The federal government has been criticized for paying scant attention to the struggles of small businesses while devoting billions of dollars to help large financial corporations survive these tough times. But owners of small enterprises can get government help if they know where — and how — to look. One program that can make the difference between survival and failure is America’s Recovery Capital.
ARC was launched in June. It offers loans of up to $35,000 backed by the Small Business Administration. The loans come with no fees and are interest-free. They’re disbursed over a 6-month period. Repayment of the principal is not due for 12 months after the last disbursement, and the borrower may take as long as 5 years to pay in full. The loans are virtually risk-free for banks, because if a borrower defaults, the SBA will pick up 100 percent of the balance. In addition, the SBA pays the lending bank monthly interest of 2 percent above prime for the term of the loan.
Who Is Eligible for an ARC Loan?
ARC loans are intended to help established small businesses that have been hurt by the recession and need cash to do things like pay workers, pay current loans, buy inventory, and make the rent. You can’t take the money and use it for a Las Vegas management retreat.
To be eligible, you must have been operating for at least two years. You must show financial statements to prove you were profitable in at least one of the past two years and that your business has taken a hit in the recession. You have to show evidence of a drop in sales (at least 20 percent in the past year), missed loan payments, rejected credit applications, higher business costs (at least 20 percent in the past year), trouble making payroll, or difficulty paying the rent.
At the same time you need to prove you’re viable by showing projections for at least the next two years indicating that you can generate enough cash to pay back your ARC loan and other obligations. Your business credit score must also meet SBA standards.
What Can You Use the Money for?
Businesses are entitled to only one ARC loan, up to $35,000. The loans are disbursed over 6 months and borrowers can use the money during that period to make payments on any current debt, with two stipulations: You can’t use it to pay down another SBA-backed loan taken prior to February 17, 2009, and you can’t use it to pay existing loans that are more than 60 days past due.
Outside of that, you can target almost any other debt with ARC money, including credit card debt, a commercial lease or mortgage, home equity loans used to finance your business, or IOUs to suppliers. The intent is to allow borrowers to take cash they’re now devoting to loan payments and use it to invest in their business, keep it alive, and keep workers employed.
Is There a Deadline?
The ARC program will expire September 30, 2010, or when funding runs out. The SBA says it has committed enough funding to enable about 10,000 ARC loans. From the program’s inception on June 15 through this past September, almost 3,000 ARC loans had been made. So if you’re interested, start now. The process involves a lot of paperwork and can be quite lengthy.
It may take a good deal of time simply to find a bank interested in talking about an ARC loan. Many big banks aren’t. They don’t like the paperwork attached, the low 2 percent interest rate from the SBA, or the high default risk (though the loans are guaranteed, banks still have to do the legwork to collect from the SBA). Wells Fargo and Bank of America are participating while U.S. Bank is not.
If you want an ARC loan, first ask your current lender if it’s participating in the program. If it’s not, it only takes about a week to join the program.
You’ll also likely have better luck if you think small. Proof of that is the SBA’s early numbers on ARC loan disbursements. In the first three months of the program, small banks in the Midwest made far more ARC loans than banks anywhere else in the country: 352 in Minnesota, 264 in Wisconsin, 141 in Iowa. By contrast, California banks made 68 and New York banks 52.
Tom Stein has contributed to leading business and general interest publications including Wired Magazine, Business 2.0, Venture Capital Journal, and Tennis Magazine. Previously, he held staff-writer positions at the San Francisco Chronicle, Red Herring, and InformationWeek. He also was a senior editor at Success Magazine, where he covered some of the most unusual and utterly unique entrepreneurial companies in the world.