ARC Loan Fund Set to Run Dry Before Long

At one time, observers were worried ARC wouldn't accomplish much. At the end of last September, CNN Money reported as a positive development the news that ARC had guaranteed $88 million in 2,715 loans. (http://money.cnn.com/2009/09/30/smallbusiness/arc_loan_update/index.htm?postversion=2009093017) Since at the end of August there had only been approximately 1,000 loans, that suggested the program was gaining significant traction.

That growth rate has since tapered off, with the SBA reporting approval of approximately 5,000 loans as of the end of February. But that's about half of the projected total of 10,000 ARC loans the program will ultimately be able to fund.

Meanwhile, critics complain that the initiative is aimed at only a narrow segment of small companies. For instance, it's only for companies deemed "viable" by the SBA. The definition for that includes profitability in at least one of the last two years. In addition, a business has to have been in existence for at least two years.

In something of a Catch-22, eligible borrowers have to be able to show they are experiencing hard times, as evidenced by loss of customer base, declining sales, loss of access to credit, falling working capital and so forth. Yet, at the same time, they have to be able to support a cash flow projection that would enable them to meet their loan obligations over a two-year period from the time it's approved for a loan.

SBA adds that companies already severely delinquent in making payments on existing loans are not good candidates for an ARC loan. In other words, you have to be sick, but not too sick.

ARC aims to provide small businesses with interest-free loans of up to $35,000 by guaranteeing lenders the loans will be repaid by the SBA if the borrower defaults. The proceeds are intended specifically to help small businesses make payments of principal and interest on their existing debt. Eligible debt can include credit cards, leases, and payments to vendors and suppliers. It can also include other bank loans, either SBA-guaranteed or not.

Loan proceeds are to be disbursed to borrowers are handed out over six months, and repayment can be deferred for 12 months after the last disbursement. At that point, the business can extend the repayment for up to five years.