SBA’s New Loan Program - ARC

Last month, the SBA got involved in the bailout business and rolled out a new loan program designed to help small businesses in need of immediate cash.  The American Recovery Capital program, or ARC, is the name of that program.  ARC is designed to guarantee loans up to $35,000 for qualifying small businesses.  These loans have no lender fees or interest.  As you can imagine, banks are not necessarily lining up to issue these loans.  Let’s try to look at this from a lender’s perspective.

First, how do you define a “qualifying” small business.  The SBA defines qualifying as follows:

“Your small business must be an established business, have financial statements demonstrating it was profitable in one of the past two years, and be able to project sufficient cash flow to meet current and future loan payments over a two-year period from loan approval.  ARC loans are not designed for start-up businesses.  

Examples of qualifying loans may include credit card obligations for your business, capital leases, notes payable to vendors/suppliers, Development Company Loan Program (504) first lien loans, other loans to small businesses made without an SBA guaranty, and loans made by or with an SBA guaranty on or after Feb. 17, 2009.”

OK, so these aren’t bottom of the barrel credit companies, but not exactly blue chippers either.  I believe it is safe to say that these companies would not be receiving any type of loan if it were not for the SBA program.

How about pricing?  Surely the banks will be compensated for lending money to clients that the SBA admits will have a “higher than average default rate.”  The SBA will pay prime + 2% to the lender for their trouble. (remember, they are interest free to the client for a period of time).  Banks will not receive principal back for the first year after disbursement, a feature that flies in the face of everything banks believe in.  Also, banks will have to absorb administrative and liquidation costs themselves.  Hardly motivation to put money to work.

I hope this program works.  But my gut tells me few loans will be established under this program, which is probably just fine for the banks.

This entry was posted on 8. July 2009 at 22:30 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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