(This column originally appeared in The Inquirer)

With interest rates at a more-than-20-year high, a slowing economy, and recent turbulence in the banking sector, getting a loan nowadays is more expensive — and in many cases more difficult — for small business owners. But there is one source of financing that has proved helpful: the Small Business Administration.

Through its network of banks and other lenders, the SBA guarantees fixed loans for eligible businesses that can be used for the purchase of equipment, inventory, and even other businesses at competitive interest rates and reasonable terms under its Section 7(a), 504 Microloans, SBA Express, and export loan programs.

This month, the SBA has launched yet another financing option, which could also prove popular, called the 7(a) Working Capital Pilot program (WCP).

Rather than a fixed loan, this program makes available a working line of credit for a business to draw down on its line, and pay it back, as it is able. A line of credit is among the most flexible and affordable ways for businesses to manage their working capital needs. Interest is charged only when the loan is in use, making it the most efficient way to access working capital.

“The SBA has expanded access to capital and increased small dollar lending over the past 3½ years,” said SBA Administrator Isabel Casillas Guzman in a news release. “Now, we are strengthening loan offerings through this new 7(a) Working Capital Pilot program to provide growth-oriented small businesses with competitively priced lines of credit to fund orders and projects as they scale.”

Chris Brown, a senior vice president and the director of SBA lending at Lancaster-based Fulton Bank, said it’s a great step forward.

“The program is very cost effective compared to other working capital programs,” he said. “It’s also extremely flexible. It helps lenders like us to add another tool to help more small businesses obtain the capital they need to fund their business.”

How a line of credit can help

With an available line of credit, a small business can get access to funds earlier than having to go through the process of applying and getting approval for individual loans. The new working capital line is collateralized against a company’s accounts receivable and inventory, and it’s available for businesses that need to finance both domestic and international transactions, something that was not as easy to do in the past.

“Many banks offer lines of credit, but this will allow us to expand the types of financing we provide to our small business customers,” said Tom Pretty, the head of SBA lending at TD Bank, a leading SBA lender with multiple locations in the Delaware Valley. “I’ve had customers that use the existing 7(a) fixed loan program for working capital, but this new program provides another option with greater benefits because it’s not a fixed amount and can fluctuate based on a company’s needs.”

Small businesses can open a line for up to $5 million with a payback of 60 months. Interest rates range from 3% to 6% above a “base rate” (generally the bank’s prime rate) with the lowest rate being available for lines over $350,000. Those rates may seem high, but they’re much more affordable than the 18%-30% that businesses can pay when they use credit cards for similar transactions.

Cheaper than a credit card

According to a study from JPMorganChase, credit card financing remains among the most popular financing options for small businesses; 79% of small employers had credit cards that were used for business purposes. The WCP program aims to provide a similar solution at a much lower cost.

“Because of the SBA guarantee, we can provide capital to our small business customers with lower risk to us,” said Pretty.

The new working capital line is still in its pilot phase and not available for everyone. Eligible companies — including those where funds are to be used to acquire their business — must show a history of 12 full months of operations. Timely delivery of financial statements, especially ledgers showing accounts receivable and inventories, are regularly required. Business owners can also expect their bank to perform due diligence on their operations by reviewing files such as tax returns, corporate filings, lease and rental agreements, and other important business documents, both when applying for the program and continuously while the line of credit remains open.

For businesses able to meet these requirements, the new program will offer yet another way to finance their growth, even as interest rates remain high.

“We’ve definitely seen an increase in demand for SBA loans,” said Brown. “This program is likely to be very popular with our customers.”