The SBA 7(a) Working Capital Pilot Program (WCP) is a dynamic new initiative designed to empower small businesses with enhanced access to capital.
As a pilot loan program under the existing 7(a) loan framework, the 7(a) WCP introduces monitored lines of credit, tailored specifically to meet the diverse financing needs of growing small businesses.
Engineered to be a versatile financial tool, the 7(a) WCP aims to:
Support a wide range of financing needs essential for business growth.
Combine the best features of existing 7(a) line of credit options.
Provide funding for both domestic and export-related purposes.
Who Can Benefit the Most from the SBA 7(a) Working Capital Loan Pilot Program?
The SBA 7(a) Working Capital Loan Pilot Program is particularly advantageous for small businesses that meet the following criteria:
Access to Lines of Credit Up to $5 Million: Businesses can secure substantial funding to fuel their growth.
Industry Focus: Ideal for companies in manufacturing, wholesale, or professional services.
Established Business History: Requires at least one year of operational history.
Financial Readiness: Businesses must be able to produce timely and accurate financial statements, along with accounts receivable, accounts payable agings, and inventory reports.
Growth-Oriented Needs: Perfect for those looking to fulfill large contracts or projects, or borrow against accounts receivable or inventory.
This program is a game-changer for businesses that may otherwise face limited options when seeking a line of credit. Traditionally, businesses have had to:
Wait for Two Years of Tax Returns: This is often required to qualify for a traditional bank line of credit.
Turn to Cash Advance Companies: These companies offer lines of credit with interest rates typically around 20% or higher, making them a costly alternative.
The SBA 7(a) WCP offers a more accessible and affordable solution, providing businesses with the capital they need to thrive without the long waits or exorbitant costs associated with other options.
Understanding the Terms of the SBA 7(a) Working Capital Loan Pilot Program
The SBA 7(a) Working Capital Pilot Program offers flexible terms designed to meet the diverse needs of small businesses:
Maximum Loan Amount: $5 million
Maximum Loan Term: 60 months
Interest Rates:
The interest rates for the 7(a) WCP are tiered based on the loan amount:
$50,000 or less: Cannot exceed the base rate + 6.5%
$50,001 - $250,000: Cannot exceed the base rate + 6.0%
$250,001 - $350,000: Cannot exceed the base rate + 4.5%
$350,001 and greater: Cannot exceed the base rate + 3.0%
As of August 2024, time of writing this blog the base rate is 8.5%
Important Considerations:
Pre-Disbursement Changes
One notable feature of the 7(a) WCP is the flexibility offered to borrowers regarding interest rate changes prior to the first disbursement. After loan approval, but before any funds are disbursed, the lender may adjust the initial note rate. This could include changes to the base rate, the spread over the base rate, or switching from a fixed rate to a variable rate (or vice versa). However, any such change requires the borrower’s written consent, separate from the execution of loan documents, and the lender must notify the LGPC or make the change through E-Tran Servicing.
Example: Imagine an SBA-guaranteed loan was initially approved with a variable interest rate. If the Prime Rate changes before the loan is disbursed, and the borrower prefers a fixed rate, the lender can accommodate this request—provided the selected fixed rate is reasonable.
Additionally, it's important to note that WCP loans are self-liquidating. This means that the conversion of trading assets to cash is the primary source of repayment. If the lender's financial analysis or field exam reveals that the applicant lacks reasonable assurance of timely repayment through sales-to-cash conversion or does not have the necessary controls to manage an asset-based loan, the loan request must be declined. This decision stands regardless of the collateral available or any outside sources of repayment.
What are the Eligible Uses of Proceeds for the SBA 7(a) Working Capital Loan Pilot Program?
The SBA 7(a) Working Capital Pilot Program (WCP) offers flexible financing options that can be used for a variety of business purposes.
Here’s how the loan proceeds may be utilized:
Working Capital Based on a Borrowing Base Certificate: Ideal for businesses needing capital to manage their day-to-day operations.
Project-Based Working Capital: Supports funding for direct costs like materials and labor for specific projects or transactions before the final shipment.
Government Contract Support: Provides working capital for businesses engaged in federal, state, or local government contracts. An assignment of proceeds is required unless: The term of the financed contract is 12 months or less, or there is a successful track record between the borrower and the contracting authority on similar contracts. A “successful track record” means that both parties have met their contractual obligations satisfactorily in prior arrangements, and the current contract is of similar size, value, and scope.
