All small business owners understand the theory of maintaining a positive cash flow in order to keep their businesses afloat. Slow or non-existent sales and/or ever-increasing expenses cause a shortfall in available capital. This lack of capital severely impacts their ability to respond to opportunities for growth as they are unable to purchase the equipment and or inventory necessary to meet the increased demand these opportunities bring. Unfortunately, in every case, reality trumps theory.
To assist in countering this situation, the US Small Business Administration has reengineered its CAPLine Program to help small business owners take advantage of smart opportunities for expansion and growth.
While many people are familiar with home equity lines of credit, which basically are long-term in nature, business lines of credit are intended to be short-term loans, i.e. the loans are usually repaid within one year of origination. A common mistake is that small business owners use short-term capital to finance the purchase of long-term assets and thus place themselves at a disadvantage as, in the long run, short-term capital costs more than long-term capital. The funds from these loans are designed to enable the business owner to obtain those short-term assets, hire additional personnel, purchase equipment and inventory, frequently the result of obtaining a large contract or multiple purchase orders.
Fifteen years ago the US Small Business Administration instituted its CAPLine Program which was designed to help small businesses meet their short-term, contract-specific and/or and cyclical working capital needs. This program encompassed credit line guarantees for asset-based loans, seasonal lines of credit, contract financing and lines of credit for residential home builders. Over the years, this program saw little use as many SBA lenders and business owners found the documentation and approval processes too cumbersome.
Recently, the SBA engaged over 150 community lenders in all 50 states to uncover ways to reengineer the program so that it could work more effectively for both lenders and borrowers alike. The newly constituted program offers some key benefits which include:
Small business owners can pledge accounts receivable, inventory, contracts and purchase orders in order to secure a revolving line of credit.
Small business subcontractors can now obtain an SBA-guaranteed line of credit to finance their work on a contract with a federal prime contractor.
The SBA will no longer require small business owners without buildings or equipment to use their personal assets as collateral to secure working capital.
Small business owners working on a contract that requires surety bonding can obtain an SBA-guaranteed line of credit.
If the lender has received delegated or preferred authority from the SBA (also known as PLP), they then can process the CAPLine application via their PLP process which significantly reduces approval time.
In addition to the above, CAPLine borrowers will benefit from the recently increased SBA 7(a) loan limit, which, under the provisions of the Small Business Jobs Act, is now $5 million.
Keep in mind that, just like any other loan or loan guarantee program, the borrower needs to meet both the lenders and the SBA’s underwriting criteria. Some lenders only offer certain types and sizes of SBA-backed loans. Also, of the key qualification criteria for the CAPLine program is that the lender needs to have prior experience managing non-SBA loans of a similar type. Be aware that some lenders may not have experience in underwriting asset-based credit lines. Work with a lender that does.
The new CAPLine program has the potential to be a good fit for those small business owners who are looking to grow their businesses and need short-term capital to do so. Owners should assess their future borrowing needs for the upcoming six to twelve months and sit down with their lender to see if this is a tool that can be used.
Mike Austin is a senior vice president for Fulton Bank, N.A., an SBA preferred lender. He can be reached at (757) 222-2437 or firstname.lastname@example.org. Jim Carroll is the vice president for small business for the Hampton Roads Chamber of Commerce and the executive director of the Small Business Development Center of Hampton Roads, Inc. He can be reached at (757) 664-2595 or email@example.com.