Starting your own business can be a rewarding yet difficult prospect, especially when you consider that only 80% of small businesses survive past the first year — and the numbers don’t get better from there.
What’s even more surprising is that fewer than 50% of those small businesses are able to meet their ongoing financial needs, requiring many to seek alternative lending options to keep the doors open.
Since access to capital plays such a significant role in the success or failure of a small business, one way to make sure your company is better positioned on financially stable ground is with a U.S. Small Business Administration revolving line of credit.
Not only can an SBA revolving line of credit help your business stay sharp and nimble in the face of short-term lulls between money coming in and money going out, it may also be a more affordable and flexible option in the long term.
So, let’s get down to brass tacks and find out if an SBA revolving line of credit is the right fit for you and your small business.
What is an SBA revolving line of credit?
In simplest terms, an SBA revolving line of credit is a flexible form of short-term financing that offers small businesses access to a predetermined amount of capital that can be borrowed (or drawn from) as needed, repaid with minimum payments, and then borrowed again.
In other words, a revolving line of credit resets as the credit line is repaid, thereby allowing business owners to continually borrow up to their set credit limit — similar to a business credit card.
How does an SBA revolving line of credit differ from a traditional line of credit?
While both a revolving line of credit and a traditional line of credit are viable financial options that allow the borrower access to a set amount of capital upfront, there are differences that should be taken into consideration.
- With a revolving line of credit: the borrower can continually access the funds up to the set credit limit. Once those borrowed funds are repaid, the available line of credit will then be replenished and available to be reused until either the borrower or the lender close it.
- With a traditional line of credit: the borrower is given access to a non-revolving line of credit that is typically a one-time arrangement. After the allotted credit limit has been spent and repaid in its entirety, the account is closed.
Why consider an SBA revolving line of credit over a traditional SBA loan?
When it comes to financing your business, there are plenty of loan options to choose from, including an SBA loan and an SBA revolving line of credit.
- SBA loans: An SBA loan is a long-term loan that typically offers lower down payments and favorable terms compared to conventional term loans. It’s a great option for businesses that may be experiencing challenges getting approved for traditional financing, or for businesses looking to expand, purchase equipment, or obtain working capital. With an SBA loan, you are provided the funds in a lump sum and expected to pay it all back with interest over a termed period.
- SBA revolving line of credit: An SBA revolving line of credit tends to be a better option for businesses that may be a little more stable and simply need help managing cash flow during slower seasons or need capital available for unexpected expenses. With an SBA revolving line of credit, you only pay interest on the amount of money you draw from the funds available to you.
What types of SBA lines of credit are available to small-business owners?
SBA offers several fixed and revolving lines of credit options that are designed to meet your short-term, working capital needs. One of the most popular is the 7(a) Express Line of Credit that provides faster, streamlined funding by allowing lenders to approve, process, and close applications without SBA approval. Funds are available up to $500,000 with a maximum SBA guarantee of 50%.
Startup businesses can now apply for a companion revolving line of credit with an SBA 7(a) Small Loan under $150,000. Startups with less than a year in business are limited to 10% of the streamlined term loan amount ($15,000 or less).
What are some possible uses of an SBA revolving line of credit?
An SBA revolving line of credit is designed to provide small-business owners with continual access to working capital to cover a variety of working expenses. The uses could include:
- Cash flow management: Pay staff or retain employees during seasonal sales peaks and valleys.
- Unexpected expenses: Cover unforeseen expenses or take advantage of unexpected opportunities that require quick action.
- Inventory: Purchase inventory or cover the timing differences between inventory purchases and sales collections.
- Equipment: Make necessary equipment and supplies purchases.
- Marketing: Fund marketing and growth initiatives.
- Maintenance: Cover any necessary maintenance costs that arise.
What are the benefits of an SBA revolving line of credit?
Acquiring an SBA revolving line of credit can be very advantageous for startups and established businesses alike. Not only can a revolving line of credit be used to manage cash flow or cover unexpected expenses, it can also be especially beneficial if forecasting future revenue/cash flow is a challenge.
Other notable benefits include:
- Flexibility: Draw money in smaller increments as needed, when needed.
- Revolving credit lines: Replenish your available line of credit as you make repayments. Plus, the account stays open until either you or the lender close it.
- Lower interest rates: Benefit from lower interest rates while only paying interest on the money you draw.
- Longer repayment terms: Benefit from longer repayment terms to accommodate your specific business/cash flow needs.
- No prepayment penalties: There are typically no penalties assessed for paying them back early.
What are the eligibility requirements of an SBA revolving line of credit?
Ensuring you have a successful SBA application isn’t just a game of chance. That’s why doing a little homework along the way can’t hurt. The first thing to remember is SBA revolving lines of credit are underwritten similarly to conventional term loans, which means that familiarizing yourself with the standard SBA loan requirements, as well as any specific requirements unique to a particular loan program, will help you make sure everything is in order.
Additionally, you may also need to meet specific lender qualifications. Most lenders use the five C’s of credit to assess creditworthiness. These qualifications include a borrower’s credit history (character), their ability to repay the loan (capacity), their current amount of available cash that could be used to pay off a loan (capital), the value of their assets that could be used to pay off a loan (collateral), and the terms or economic factors that may impact the borrow (conditions).
How to apply for an SBA revolving line of credit?
Applying for an SBA loan or SBA revolving line of credit is an essential step toward solidifying your business’ potential for growth and sustainability. Zions Bank is proud to be an SBA-preferred lender and the top SBA 7(a) lender in Utah and Idaho. Our streamlined loan application for SBA term loans up to $150,000 comes with limited upfront documentation requirements, moving you closer to funding even faster.
To learn more or get started with an SBA revolving line of credit, visit Zions Bank online or stop by a local Zions Bank branch and speak with one of our experienced bankers today.
Content above is offered for informational purposes only and does not constitute tax, legal, financial, or business advice. Contact a specialist about your specific needs and circumstances. Content may contain trademarks or trade names owned by parties who are not affiliated with Zions Bancorporation, N.A. Use of such marks does not imply any sponsorship by or affiliation with third parties, and Zions Bancorporation, N.A. does not claim any ownership of or make representations about products, services, or content offered under or associated with such marks.
