CAPlines: Contract Lines of Credit

April 13, 2006

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Previously, SBA assistance was available to help small businesses with short-term financing of the labor and material costs of a specific, assignable contract. The current CAPline program adds the option of a revolving feature.

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; however, 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 and/or outside assets and secured personal guaranties. Applicants can apply to the lender prior to, or after, a contract has been received. However, detailed information on the bid or contract must be available at the time of application.