending on the type of business an entrepreneur owns. Some of the necessary forms include the following:

  • SBA Form 1919: This form is meant to collect information about the borrower and is necessary when applying for any 7(a) loan.
  • SBA Form 912: This SBA form is a statement about the owner’s personal history and is used to assess the entrepreneur’s character.
  • SBA Form 413: This form is used to assess the financial health of any individual who is a proprietor of the business.
  • SBA Form 159: This form is only necessary if the owner hire someone to help complete the SBA loan application.
  1. Meet With a Broker

After a business owner has completed the necessary paperwork for an SBA loan, he or she should meet with their broker to complete the SBA CAPLine application process and secure the loan.

Is an SBA CAPLine Loan the Right Choice for a Small Business?

While SBA CAPLine loans are not the simplest things to understand, there is no denying that they can be very useful for a small business. The above information should help an entrepreneur decide which option is most suitable for his or her business, if any.

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