Inside The Small Business Administration’s New Working Capital Pilot Program

The SBA has launched a new Working Capital Pilot Program. Representatives from the SBA discuss the program’s origin and development, lender and borrower requirements, and how the program will bring new lenders to the ABL market while complementing the product offerings of existing ABL and working capital lenders.

On August 1, 2024, the U.S. Small Business Administration (SBA) began accepting applications for the 7(a) Working Capital Pilot (WCP) program, which was designed to address critical gaps in the current small business lending landscape.

The program, developed through a collaboration between the SBA’s Office of Capital Access (OCA) and Office of International Trade (OIT), provides small and medium sized enterprises (SMEs) with more flexible and accessible working capital options.

“Having access to working capital is critical for small businesses,” Kathryn Frost, the SBA’s associate administrator in the Office of Capital Access, says, “as it enables growth and allows a company to take on transformational opportunities. The WCP has been engineered with the needs of small businesses in mind and is intended to support this vital area of our economy.

“The WCP has been active for just over two months, and it is already exceeding expectations in terms of market adoption. We’re pleased to see how enthusiastically the lending community has been embracing the program.”

ORIGIN OF THE PROGRAM
The SBA provides loan guaranties to participating lenders. If an SBA loan defaults, the SBA will reimburse the lender up to 75% of the loss amount on most programs and up to 90% for its export programs. “What that guaranty provides is the ability for the lender to expand their credit box, offer more flexible terms, or take on a small business a little earlier than they might normally. The borrower benefits by receiving competitive rates and terms on a loan that they may not have been able to get otherwise,” Ginger Allen, SBA’s chief of the 7(a) Loan Origination Policy Division in OCA, says.

Feedback from lenders who have been working with the SBA’s existing line of credit programs led to the WCP concept. According to Daniel Pische, national director of Trade Finance in the SBA’s Office of International Trade, lenders participating in the Export Working Capital Program (EWCP) sought greater flexibility since the program was limited to export transactions. This limitation often required lenders to structure multiple working capital loans to meet a company’s broader needs, creating inefficiencies and challenges for both lenders and borrowers.

“The concept for this program started with the need for a hybrid trade finance product,” Pische says. “I wanted to have a single loan solution that was an option for lenders, and that’s what the WCP is designed to be. To have a true hybrid trade finance facility, we needed the WCP to be able to support both domestic and international sales in any combination so that it can be used by companies who are just beginning to export.”

Most government guaranteed export finance programs, whether via the SBA or EXIM Bank, are limited to export orders, which Pische believes can be overly restrictive for SMEs.

“The Export Working Capital Program is a great product, but it is challenging to find the specific transaction that necessitates a dedicated export facility,” Pische says. By positioning the WCP to be used for both domestic and export purposes, it greatly expands its range of use which will allow lenders to support more small businesses.

DEVELOPMENT PROCESS
The WCP program is the result of years of evaluation and refinement. Since 2021, OCA and OIT have been working together to improve the SBA’s working capital options. One significant milestone in this journey was the introduction of a new guaranty fee structure for the EWCP in 2021, which simplified the documentation process and reduced the need for annual loan reissuances. This new fee structure was well-received by lenders and provided a foundation for further innovations to SBA’s loan programs.

“We conducted a series of lender listening sessions to understand their needs and challenges,” Allen says. “This feedback has been instrumental in shaping the WCP.” The sessions revealed a clear demand for a more flexible, lower cost working capital solution that could serve a broad range of businesses.

The SBA made the strategic decision to launch the WCP as a pilot program to facilitate more nimble adjustments and refinements based on real-time feedback from the market and participating lenders. The pilot approach gives the SBA the flexibility to test new ideas, gather data and make necessary changes before potentially rolling the program out on a permanent basis.

“From an SBA lender perspective, the Working Capital Pilot can be a build-around,” Allen says. “For the institutions that don’t have an asset-based desk or monitoring capabilities, this is a product that the lender can invest in to bring those functions online. The WCP will allow lenders to provide a full suite of lending products to keep their customers in-house. For lenders who work with revolving products, I believe they will see the WCP as an enhancement that can expand the ways they support growing small businesses.”

“We’re taking away all the excuses,” Allen says, adding that the program will incorporate the EWCP fee schedule built for a line of credit program with intervals ranging from one to five years and provide lenders with access to Pische’s team of knowledgeable export finance managers. “They’ll be available if lenders want to discuss individual projects, to help answer questions, or to structure transactions as needed.”

COMPLEMENTING EXISTING ABL & WORKING CAPITAL OPTIONS
Pische notes that the WCP program is a formula-driven product that will complement the existing working capital and asset-based lending products of those serving the market. The WCP, according to Pische, will support asset-based lenders in three ways:

1. Better Support for Inventory: Lenders will benefit from the addition of work in process and enable a greater inventory advance rate than what is typically available conventionally.

2. Expanding Project Financing Options: While asset-based lenders excel at leveraging receivables and inventory already on the balance sheet, the WCP can support upcoming projects. If a borrower receives a large order and needs to purchase components or materials for it, the program can provide financing for those needs separately.

3. Entry Point for New ABL Clients: When a small business outgrows their existing line of credit and is ready to move into an ABL product, the WCP program can help lenders establish guardrails as the company gets their reporting and accounting up to speed.

TARGET BORROWERS
The WCP program will be best suited for borrowers that have been in business for at least one year and that might be slightly larger than the typical small business borrower — perhaps falling between what would be considered business banking and middle market.

Prospective borrowers for the WCP include those in industries that are capital intensive, with manufacturers and wholesalers topping the list. For existing ABL lenders, the WCP’s transaction financing function could be a good option for project-oriented needs where funds are needed before they would ordinarily be available under a borrowing base.

LENDER REQUIREMENTS
All SBA 7(a) lenders can make WCP loans. For non-regulated lenders interested in participating in the 7(a) program, the SBA’s Office of Capital Access opened the application period for new Small Business Lending Companies (SBLC) from Sept. 2, 2024, to Oct. 15, 2024. SBA similarly opened the application period for Community Advantage SBLCs (CA SBLCs) from Sept. 2, 2024, to Dec. 20, 2024. Details on the application process can be found in the Federal Register at 89 FR 65174.

While the WCP program could be a good reason for regulated lenders to begin working with the SBA, Allen says banks that already work with the SBA will be in the best position to hit the ground running. “It’s an SBA loan and an ABL loan simultaneously, so you really need to have both operating structures built out,” Allen says.

To begin offering the WCP program, the bar is set at standard limits for obtaining delegated status, and lenders must demonstrate that they have an existing portfolio and a sound operational structure. SBA lenders that do not have an existing ABL department must demonstrate that the product will be supported by an operational team — not an individual lender who is solely responsible for the administrative functions.

Regulated lenders interested in the WCP program can reach out to Pische and his team of export finance managers to learn more about the onboarding process. To learn more about WCP, visit SBA’s Training on Demand page to access recorded trainings and the downloadable Program Guide. •

Rita E. Garwood is editor in chief of ABF Journal.