Line of Credit (LOC) financing is more difficult for small-business owners to get than term loans. Small community banks often lack the expertise and staff to service them and large banks that make LOCs, eliminate all but their most creditworthy customers. Additionally, tight credit and regulators scrutinizing every move that bankers make, add to the mix of reasons that LOCs are harder to find. And with the holiday shopping season about to begin, retailers are worried that they won't be able to procure the seasonal working capital they need to survive.
To provide the needed liquidity, the U. S. Small Business Administration is revising its CAPLine program to make LOCs more acceptable to lenders and more available to small-business owners. The existing features will remain mostly intact with the revised program but the reduced paperwork and servicing requirements might bring more lenders on board.
SBA's district offices have been informing its lenders around the county about the revised CAPLine and inviting them to come on board. The maximum loan amount is $5 million and the term can be up to 10 years, depending upon how the funds are used. Most banks have minimum loans amounts, based upon their internal production cost of putting the loans on their books.
Most banks, however, do not currently participate in CAPLine, even if they make other types of SBA loans. They say that CAPLine requires too much paperwork, the servicing procedures are unreasonably extensive and they cannot sell them into the secondary market. That is especially important for small, community banks that sell the SBA-guaranteed portion of their term loans and are unwilling to keep 100 percent of CAPLines in their portfolio.
As a result, many banks would rather make conventional LOCs to their most credit-worthy customers and take 100 percent of the risk rather than hassle with SBA's requirements to get 75 percent of the loan guaranteed. But that leaves the more marginal borrowers scrambling to find alternatives for seasonal working capital, and inventory and accounts receivable financing especially needed for the approaching holiday season. It also hurts contractors who need working capital to front-end expenses needed to comply with contracts.
Perhaps most urgently, it can be devastating for entrepreneurs who must refinance their existing LOCs because their bank will not renew them, and non-bank alternatives cost too much.
"Alternative financing products are expensive in comparison to traditional conventional and SBA financing," says Fred Dunayer, a financier in southwest Florida. His company represents The Interface Financial Group and he buys invoices from small businesses to provide them with cash flow.
Jessica Conn, an attorney with Pennsylvania-based Starfield & Smith, P.C., says that SBA's revisions "were intended to make the working capital CAPLine more user friendly, allowing lenders to advance working capital lines in a manner that is more consistent with their own bank policy." Her law firm represents lenders that make government-guaranteed loans. "The lender should utilize financial covenants tested in a manner that is consistent with covenants that the lender would require conventionally on a similar loan product."
But Conn points out that the agency's standard operating procedures will still require of lenders that "at a minimum, they must conduct a credit review including cash flow analysis, collateral analysis to ensure there is a 1:1 collateral ratio, owner /guarantor credit review and site visit on an annual basis."
Check with your lender to find out if they will participate in the revised CAPLine program. Alternatively, download the SBA guidebook in your location and see if it lists the most active SBA lenders. If not, contact your SBA district office for a list of lenders that currently participate it the CAPLine program and also the ones that have expressed interests in doing them. Please let me know what you find out.
Jerry Chautin is a business columnist and former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin