Asset-Based Lines of Credit

April 13, 2006

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Asset-based lines of credit are available through the CAPline program as an SBA loan guarantee on a term commitment, up to five years, for a revolving line of credit to a small business. 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. A borrower cannot simply draw down the line of credit (borrow the maximum amount) and make only interest payments until maturity ("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.

Asset-based lines of credit were previously available through the SBA's "Greenline" program; unfortunately, the Greenline program was expensive for banks to administer because of the need for continuous monitoring of each business's accounts receivable and inventory. Few private lenders had quality tracking systems that met the SBA's stringent standards. For smaller lines of credit in particular, it was not cost efficient for the banks to perform this monitoring, and it was also too expensive to farm out the work to private firms.

Now, under the CAPlines program, the SBA divides asset-based lines of credit into two categories: small asset-based lines (under $200,000), and 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.

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 CAPline 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.