SBA announces new ARC loan guidelines
Today the U.S. Small Business Administration announced new lender guidelines for the America’s Recovery Capital (ARC) loan program it unveiled last month.
According to the SBA release, the ARC program provides emergency funds, in the forms of deferred loans, of up to $35,000 to “viable small businesses suffering immediate financial hardship.” These loans are not provided directly by the SBA, but through SBA-backed lenders – mostly smaller or community banks – and are 100 percent guaranteed by the government and have no lender fees attached.
The SBA defines a “viable” business as an “established, for-profit business with evidence of profitability or positive cash flow in at least one of the past two years.” The term “immediate financial hardship” is subsequently defined by the SBA as “evidence to show a change in the financial condition such as declining sales, frozen credit lines, difficulty meeting payroll, paying rent, difficulty making loan payments or perhaps something else.”
SBA lenders will start dispensing ARC loans next week, on June 15.
Eric Zarnikow, associate administrator for Capital Access – the SBA department overseeing the new loans, said he expects 10,000 ARC loans to be doled out over the next 15 months until the September 30, 2010 cutoff date.
In an attempt to make sure all small businesses from across the country benefit from the program, Zarnikow said there will be an ARC loan cap of 50 per week to each SBA-approved lending institution, with no more than 1,000 loans issued from any one lender in total.
If a lender was only able to make 30 loans in any one weekly period, they would be able to catch up the next week by making up to 70 loans, in what Zarnikow referred to as a “rollover” provision.
“We will be evaluating these limitations from time to time,” said Zarnikow, adding the first one will be done in August.
Borrowers will not have to make any payments for the first year and will have an additional 5 years to pay back their loan. Only one loan per applicant is allowed and potential burrowers must not have any existing SBA loans.
Startup businesses are ineligible for ARC loans. For a full list of eligibility criteria, click here.
ARC funds can be used to pay home-equity loans or credit card debt, so long as it was used for business purposes only.
“If somebody has a home-equity line of credit and drew against that and put the money in their business we would allow an ARC loan to help cover that,” said Zarnikow, “but we cannot allow the ARC loans to pay personal expenses, like their personal mortgage.”
In addressing concerns that due to the riskier nature of these loans and the 100-percent guarantee by the SBA, that the ARC program would act more like a grant program, Zarnikow admitted that “losses” or number of defaults were expected to be “higher” under the new program.
“We do expect there are going to be losses and businesses that aren’t going to make it,” said Zarnikow, “but there are going to be a number of businesses that do make it and those are going to save jobs, or extend jobs for a period of time even for those that ultimately fail.”
Zarnikow said that while lenders will still be evaluating potential burrowers by their credit scores, he acknowledged there will be an accomodation for those small businesses whose ratings may have been adversely impacted by the recession. Zarnikow said in these cases SBA lenders will look at what he called a “hybrid” credit score, which is a combination of an owner’s personal credit score and that of his or her business credit score.
“We do recognize that these are businesses that are facing some immediate financial hardships and their credit may not be as strong as it would be if they were coming in for a loan to grow a business.”
For complete information on the ARC loan program, visit the SBA’s website: http://www.sba.gov/recovery/arcloanprogram/index.html