May 3, 2016
SBA Hot Topic Tuesday — SBA CAPLines: Tools for the Toolbox
By Walter H. McLaughlin
Coleman Report Contributor
Senior Vice President/SBA Manager
The importance of working capital to America’s small businesses simply cannot be overstated. In a general discussion about working capital, Investopedia says the following:
When a company does not have enough working capital to cover its obligations, financial insolvency can result and lead to legal troubles, liquidation of assets and potential bankruptcy. Thus, it is vital to all businesses to have adequate management of working capital.
That’s pretty straightforward, and underscores the liquidity concerns facing many small businesses, especially those with capital tied up in accounts receivables and inventory. And yet, even though the Great Recession officially ended just over six years ago, financing options for many “Main Street” small business borrowers remain challenged due to being younger companies or for otherwise not quite fitting within the narrow credit boxes of commercial lenders.
Dusting off its previously underutilized CAPLine programs, the Agency modernized them in 2012 so that they became much more user-friendly to both the lending community and eligible small businesses. As with other streamlining and modernization in recent years, the SBA’s efforts created positive results for small businesses, lenders and the overall U.S. economy.
The SBA currently offers four different CAPLine programs:
Working Capital CAPLine – As the name suggests, this credit facility provides financing for short-term working capital needs. Although typically advanced using borrowing base certificates, it can be disbursed without them if the line has a 1:1 collateral ratio assuming full utilization and using approved
Seasonal CAPLine – For businesses that can “demonstrate a definite pattern of seasonal activity,” the Seasonal CAPLine finances seasonal increases in accounts receivable and inventory for businesses that have been in operation for at least 12 months. A 30-day “clean up” period is required.
Contract CAPLine – The Contract CAPLine is available to finance line-item costs for one or more specific contracts, including overhead or general and administrative expenses allocable to the specific contract(s). It cannot be used to cover mark-up or profit. In most instances, an assignment of the
Builder’s CAPLine – The only CAPLine program not specifically designed for working capital, this product is available to finance direct expenses related to the construction or “substantial” renovation costs of specific eligible projects (residential or commercial buildings) for resale.
As with all SBA programs, it is important lenders ensure that the Credit Elsewhere Test is stringently applied and documented in the file. SBA borrowers must have at least one significant issue standing in the way of conventional financing that meets the following directive: SBA requires the Lender or CDC to certify or otherwise show that the desired credit is unavailable to the applicant on reasonable terms and conditions from non-Federal sources without SBA assistance, taking into consideration the prevailing rates and terms in the community in or near where the applicant conducts business, for similar purposes
Other program requirements worth noting:
- Working Capital CAPLines require a discussion of how the line amount was determined (SBA provides a formula in the 50 10 5 (H) SOP), a calculation of the cash cycle and an eventual exit
- A/R concentration limits are typically 20%, unless the account is a high-rated public company, a Federal government account, the customer has a long-standing positive credit history with the borrower, the customer is a prime contractor performing on a Federal government contract, or the accounts are insured through credit insurance.
- The amount of the Seasonal CAPLine must be based on cash flow projections, and funds cannot be used during the business’ slow period (s).
- Contract CAPLine recipients must be able to demonstrate an ability to operate profitably based upon the prior completion of similar contracts. Furthermore, they must possess the overall ability to bid, accurately project costs, and perform the specific type of work required by the contract(s) and have the financial capacity and technical expertise to complete the contract on
- All CAPLines should have safeguards in place so final disbursement is far enough in advance to ensure the assets being financed have sufficient time to be converted to cash in order to zero
In conclusion, consider including SBA CAPLines in the toolbox of options for your small business borrowers. As Robert Half has said, “It’s easy to make good decisions when there are no bad options.”