Banks cautious on ARC loan program

A new loan program that the U.S. Small Business Administration (SBA) began offering in June seemingly would attract many businesses: no interest payments for the life of loan, no principal payments for at least 12 months, and the loans are 100 percent guaranteed by the federal government.
For some companies, however, it may be a challenge finding an institution willing to offer the loans.
Of the 23 eligible lenders in Rhode Island that have issued SBA-backed loans this year, 16 are taking part in the America’s Recovery Capital Loan Program (ARC). And all 16 are offering the loans only to existing customers or small businesses that will become their customers (beyond the loan program), according to Mark S. Hayward, director of the SBA office in Rhode Island.
“That’s their prerogative,” Hayward said in defense of the lenders. “Sixteen told us that they would participate, and I think that’s pretty good.”
Bank Newport is one bank that has limited the program to existing or potential customers because the application process and later follow-up requirements are too labor intensive to offer to everyone.
“We just don’t have the resources or the manpower to handle what we expect would be a high-volume demand,” said Leland R. Mitchell, senior vice president and manager of commercial lending at Bank Newport. The application process, he said, is detailed and “a lot of work” for the customer and bank, even though the SBA on its Web site (www.sba.gov) promises a “streamlined” application process.
“And then management of the loan afterwards is pretty intense, too,” Mitchell said. “It gets very costly, very quickly.”
Bank Newport has approximately 12 applications pending from current loan-holders, according to Mitchell. “We do feel it is a good program and that’s why we’ve offered it to our existing customers,” he said. Bank Newport will entertain applications from businesses that are not current customers, but willing to move “their relationships” to the Newport-based bank, Mitchell said.
The ARC loan program took effect June 15 and offers a maximum amount of $35,000 to help “viable small businesses” facing “immediate financial hardship” make payments on existing small-business debt, the SBA said. The federal program is authorized through Sept. 30, 2010, or until appropriated funds run out, whichever comes first. Key aspects of the loan program include: a five-year term, during which the borrower is charged no interest; up to a six-month disbursement period, followed by 12 months without payments; no SBA fees or points; 100 percent SBA guarantee; and no collateral required. The SBA rather than the borrower will pay participating financial institutions interest on the loans, at a rate the SBA Web site (www.sba.gov) says is prime plus 2 percent, or 5.25 percent right now. The ARC loans are not designed for startups, the SBA said.
The idea is to provide small-business owners with “temporary financial relief” so they can redirect debt payments to investments in the business, thereby keeping the doors open and employees on the payroll until cash flow is back on track, according to the SBA.
Keith W. Stokes, executive director of the Newport County Chamber of Commerce, hosted an informational forum June 30 in his city about the ARC loans. About 150 people attended.
Stokes said he is not concerned by the fact that lenders offer the ARC program only to customers. “That’s pretty standard,” he said. He suggested that most small-business owners when investigating loan options turn to the banks they already do business with anyway.
The “most important” point, he said, is that with the challenges presented by the dismal economy, “we can’t afford to do nothing. We must be as creative as possible” to develop new financial products for struggling businesses, and then let the businesses decide if they want them or not.
“I am pleased that the SBA is being so creative,” Stokes said.
Although her agency is willing to help financial institutions with loan packages that include ARC, Maria Gooch-Smith, executive director of the South Eastern Economic Development Corporation (SEED), based in Taunton, said her nonprofit organization cannot handle ARC loans because the program is only for for-profit financial institutions.
Gooch-Smith warned businesses against seeing ARC loans as the answer to their prayers. “A lot of people are looking at this as a savior for everything,” she said, “but it may not fit everyone for a lot of reasons.” “Most banks,” she said, are offering ARC loans only to existing customers or those about to become customers, in part so the banks can recoup their own debts. She noted participating financial institutions will not receive principal payments for at least 12 months, but have “all the paperwork” to do nonetheless, so there is “little incentive” to take part.
She reminds small businesses that the SBA micro-loan program remains in place, offering loans of up to $35,000 at a fixed rate (now 6.5 percent) for six-year terms and she said the funds can be used to pay vendors, credit card bills or other debt. Her agency has $3.5 million available to lend in SBA-backed micro-loans.
Additional cautionary advice came from John W. Nelson III, who operates a consulting business in Newport, and has 30 years of experience in bank management at the former R.I. Hospital Trust National Bank, the former Bank of New England and Citizens Bank. “You have to prove the need” for the loan, through past financial statements and future fiscal projections, he stressed.
For confidentiality reasons, he declined to reveal his clients’ identities, but spoke of one real estate speculator interested in an ARC loan. “I said to him, ‘it’s like you’re gambling at Las Vegas and now you’re looking to cover your losses,’” Nelson recounted.
“Most of the time, small businesses don’t keep good records,” he added. He has handled recent inquiries from business owners whose financial statements were “all screwed up,” Nelson said, or consisted of tax returns showing the business running at a loss. “The business must be viable at the time of the loan,” he said, noting the SBA requires proof of positive cash flow in the past two years to obtain ARC funding. He urged business owners “to get your house in order” before heading to the bank.
As Mitchell and Gooch-Smith indicated, Nelson said some banks have doubts about entering the ARC program or will do so only for their own customers because “it’s a lot of work.” In the event of defaults, it’s the banks that have to chase the loans and not the SBA, he noted, in exchange for only “nominal” interest payments. &#8226