Post-Shipment Accounts Receivable Financing: Offers financing for accounts receivable after goods have been shipped.
Support for Performance Standby Letters of Credit: Helps businesses secure letters of credit related to short-term projects.
Temporary Advances Against Tax Credits or Rebates: Provides temporary advances against federal or state tax credits or rebates, once earned and confirmed by the lender. It's important to note that this applies to specific tax rebates, not income tax refunds.
Debt Refinancing: Allows businesses to refinance existing debt, freeing up cash flow for other business needs.
What are the Credit Standards for the SBA 7(a) Working Capital Loan Pilot Program?
Aside from common sense Good Personal Credit. The SBA 7(a) Working Capital Pilot Program (WCP) has established credit standards to ensure that loans are granted to businesses with a strong potential for success.
Here’s what lenders need to know:
Underwriting Requirements
Transaction-Based vs. Asset-Based Loans: Lenders must clearly specify whether the loan request is for a Transaction-Based loan (single or multiple transactions) or an Asset-Based loan. This distinction helps in assessing the appropriate level of risk and structuring the loan accordingly, so you as a business owner must be clear about the type of loan that you want.
Credit Analysis
Before a loan is approved, the lender’s initial credit analysis must include the following key elements:
Use of Proceeds: A detailed explanation of the loan's purpose, including specific information about the underlying transaction(s) that necessitate the loan. If the borrower is engaged in exporting, the analysis must also outline the countries where the buyers are located.
Credit Availability: An indication that the applicant does not have credit available elsewhere on reasonable commercial terms from non-federal, non-state, or non-local government sources.
Business Overview: A description of the nature of the business, including the length of time it has been operating under current management. If applicable, this should also include an assessment of the management team’s experience in the industry or related fields.
Export Experience (if applicable): If the applicant plans to use the line of credit to support exports, the analysis should include:
The dollar amount of revenues generated or expected to be generated by export sales and the percentage of total revenue.
Measures used to mitigate international credit exposure, such as trade credit insurance or letters of credit.
Principal or proposed export markets.
Proposed or established export customer relationships.
These rigorous credit standards ensure that loans are granted to businesses with a clear plan and the capacity to repay, making the SBA 7(a) WCP a valuable tool for sustainable business growth.
What Financial Information will be Reviewed in the SBA 7(a) Working Capital Loan Pilot Program?
When applying for the SBA 7(a) Working Capital Pilot Program (WCP), lenders will conduct a thorough review of the applicant's financial information to assess the viability of the loan. Here’s what the review process entails:
Financing Relationships (We can help you get the right ones)
Lenders will discuss the applicant’s existing financing relationships, including:
Summary of Debt: A comprehensive overview of all short- and long-term debt relationships, including revolving lines of credit or other term debt credit facilities. This summary should describe the purpose of the debt, payment structure, and any collateral involved.
Standby Debt: Debt on standby (e.g., with terms allowing no payments or interest-only payments) will be examined. Lenders will assess whether the standby debt permits interest payments, including the amounts, frequency, and conditions under which such payments might be halted.
Government-Guaranteed Financing: Identification of any SBA or other government-guaranteed financing.
Historical Financial Analysis
Lenders will analyze the applicant’s financial performance over the past two years, including:
Financial Statements: A review of the applicant's two most recent years of historical financial information (e.g., tax returns or balance sheets with debt schedules and income statements) and an interim statement.
Cash Flow Analysis: An analysis of historical cash flow, including total debt service for the existing business, and a calculation of Operating Cash Flow (OCF), defined as earnings before interest, taxes, depreciation, and amortization (EBITDA).
Cash Flow Adjustments: Documentation of any additions or subtractions to cash flow, such as unfunded capital expenditures, non-recurring income, expenses, distributions (including for S-Corp taxes), rent payments, owner’s draw, and global cash flow analysis that considers significant affiliate businesses.
Debt Service and Projections
Debt Service (DS): Defined as the future required principal and interest payments on all business debt, including new SBA loan proceeds.
Projected Cash Flows: Lenders will calculate debt service coverage for the 12 months following the first disbursement. This calculation will be based on OCF(Operating Cash Flow), EBITDA, and DS, and will include an analysis of the assumptions supporting the projected cash flow, such as:
Reasons for a reduced expense structure.
Justifications for revenue growth, such as new product lines, sales channels, or production facilities.
Industry analysis.
Asset-Based Loans
For asset-based loans, the lender will perform a financial analysis of the collateral securing the WCP loan.
