The Small Business Administration (SBA) begins processing applications for its new American Recovery Capital (ARC) Loan Program next week. This product is designed to help viable small businesses, which are facing temporary financial hardship today and will return to profitability within a reasonable timeframe. For approved borrowers, payments will be disbursed monthly (as much as $35,000 for up to six months). Repayment will be deferred for 12 months following the end of the lending period. Then a business can take as long as five years to repay.
At first glance, this appears to be an enlightened bridge loan program. The ARC loans are fee free, interest free, and the SBA removes all lender risk by providing financial institutions a 100 percent guarantee. Yep, sounds exciting, doesn’t it? However, the program is closer to bait and switch than bailout.
According to the SBA, the purpose of an ARC loan is “to make payments of principal and interest, in full or in part, on one or more existing, qualifying, small business loans for up to six months.” Their intention is to provide an infusion of cash to relieve debt payments. Money you are using to pay debts can be re-directed to other purposes, such as purchasing inventory or paying employees. You cannot use an ARC loan to cover non-debt operating expenses.
SBA’s lender document indicates the usual entanglement of government red tape. Although the loans are fully guaranteed and there are no fees charged by SBA, many banks believe resources required to process and manage the loans will cause each loan to result in a net loss to lenders since the interest rate (paid to lenders by the SBA) is only the prime rate plus 2 percent – currently 5.4 percent.
Unfortunately, very few lenders (banks and credit unions) have agreed to offer ARC loans. Your first challenge, as a borrower, might be finding a lender who will process your application. It is important to note that financial institutions, such as credit unions which are not currently SBA lenders, will be able to process ARC loans after a short training by the SBA. Customer-focused credit unions might turn out to be your best source for a lender.
ARC loan parameters:
- You own a viable for-profit enterprise, which has been in business for at least two years.
- Your business is required to supply lender with financial statements going back three years or less if you have only been in business two years.
- Financial statements that are more then 90 days old must be supplemented by interim up-to-date statements.
- It is preferred that the borrower is current on all loans and no loan can be more than 60 days past due when the ARC loan is processed.
- Business must have an acceptable business credit score, as determined by the SBA.
- All principles owning 20 percent, or more, of a business must personally guarantee the loan. This means all the principles must have acceptable personal credit histories.
- Collateral may be required.
- Show adequate cash flow projections to meet ongoing expenses and repay loan.
- You must be able to demonstrate financial hardship, as defined by the SBA:
- Loss or reduction of customer base. Or loss or reduction of 20 percent of revenue, or more, over the past 12 months
- Increase in cost of doing business by 20 percent, or more, over the past 12 months
- Working capital loss or reduction of 20 percent, or more. Or similar short-term loss or reduction of credit availability
- Gross margin decline of 20 percent, or more, over the past 12 months
- Operating ratio decline of 20 percent, or more, over the past 12 months
- Credit restrictions during the previous 12 months have resulted in an inability to restructure existing debts.
- Loss or reduction of employees
- Loss or reduction of major suppliers — suppliers out of business
- Other immediate financial hardship, with explanation
With an understanding that owners of small businesses sometimes finance their enterprises with home equity loans and with personal credit cards, the SBA is allowing ARC loan payments to be used to repay these if the borrower can show detailed receipts proving expenditures were made for business purposes. When loaning your business personal money, it is always smart to make a clean transfer of funds to your business so there will be no question about mingling of personal and business expenditures.
Loans repaid with ARC funds must have been for sound business expenditures and for one of the following eligible purposes:
- Acquire land by purchase or lease.
- Improve a site. Examples: grading, streets, parking lots, landscaping.
- Purchase one, or more, existing buildings.
- Convert, expand, or renovate one, or more, existing buildings.
- Construct one, or more, new buildings.
- Acquire (by purchase or lease) and install fixed assets.
- Purchase inventory.
- Purchase supplies.
- Purchase raw materials.
- Working capital.
- Refinance certain outstanding debts.
If the ARC loan program provides an ideal solution for your short term financial needs, contact your local banker or your district SBA office to find an ARC lender in your area.