National Clothesline

Unlike the popular cash for clunkers government give-away, there have been relatively few takers for the government’s loan program designed to help struggling small businesses. The program itself has been a clunker so far.

Known as America’s Recovery Capital (ARC), the program lets business owners apply to a bank for an interest-free loan, the proceeds of which can be used to retire existing debt. The loans in essence help current cash flow by postponing debt payments.

The program is scheduled to last through September, 2010, or until the money runs out. Off to a slow start, it looks like time will run out before the money.

With $255 million allocated, the Small Business Administration figured it could fund about 10,000 loans of up to $35,000 each. As of mid-August, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.

SBA pays the bank two percentage points over the prime rate. After a one-year deferral, the borrower repays the loan over five years. The agency will repay the lender in case of default.

Many banks, including some of the largest, appear reluctant to take part in the program, The New York Times reported on Aug 13. Some bankers cited the lack of a profit motive in a small loan extended over six years. Also, banks can’t charge an application fee for ARC loans, which could cover some of the lenders’ costs. Other bankers said the underwriting standards require as much work as larger loans. Also, banks can’t charge an application fee for ARC loans, which would have covered at least some of the lenders’ costs.

Another sticking point is that Congress restricted loan eligibility to companies that are struggling but viable. The business must face an “immediate financial hardship,” meaning a 20 percent reduction in a critical operating number, such as revenue, or other hardship such as declining sales, frozen credit lines, difficulty meeting payroll, paying rent, or difficulty making loan payments.

But the company also has to have shown a profit, or at least a positive cash flow, in one of the last two years and it must do a two-year cash-flow projection to show it can repay all its obligations. Also, a borrower should be no more than 60 days past due on any loan being paid with an ARC loan.

Loan proceeds are provided over a six-month period and repayment of the principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years. Loans and debts qualifying and eligible for assistance with ARC loans include secured and unsecured conventional loans; capital leases; notes payable to vendors/suppliers/utilities; Community Development Company (CDC) Loan Program first mortgage loans; and credit card obligations for business purposes.

The requirements and restrictions are making it difficult for banks and businesses to get together on the loans. To the extent that banks are interested in participating, they are primarily interested in serving existing customers which makes the vetting press to meet the program requirements easier.

The New York Times reported that Wells Fargo, one of the largest Small Business Administration lenders, had received 700 to 800 completed applications, but has approved only several dozen. At the same time, the SBA said it had signed off on only three of them.

Despite the work, the risk to the bank is minimal since the loans are 100-percent guaranteed by the government. However, banks are somewhat leery of that guarantee because of all the guidelines. If an “i” isn’t dotted or a “t” crossed, the guarantee may not be honored.

The program seems more popular in some parts of the country than others. SBA-backed lenders in the states of Minnesota, which has more than 70 participating banks, and Wisconsin, which has over 40 lenders, lead the country in the number of ARC loan participants. Iowa places third with more than 30.

In fact, fully a third of the banks making ARC loans are in those three states, according to SBA information. On the other hand, just one lender in New York and only nine in California are making these loans.

The SBA maintains an updated list of participating banks, along with other information on the ARC program, on the web at www.sba.gov/recovery/arcloanprogram/index.html.




						Few takers for small business loans



						Unlike the popular cash for clunkers government give-away, there have been relatively few takers for the government’s loan program designed to help struggling small businesses. The program itself has been a clunker so far. Known as America’s Recovery Capital (ARC), the program lets business owners apply to a bank for an interest-free loan, the proceeds of which can be used to retire existing debt. The loans in essence help current cash flow by postponing debt payments. The program is scheduled to last through September, 2010, or until the money runs out. Off to a slow start, it looks like time will run out before the money. With $255 million allocated, the Small Business Administration figured it could fund about 10,000 loans of up to $35,000 each. As of mid-August, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended. SBA pays the bank two percentage points over the prime rate. After a one-year deferral, the borrower repays the loan over five years. The agency will repay the lender in case of default. Many banks, including some of the largest, appear reluctant to take part in the program, The New York Times reported on Aug 13. Some bankers cited the lack of a profit motive in a small loan extended over six years. Also, banks can’t charge an application fee for ARC loans, which could cover some of the lenders’ costs. Other bankers said the underwriting standards require as much work as larger loans. Also, banks can’t charge an application fee for ARC loans, which would have covered at least some of the lenders’ costs. Another sticking point is that Congress restricted loan eligibility to companies that are struggling but viable. The business must face an “immediate financial hardship,” meaning a 20 percent reduction in a critical operating number, such as revenue, or other hardship such as declining sales, frozen credit lines, difficulty meeting payroll, paying rent, or difficulty making loan payments. But the company also has to have shown a profit, or at least a positive cash flow, in one of the last two years and it must do a two-year cash-flow projection to show it can repay all its obligations. Also, a borrower should be no more than 60 days past due on any loan being paid with an ARC loan. Loan proceeds are provided over a six-month period and repayment of the principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years. Loans and debts qualifying and eligible for assistance with ARC loans include secured and unsecured conventional loans; capital leases; notes payable to vendors/suppliers/utilities; Community Development Company (CDC) Loan Program first mortgage loans; and credit card obligations for business purposes. The requirements and restrictions are making it difficult for banks and businesses to get together on the loans. To the extent that banks are interested in participating, they are primarily interested in serving existing customers which makes the vetting press to meet the program requirements easier. The New York Times reported that Wells Fargo, one of the largest Small Business Administration lenders, had received 700 to 800 completed applications, but has approved only several dozen. At the same time, the SBA said it had signed off on only three of them. Despite the work, the risk to the bank is minimal since the loans are 100-percent guaranteed by the government. However, banks are somewhat leery of that guarantee because of all the guidelines. If an “i” isn’t dotted or a “t” crossed, the guarantee may not be honored. The program seems more popular in some parts of the country than others. SBA-backed lenders in the states of Minnesota, which has more than 70 participating banks, and Wisconsin, which has over 40 lenders, lead the country in the number of ARC loan participants. Iowa places third with more than 30. In fact, fully a third of the banks making ARC loans are in those three states, according to SBA information. On the other hand, just one lender in New York and only nine in California are making these loans. The SBA maintains an updated list of participating banks, along with other information on the ARC program, on the web at www.sba.gov/recovery/arcloanprogram/index.html.