This will include addressing any remarks or findings from the field examination.
Financial Ratio Benchmarks
Lenders will calculate and assess the following financial ratios, which are significant for the business and industry:
Current Ratio
Debt/Tangible Net Worth
Debt Service Coverage
Inventory Turnover
Receivables Turnover
Payables Turnover
Any other ratios deemed significant by the lender will also be evaluated.
Collateral Analysis
If applicable, the lender will conduct an analysis of the collateral, which may include:
Risk Assessment: An evaluation of risks related to buyers, export destination markets, economic conditions, political factors, compliance, currency, and logistics.
Terms of Sale: Anticipated terms of sale for exports financed through the WCP loan.
Credit Insurance: Experience with credit insurance.
Collateral Quality: Analysis of the collateral's composition and quality in the proposed borrowing base, considering factors like:
The quality of the borrower’s customer base.
Concentration risks.
Delinquency volumes and trends.
Dilution.
Credit Experience
Lenders will also discuss their credit experience with the applicant and review both; business and personal credit reports.
Will it be Annual and Renewal Credit Reviews for the SBA 7(a) Working Capital Loan Pilot Program?
To ensure ongoing creditworthiness and compliance, the SBA 7(a) Working Capital Pilot Program (WCP) requires lenders to conduct regular reviews of the borrower's financial status:
Annual Review Requirements
At least once a year, and as part of any loan renewal process, the lender must:
Obtain Updated Financial Statements: This includes both year-end and interim financial statements.
Conduct a Full Credit and Collateral Review: The lender must thoroughly review the credit status and the collateral securing the WCP loan. This review must demonstrate that the applicant:
Is Creditworthy: The applicant’s financial health and credit history must reflect a strong ability to meet financial obligations.
Has Reasonable Assurance of Repayment: There must be a clear expectation that the applicant can repay the loan in a timely manner through the conversion of sales into cash.
Complies with WCP Program Requirements: The applicant must continue to meet all the criteria set forth by the WCP program.
Renewal and Disbursement Conditions
If the lender’s analysis fails to confirm that the applicant meets all three requirements—creditworthiness, reasonable assurance of repayment, and compliance with program requirements—then:
No Further Disbursements: The lender must cease any additional disbursements of loan funds.
Loan Renewal Suspension: The loan cannot be renewed until the applicant can demonstrate that they meet all the necessary requirements.
This diligent review process ensures that the WCP loans are continually serving the best interests of both the borrower and the lender while maintaining the integrity and security of the program.
What are the Service and Packaging Fees for the SBA 7(a) Working Capital Loan Pilot Program?
When applying for a loan under the SBA 7(a) Working Capital Pilot Program (WCP), it’s important to be aware of the fees that lenders may charge for packaging and other services:
Allowable Fees
Lenders are permitted to charge applicants reasonable fees that are customary for similar lenders in the geographic area where the loan is being made. However, there are specific guidelines to follow:
Fee Reporting: Regardless of the fee amount, whenever a lender charges an applicant or borrower a service or packaging fee, it must be reported to the SBA through E-Tran.
Hourly-Based Fees: Service and packaging fees must be charged on an hourly basis, with 8 hours equaling one day. Under the WCP, lenders are not allowed to charge these fees as a percentage of the loan amount. Examples of allowable fees include:
Field Examinations: Fees associated with the examination of the applicant’s field operations.
Document Preparation Fees: Costs related to preparing the initial loan approval documents.
Loan Renewal Document Fees: Charges for preparing documents related to the annual renewal of the loan.
What Eligible Lenders can provide the program?
Not all lenders can offer the SBA 7(a) Working Capital Pilot Program. However, 7(a) lenders with Preferred Lender Program (PLP) status under the Export Working Capital Program (EWCP) will automatically be granted PLP-WCP delegated authority, allowing them to provide this product. The best way to find them is by connecting with the right bankers through GeeGoals.
Partner with a Strategic Banking Ally
Navigating the complexities of SBA loan programs can be challenging, but you don’t have to do it alone. As your Strategic Banking Ally, Yosmel is dedicated to helping your business leverage the banking and lending industry to your advantage. Whether it’s securing the right financing or understanding the intricacies of the SBA 7(a) Working Capital Pilot Program, Yosmel is here to guide you every step of the way.
Better Banking = Better Lending = More Money = More Freedom.
Take the first step towards exponential growth for your business. Book an appointment with a Strategic Banking Ally today and unlock the power of strategic banking to fuel your venture's success.
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