Time Running Out on ARC Loan Program

By PlanetLaundry staff | Mar 12, 2010

For the many laundry owners in need of credit or loans, another funding option may soon be slipping away.

More than 6,000 small-business owners have received an “America's Recovery Capital” loan, offered by the Small Business Administration as part of last year's stimulus package. The ARC loans, designed to help distressed businesses, are capped at $35,000 and are interest-free to the borrower, who has a one-year grace period before starting the repayment process and then another five years to completely pay the principal.

But other small businesses hoping to secure an ARC loan may need to act fast.

"We are averaging in the neighborhood of 145 to 150 loans a week, which puts us on track to see funds for the program run out in the August to September time frame," said SBA spokesman Jonathan Swain.

The SBA anticipates approving a total of 10,000 ARC loans from participating lenders and credit unions. Less than half of those remain.

One of the toughest parts of the process is finding a participating lender. Even though more than 1,100 lenders, including big banks such as JPMorgan Chase and Wells Fargo have jumped on board, most participants are smaller community banks based in the Midwest. And some of the largest small-business lenders, such as Bank of America, have declined to take part.

A Bank of America spokesperson said the company evaluated the program, but in the end felt it could "help small-business owners in other ways."

ARC loans can only be applied to pay down existing debt such as other loans, accounts payable and credit cards.

ARC loans are designated for small companies that fall within specific parameters. The business must demonstrate financial hardship, such as a 20 percent drop in annual sales, frozen credit lines and other indicators that usually deter lenders. However, the business must also be viable, by showing past profitability in one of the last two years and projected future financial stability that ensures repayment of the loan.

"The ARC loan is not for everyone, it's just a bridge loan," said the SBA's Swain.

In general, small businesses have come not to expect much from banks in the downturn. Only 40 percent of businesses that tried to borrow last year had all their credit needs satisfied, according to a recently released National Federation of Independent Business survey of 750 small employers. Among those who didn't secure funding, nearly three-quarters say the money would have been used to help cash flow.

The SBA created the ARC program with a number of incentives to attract lenders. For instance, the SBA placed a 100 percent reimbursement guarantee on the loan in case the borrower defaults and will pay the loan's interest on behalf of the borrower.

But lenders are wary of the ARC program because of its arduous paperwork and its relatively low return given that the loans are so small.

Furthermore, because the specifications for qualifying businesses are so narrow, many lenders fear the SBA will reject the guarantee if it finds error with the bank's assessment of the business. Because the Office of Management and Budget has projected a 56 percent default rate with the loans, many lenders are hesitant to take a chance.

Source: The Wall Street Journal