America’s Capital Recovery (“ARC”)
The America’s Capital Recovery (“ARC”) loan program is set to launch shortly, making up to $35,000 available to small business owners who are struggling in the current economy. The Small Business Administration has published guidelines to assist both potential borrowers and banks in understanding how the loans are supposed to work.
As of June 15 the SBA will begin processing applications for the loans, but individual banks may need more time to organize their application process. Borrowers can use ARC loans to make up to six months worth of payments on their existing debt, and no repayment is due on the loan for a year. After the first year, the business has five years to pay back the loan principal. Interest payments are covered by the government.
To apply for an ARC loan a business owner cannot go directly to the SBA. Instead, individual banks will provide the loans and the ARC will offer guarantees on the loans so that if a business owner defaults the SBA will cover the debt. Default will affect the business’s credit rating.
A business can only receive one ARC loan, at a maximum value of up to $35,000, but the loan monies can be used for multiple debts owed by the company. Borrowers may even be able use ARC loans to cover payments on their personal credit cards if the money was borrowed for business expenses. Borrowers can also use the loans to cover most other business debt, including home equity loans used to finance business operations, a commercial lease or mortgage, bank loans made outside the SBA program, credit card debt and notes payable to suppliers.
When it comes to eligibility requirements, it’s important to note that the ARC loans are not for start-ups. Businesses must have been in operation for at least two years and need to have been profitable in at least one of the preceding two years. Applicants must prove they are experiencing financial hardship, by providing evidence of difficulty meeting payroll, making loan payments, paying rent, declining sales of at least 20% over the past year, frozen credit lines, or rising business costs of 20% or more in the past year.
Also, borrowers must be able to show the viability of their business. Two year cash-flow projections must be provided which show that the business will be able to repay its debts, including the ARC loan Applicants need to have acceptable business credit scores, and they can’t be more than 60 days past due on any loan they’d like ARC funds to help cover. Lenders can also require collateral to back up the loan.
According to estimates by the SBA, approximately 10,000 small businesses will receive ARC loans, although when such loans will start to be disbursed is hard to predict.
As for banks and ARC funding, there is some hesitation and concern. The government penalizes lenders who have high default rates in their portfolios. It is not easy to collecting the government guarantee if a loan goes into default and banks are responsible for their own administrative costs related to pursuing delinquent loans. The SBA admits that ARC loans are likely to default at a higher rate than those in its other programs. Interest rates paid by the SBA aren’t particularly high either, being only prime plus 2%. The reasoning for such a low interest rate lies in the 100% loan guarantee, which does at least reduce the risk for banks that choose to participate in the ARC program.
Under the Recovery Act, Congress has allocated $255 million to support the ARC loan program. That money covers only the program’s subsidies, for interest payments and defaults, allowing the money to stretch to support a larger dollar-volume of lending. Only 50 loans per week are available per lender, although if a bank issues fewer than 50 loans in a given week the unused amount can carry forward to future weeks. A final cap of 1000 loans per lender is in place. The ARC loan program is scheduled to run until its funding runs out or Sept. 30, 2010, whichever happens first.
