The Small Business Administration (SBA) has launched its new 7(a) Working Capital Pilot (WCP) program, which will take effect on August 1, 2024. SBA published notice of the WCP in the Federal Register on July 15, 2024 at Federal Register :: 7(a) Working Capital Pilot Program and is accepting comments currently through August 14, 2024. The WCP program is a pilot loan program within the 7(a) loan program and will remain in effect through July 31, 2027, at which time SBA will decide whether the program should be made permanent. SBA has issued a 7(a) Working Capital Pilot Program Guide (Program Guide) which is available at 7(a) Working Capital Pilot (WCP) Program Guide | U.S. Small Business Administration (sba.gov).
Benefits
Lines of credit, rather than term loans, provide a flexible and cost-efficient way for businesses to manage their working capital needs. With a line of credit, a Borrower can draw down on the line when working capital needs arise, and only pay interest when the loan is being utilized. The WCP program is intended to support both transaction-based project lending (on either a revolving or non-revolving basis) as well as asset-based lending and can be used for both domestic and international needs.
The 7(a) loan program currently has four different line of credit programs, including the 7(a) SBA Express program, the CAPLine program, the Export Express program and the Export Working Capital program (EWCP), but each of these programs has its limitations (e.g., small loan limits, export use only, expensive fee structure, difficulty of administration). The WCP program is intended to draw on the strengths of each of these programs and make working capital loans more efficiently and effectively.
Eligible Uses of WCP Proceeds
WCP loan proceeds may be used for, among other things, working capital based on a borrowing base certificate, working capital used for direct material and labor for a project, working capital for government contracts, temporary advances against certain federal or state tax credits or rebates, and certain eligible debt refinancing. See the Program Guide for a complete list of eligible uses of WCP proceeds as well as exclusions.
Loan Terms
Unlike the SBA Express and Export Express programs which are capped at $500,000, WCP loans have a maximum loan amount of $5 million. WCP loans of $150,000 or less may have an 85% SBA guaranty, and WCP loans greater than $150,000 may have a 75% guaranty. Loans may have a term up to 60 months. WCP loans are still subject to the standard regulatory maximum interest rates for SBA loans, but in addition to the use of Prime and SBA’s Optional Peg Rate, WCP loans may also utilize an interest rate based on the Secured Overnight Financing Rate (SOFR) plus 3% as a base interest rate.
SBA Guaranty Fees
SBA guaranty fees under the WCP program, also referred to as SBA Upfront Fees, are modeled after the 7(a) EWCP program. The SBA Upfront Fee “operates as a function of time, charging a proportional amount for each year the facility is in use.” Loans with a longer loan term will have proportionally higher SBA Upfront Fees than loans with a shorter loan term.
SBA Requirements
The WCP program is subject to all 7(a) eligibility, program and regulatory requirements. Additionally, WCP loans are only for businesses that have been in operation for at least 12 full months prior to application and businesses that can produce timely and accurate financial statements, accounts receivable and accounts payable agings, and inventory reports. Further, Lenders must obtain updated Borrower financial statements annually and perform a full credit and collateral analysis annually, or as part of any renewal, to document that the Borrower is creditworthy, is reasonably likely to repay the loan in a timely manner and is compliant with all WCP program requirements.
WCP Lenders
All participating 7(a) lenders in good standing are authorized to make WCP loans, but not necessarily utilizing delegated authority. Lenders who are authorized to make PLP delegated EWCP loans are automatically authorized to make WCP loans using delegated authority. All other 7(a) PLP lenders may apply for PLP-WCP delegated authority. SBA has issued SBA Form 2534 WCP Addendum to SBA 1919, which Lender must complete and submit electronically to SBA. The information from the SBA Form 2534 must be submitted into E-Tran.
Regulatory Waivers
SBA has authority to waive certain regulations for a limited period of time to test the pilot program. Therefore, SBA is waiving the regulation at 13 CFR 120.130(c) that prohibits loan proceeds to be used for revolving lines of credit except under SBA’s 7(a) CAPLine and EWCP programs. SBA is also waiving 13 CFR 120.452(a)(2) that prohibits Lenders from making a PLP 7(a) loan that reduces its existing credit exposure to a borrower. This will allow lenders with PLP WCP authority to make WCP loans to refinance an existing same-institution SBA Express loan into a WCP loan so a borrower can transition from an SBA Express line of credit to a monitored WCP line of credit with larger lending limits and a higher SBA guaranty percentage.
See the Program Guide for detailed guidance on WCP eligibility, collateral, credit and monitoring requirements. For questions regarding the 7(a) Working Capital Pilot Program and other SBA programs, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.
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