On June 6, 2024, the SBA announced the 7(a) Working Capital Pilot Program. The Working Capital Pilot Program or WCP offers a "a newly structured line of credit" that will be made by 7(a) lenders and will be backed by the SBA, which will allow banks and non-bank SBA lenders extra risk protection while also providing small business owners greater flexibility in lending options.
How Do SBA Loans Work?
SBA loans are loans that banks and non-bank lenders make directly to small business owners. The reason they are called SBA loans is because the government, via the Small Business Administration (SBA), provides rules and regulations, which, if lenders comply, result in the government guaranteeing a portion of the loan made by the lender.
For example, if a bank makes a $200,000 loan and complies with all of the rules in the SBA standard operating procedures (SBA SOP), then the SBA says that they will guarantee up to 75% of the loan. Since small business loans can be risky (only 1 in four make it to 15 years), this guarantee incentivizes lenders to make loans to small businesses and thereby help bolster the overall economy.
Meeting the Needs of Small Business Owners
SBA Administrator Isabel Guzman said, "Small businesses require working capital through competitively-priced lines of credit to operate efficiently and fund their pursuit of growth opportunities – which is why the SBA is meeting the market needs, especially in a higher interest rate environment, by adding the 7(a) Working Capital Pilot Program to our suite of loan products."
She continued by saying, "As the Biden-Harris Administration doubles down on its commitment to help entrepreneurs achieve their American Dreams of business ownership, this newly structured line of credit will empower more small businesses to pursue opportunities from President Biden’s Investing in America agenda, create jobs, and grow their businesses."
Do Small Businesses Need Working Capital?
As banking professionals, we believe this program will be extremely beneficial for business owners. Often, we see businesses who, instead of a term loan that will have a large disbursement of cash all at once followed by monthly principal and interest payments, the WCP will offer businesses the chance to only use money as they need it in the form of a line of credit. This can be very beneficial for businesses with high inventory turn over and other high turn over businesses that get payments from customers every 30-60 days.
The debt structure can be very useful for a business that is, for example, seeking money for an asset purchase or real estate purchase, but also needs money to expand its inventory or product offering. Utilizing a line of credit would allow a borrower to meet its needs while also minimizing the monthly payments required for any debt it takes on.
Benefits of the 7(a) Working Capital Pilot Program
Specifically, the 7(a) Working Capital Pilot Program will significantly expand the loan programs offered by the SBA by adding a credit product with an innovative fee structure which will incentivize lenders to participate in the program and offer more flexibility to borrowers.
Here are some of the benefits:
- The Transaction-Based WCP will allow small businesses to fund individual projects or orders, enabling access to working capital earlier in the sales cycle.
- Asset-Based WCP loans will provide small businesses with a cost-effective way to access working capital against their assets, allowing small businesses to better manage their cash flow while also supporting supply chain resiliency.
- For small businesses participating in the global marketplace, the WCP is designed to support both domestic and international sales under one facility.
- For small businesses participating in the Home Energy Rebate Programs funded by the Inflation Reduction Act, the WCP provides a new solution to help companies ramp up capacity and mobilize service.
When Does it Take Effect?
The Working Capital Program will launch this year (2024) and more details will come out as the program is implemented. Visit www.sba.gov for more details.
Our Take
We think this new working capital product will be a great help for small businesses. Previously, working capital lines of credit were hard to come by at reasonable interest rates. However, now this will allow for even more options for small business owners to increase growth and keep more money in their own pockets.
We believe this product is exactly what is needed in the market right now. We try to find and provide what we consider, based on our experience, the best small business lending products and this has the potential to become exactly what small businesses owners need in today's economy.