ComplianceFinanceSeptember 26, 2020

Short-term financing

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:

  • Straight line of credit (similar to a term loan, with 1-5 year maturity)
  • Revolving line of credit
  • Fxed line of credit (usually very short-term with repayment tied to a specific contract or project)
  • 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

CAPlines’ asset-based 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 small business.

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 in business.

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:
    1. 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
    2. 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)
    3. 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 structures.

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 program.

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.

Work smart

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.

Mike Enright
Operations Manager
small business services


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