A primer on the SBA’s new 7(a) working capital pilot program: Another financing option for small businesses

As small businesses grow, they require access to working capital - the capital required by a business to meet its day-to-day expenses. Access to working capital is usually accomplished through a line of credit which gives the business sufficient liquidity to take on new business opportunities. The revolving nature of a line of credit provides the most efficient means for a business to control its cash flow and manage the associated debt service and interest expenses related to the line of credit.  

The U.S. Small Business Administration (SBA) has historically offered various types of 7(a) loans for small businesses:

• Standard 7(a) loans – Loans that are greater than $500,000 and capped at $5 million.
• Small 7(a) loans – Term (non-revolving) loans that are $500,000 or less.
• Express loans – Loans that are less than $500,000 and SBA lenders have delegated authority to process, close, service, and liquidate the loan without SBA review.
• Export Express loans – Loans that are less than $500,000 (revolving lines of credit or term loans) to develop the export side of a company’s business.
• 7(a) Export Working Capital Program loans – Loans up to $5 million for businesses that generate export sales and need additional working capital to support these sales. 
• 7(a) International Trade loans – Loans up to $5 million to acquire, construct, renovate, modernize, improve, or expand facilities and equipment to be used in the United States to produce goods or services involved in international trade and to develop and penetrate foreign markets, and for working capital for export transactions.
• CAPLines loans – A series of permanent loan programs under the SBA 7(a) program that allow a small business to take out loans specifically for seasonal or cyclical needs. There are four subsets of CAPLines loans –

1. Contract loans - All of the funds from the CAPLines contract loan must be used to cover costs related to specific contracts, including any subcontracts, purchase orders, or other overhead related to the contracts in question. The maximum loan amount for the contract loan is $5 million, with a maturity date of no greater than ten years.
2. Builder’s loans - The small business must be a construction contractor or homebuilder. The SBA requires that borrowers be able to demonstrate their ability to complete projects, have the staff to keep management on-site at all times, perform major and timely renovations, and be successful bidders. Similar to the contract loan, borrowers of the CAPLines builder’s line must use the funds from the loan for costs associated with the specific projects that are approved. The Builder’s Line loan is capped at $5 million and has a five-year maximum maturity date.
3. Seasonal Line of Credit loans - Small business owners must use the funds in ways that directly relate to seasonal needs, and not in ways that support the business during non-seasonal times. The Seasonal Line of Credit loan is typically used for inventory and temporary labor. This loan is capped at $5 million.
4. Export Working CAPLine loan - A line of credit for short-term needs and cyclical growth. The maximum maturity date is 10 years.

On August 1, 2024, the SBA launched a new 7(a) Working Capital Pilot Program (WCP).  The WCP is designed to provide small business owners with greater flexibility and access to working capital through a line of credit of up to $5 million. The WCP is targeting borrowers that have been in business for at least one year and are slightly larger than the typical small business borrower – perhaps falling between what would be considered business banking and middle market companies. Prospective borrowers for the WCP include those in industries that are capital intensive, like manufacturers and wholesalers. The SBA estimates approving approximately 270 WCP loans totaling $337 million in fiscal year 2025, with half of that volume being new business beyond existing SBA 7(a) loan programs. The WCP is set to expire on July 31, 2027.

Below are key points with respect to the WCP:

Loan terms:

Maximum loan size	$5,000,000
Maximum SBA guaranty %	85% for loans up to $150,000 75% for loans greater than $150,000
Maturity	Up to 60 months
Processing	Non-delegated authority Preferred Lender Program (PLP) - WCP Delegated Authority
Interest Rates	$50,000 or less: cannot exceed base rate (usually the current prime rate) + 6.5% $50,001 - $250,000: cannot exceed base rate + 6.0% $250,001 - $350,000: cannot exceed base rate + 4.5% $350,001 and greater: cannot exceed base rate + 3.0%

Applicants must have a history of at least 12 full months of operations prior to filing an application for a WCP loan.  If the WCP loan is for an acquisition, the acquiring borrower must have a history of 12 full months of operations prior to filing an application for the WCP loan. The applicant must be able to produce timely and accurate financial statements, accounts receivable and accounts payable aging reports, and current inventory reports.

Purpose:

SBA Lenders will be able to use the WCP to issue revolving lines of credit with the flexibility to structure both asset-based and transaction-based facilities.  

Transaction-Based Loan: A line of credit that can support a single transaction or multiple transactions during the term of the loan.  A Transaction-Based WCP loan may be established on a revolving or non-revolving basis based on the needs of the business.  Monitored pre-shipment financing allows a business to purchase materials, components, or other related expenses necessary to start a project. 

Asset-Based Loan (ABL):  ABL loans are revolving lines of credit supported by a borrowing base certificate which measures the collateral position of the borrower -- accounts receivable and inventory.  ABL loans are typically committed for 12 months and then renewed or re-issued annually. The SBA lender must obtain updated financial statements from the borrower annually and perform a full credit analysis annually, which will coincide with any applicable renewal term of the ABL loan.  The SBA guaranty helps SBA WCP lenders support enhanced advance rates:

• Domestic Accounts Receivable: Maximum advance rate is 85%, 90% if insured.
• Foreign Accounts Receivable: Maximum advance rate is 90% if insured or backed by a letter of credit. Lenders may advance 70% on open account foreign accounts receivable (capped at 15% of the line).
• Inventory: Maximum advance rate is 60%.

SBA Guaranty Fee Structure:

The annual guaranty fee is the foundation of the WCP, allowing SBA lenders the means to structure revolving lines of credit in 12-month increments.  The WCP has a maximum loan term of 60 months which represents the total commitment period.  The SBA lender may set independent loan maturities (typically on an annual basis) during the loan term which will coincide with the annual review process.  SBA lenders may issue a new WCP loan at the end of the 60-month maximum term, or at any other point during the loan term, as proceeds from the new WCP can be used to pay off the initial WCP facility.

Benefits of the WCP:

1. Borrowers will benefit from the addition of work-in-process in the borrowing base and higher advance rates.
2. The WCP can be used to fund upcoming projects.
3. If a borrower receives a large order and needs to purchase components or materials for it, the WCP can provide financing for those needs.
4. The WCP will benefit borrowers in industries that are capital intensive.

Cons of the WCP:

1. In order to qualify for the WCP loan, a borrower must be a for-profit business and have required financial statements and business plans.
2. The application process may take longer than the application process for historical SBA 7(a) loans.
3. The WCP requires the granting of liens on the borrower’s assets as collateral for the loan and personal guarantees of the loan are required from owners of 20% or more of the equity of the borrower.