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ARC Emergency Small Business Loans - Can They Get to Market in Time to Matter?

Anita Campbell Founder, Small Business Trends Recent Posts

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May 20, 2009

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The SBA announced an emergency loan program for small businesses this week, called ARC loans. An ARC loan is sort of like a bridge loan, although not exactly. The loans are designed to help struggling businesses that are having trouble meeting their existing obligations. The loans can be used to meet those other obligations.

I’m not big on writing about SBA loans, for one simple reason: they apply to so few small businesses. The numbers of small businesses that get SBA loans each year is a drop in the bucket compared to other financing sources. Fewer than 100,000 out of the 27+ Million small businesses in the United States get SBA loans each year. I’m not saying SBA loans do not serve a good purpose — of course they do. It’s just that their impact is limited — they touch a relatively small number of businesses.

However, the recently announced ARC Loan program caught my eye because it potentially casts a wider net to touch businesses that ordinarily would not seek out or get an SBA loan. Plus it is designed to help those struggling the most. If this program can get started and out from under bureaucracy in time, it could be a useful program.

But, will it actually get off the ground fast enough? And will lenders buy into it?

Let’s take a look at what the ARC loan program is — and is not:

ARC, which stands for “America’s Recovery Capital”, is a loan program that will provide up to $35,000 in short-term relief for small businesses facing immediate financial hardship. ARC loans are designed to help ride out the current uncertain economic times and return to profitability.

Each small business is limited to one ARC loan.

ARC loans will be available from June 15, 2009 up until September 30, 2010, or as long as funding is available, whichever comes first.

The borrower must use the loan to pay on existing obligations (but not on SBA loans made prior to February 17, 2009 when the Stimulus bill was passed). Existing obligations include (PDF): “payments of principal and interest for existing, qualifying small business debt including mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payable to vendors, suppliers and utilities.”
Repayment does not begin until 12 months after the loan funds are disbursed. Then the small business has up to 5 years to repay the ARC loan. Borrowers do not have to pay interest on the ARC loans (although some fees by lenders may apply).
More details and eligibility requirements for ARC loans can be found on the SBA website.

Two big questions are up in the air at this point:

(1) Can the ARC loan program get out to market in time to help enough small businesses? Signs are that we are already starting slowly to come out of the recession. However, struggling small businesses that are already behind in payments or that have lost revenues, will suffer for many more months … a delayed domino effect. Things won’t turn around fast enough to save some of them. Although passed a few months back, so far ARC lacks concrete processes in place at lenders behind it to make it a reality — and the loans don’t start for another month. Somehow our government needs to work through the red tape to get this program going — and fast — if it’s to live up to its potential to help small businesses survive.

(2) Will lenders go for the program? Remember that the loans need to be made through private lenders, not directly by the government. The Coleman SBA Lender Daily is taking comments from lenders about the ARC program. As of this writing, many of the comments by lenders have not been positive. One of the issues from the lender perspective: that the loans are interest free for borrowers. Fifty lenders say they don’t have enough information to decide whether they will offer the ARC loans; roughly 33 say they won’t make ARC loans; and 18 say they will. In short, a big “meh” from lenders so far, based on that sample.

Can ARC help save some struggling small businesses? I hope so — but I fear it won’t make it to market fast enough or interest enough lenders to make it a practical reality. In that case, it would be just another good idea gone astray.