Today, the average annual percentage rate on a new small-business credit card is 17.82%, but that hasn’t stopped roughly 25% of businesses from using credit cards for short-term transactions to keep the lights on, according to several studies.
At the same time, applying for a loan to bridge a short-term business need isn’t exactly efficient, either.
To reduce some of these headaches, the U.S. Small Business Administration has launched a new “working capital” pilot program that the agency says will provide approved small businesses access to a line of credit to fund a range of needs from short-term contingencies such as payroll and inventory to one-time capital projects.
Joseph Raycraft, SBA export finance manager for the New England region, says the pilot could be the ticket to expansion for many Rhode Island businesses.
“It is there to help these companies grow and take on more projects,” he said.
The working-capital program is based on the SBA’s long-established 7(a) loan program. But rather than loans, borrowers can tap lines of credit of up to $5 million – collateralized against the company’s accounts receivable and inventory – with interest charged only when the funds are used.
According to the agency, the 7(a) program backed over 57,000 loans totaling $27.5 billion in 2023, a 7% increase from 2022; a majority for less than $350,000. And the SBA database shows Rhode Island lenders issued 228 traditional 7(a) loans in fiscal 2024, totaling $73.2 million. The average loan was $321,000.
However, SBA administrators have acknowledged that the existing programs haven’t always reached the participation rates they had hoped for.
Raycraft says the 7(a) working-capital pilot program’s flexibility should make it more popular. He is currently setting up informational meetings with Rhode Island trade organizations, even planning to contact some larger businesses directly, such as tenants of Quonset Business Park.
One distinct feature of the new program is that it offers deferred first loan payments.
“This setup is nothing new in commercial finance,” Raycraft said. “We just took an updated approach to modernize and build around an existing product.”
Available to businesses that have been in operation for a minimum of 12 months, lines of credit of $150,000 or less will have an 85% SBA guaranty; loans greater than $150,000 will run at 75%. Lenders can authorize loan terms of up to 60 months.
The annual fee and maximum interest rates will be based on the prime rate plus 3% to 6.5%, translating to between 12% and 15% right now, according to the agency.
SBA National Director of Trade Finance Daniel Pische said the initiative is “an important tool to helping manage the current rate environment we are in.”
He says financial institutions will have most of the initial oversight responsibility, similar to other publicly backed asset-based borrowing structures.
“We want to make sure the preferred lending authority knows how to monitor [approved applicants] because that is going to eliminate the risk of some of these going bad,” Pische said. “Because if you don’t closely monitor them, things can get out of hand very quickly.”
As many traditional banks have slowed their lending, the SBA database shows an influx of online and financial technology banking institutions have filled some of the void in recent years.
The number of approved SBA lenders in Rhode Island increased from 37 in 2023 to 42 in 2024. All newcomers were out-of-state or online banks.
Raycraft says this development came up in a stakeholder meeting in Maine over the summer.
“For the most part, SBA lenders have always been local or regional. But then you see three or four out of state. People were wondering how they are getting these deals,” he said.
In addition to the SBA’s online lender match tool, Raycraft thinks it’s a matter of resources.
“The local banks do these [loans], but it can be time-consuming,” he said. “I think these fintech banks probably have a team of a dozen people where all they do is follow up on these leads and keep pounding. Banks don’t really like to do that.”
Administration officials previously said they expected to approve about 270 working-capital pilot loans with a total value of about $337 million through 2025. Though the program is scheduled to expire in July 2027, Raycraft says it could be extended further depending on the program’s popularity.
The program started Aug. 1, and there have been 14 loans closed to date nationally, as of Sept. 3.
Data for Rhode Island was not immediately available, but Raycraft is confident some deals will be closed in the Ocean State once the agency gets the word out.
“The value I see being applied ... locally here in New England would be in manufacturing and private and government contractors,” he said, adding that the threshold to make it worthwhile is around $500,000 or more.
“That’s where we expect to get the most volume,” he said.
But Raycraft has also received inquiries from other industries with operators facing challenges accessing capital, such as those in the medical field, and even hospitality.
“Some of the conversations I’ve had so far have been outside of those industries,” he said. “I had a call with a fast-growing solar installation company that needs working capital because they need to buy inventory like solar panels and electrical components. They might get something upfront, but for the most part, they don’t get paid until they get a certificate from the utility to confirm that thing is working.”
In Rhode Island, where businesses that have 10 employees or fewer constitute 93.9% of all companies, the pilot program could be a means toward expansion.
“This is also a good relationship-building tool,” Raycraft said. “I think it will help local lenders as well. But this is for Rhode Island businesses.
“This is going to have a much further reach,” he said. “We’re agnostic. We will do anything.”
