As a debt-relief vehicle for small businesses became available in mid-June, some experts feared banks would limit participation due to excessive paperwork on the risk-free, but skimpy, loans.
As of June 15, the U.S. Small Business Administration began accepting applications for America”™s Recovery Capital (ARC) loan guarantees, authorized by Congress to provide up to $35,000 to small businesses that need immediate cash to ride out the recession.
SBA is promising a turnaround time of five to 10 business days for loans originated from an existing SBA lender, longer for those from lenders that do not typically participate in SBA lending programs.
Banks making loans under the program face significant paperwork requirements, however, which some said might limit the program”™s availability as banks shy away. The boilerplate form is 50 pages in length, and lenders must complete additional forms as well in processing a loan.
As of mid-June, several of Connecticut”™s largest SBA lenders had yet to reference the program prominently on their Web sites, including Waterbury-based Webster Financial Corp., Newtown Savings Bank, and Ridgefield-based Fairfield County Bank Corp.
The lead SBA administrator running the program hinted that could be shortsighted, as small businesses that survive the recession on the ARC respirator may become loyal ”“ and profitable ”“ patrons as the business gains steam in the economic recovery.
“I think this program would really help lenders maintain their relationships with small businesses ”¦ they think can succeed if they can help make it through the different economic times,” said Eric Zarnikow, SBA”™s associate administrator for capital access who is overseeing the ARC program. “We”™ve reduced the lender”™s risk and we”™re refinancing the expenses for borrowers.”
Under the American Recovery and Reinvestment Act, the SBA has some $730 million in additional funding, with more than a third of that amount earmarked for ARC loans and the rest to cut lending fees across SBA programs and improve its ability to process applications.
The SBA is picking up the cost of interest on the loans, and is not charging its customary fee for loans originated under SBA guarantees.
The program is being offered through September 2010 or until program funds run dry, with businesses allowed to tap the loan fund only once. The agency plans to publish program-performance reports measuring borrower and lender characteristics, risk parameters and program outcomes.
SBA is backing 100 percent of loans disbursed by banks, allowing wide latitude for how the loans are used, including for the payment of mortgages, home-equity lines or credit, or credit card debt if the loans are used for business purposes.
Loans are limited to viable, for-profit businesses undergoing hardship that can demonstrate positive cash flow in 2008 or 2007, and which are no more than 60 days overdue on any loan being repaid under the program.
SBA has already stated that it expects a higher default rate on the loans than for its standard 7(a) program that backs working-capital loans to businesses that otherwise are having trouble securing money from traditional bank lending programs.
SBA is leaving it up to lenders to determine if a state of hardship exists, to include negative 20-percent swings in sales or business expenses, along with:
Ӣ a supplier going out of business;
Ӣ frozen credit lines;
Ӣ difficulty making loan payments;
Ӣ inability to restructure debt;
Ӣ difficulty meeting payroll;
Ӣ loss of key employees; or
Ӣ problems paying rent.
