Limomangary

http://money.cnn.com/2009/05/21/smallbusiness/banks_wary_of_arc_loans.smb/index.htm

NEW YORK (CNNMoney.com) — The Small Business Administration plans to begin dispersing funds in mid-June for a new, highly anticipated emergency lending program, but don’t race off to the bank to fill out an application just yet. Many lenders are still sitting on the sidelines, waiting for more details from the SBA before they decide whether or not to participate.

“What is the economic incentive for banks to make these loans?” asked Arne Monson, president of Holtmeyer & Monson, a consulting firm that works with small business lenders.

That’s a question many potential participants are asking right now as they await formal guidelines from the SBA for the “America’s Recovery Capital” program. Created as part of the stimulus bill, the initiative aims to bring temporary relief to established small business suffering through the recession.

Borrowers can apply for interest-free loans of up to $35,000 to help cover their payments for six months on existing debt, with no repayment due on the ARC loan for 12 months. The loans will come from banks and other authorized lenders, but the SBA will offer those lenders a 100% guarantee on the loans – meaning that if the business owner defaults, the government foots the bill.

That’s great in theory, but potential lenders are wary of how it will play out. Banks have spent years wrangling with the SBA over the bureaucracy of collecting on the agency’s loan guarantees. ARC loans are intended to go to businesses that are “viable” but also suffering “financial hardship,” and until the SBA offers more specifics, bank officials say they are leery about making the correct call on which applicants they should green-light for loans.

“If there is a faulty closing or process at the bank level and SBA voids the guarantee – which has higher likelihood in this program – the bank will face a total loss at that point,” Monson noted.

Another concern for bankers: ARC loans are intended to be interest-free for borrowers, who will only have to repay the principal. That caused much grumbling in an online comment forum hosted by Coleman Publishing, a trade publisher for SBA lenders.

“‘Interest free to the borrower?’ Why would we do that?,” wrote one commenter.

“There needs to be greater clarification on what will motivate the banks to make these loans. We have scarce resources,” another banker wrote.

SBA officials say they expect lenders’ doubts to disappear as the agency finishes working out, and releases, more details on how the ARC loans will work. For example, while the SBA doesn’t yet know what interest rate it will pay banks for ARC loans, that amount won’t be zero. The agency will subsidize every loan, making some sort of interest payment to the banks on the borrower’s behalf.

Some banks will join the ARC program simply for the civic value of helping small business customers, but others say they won’t participate unless it’s in their financial interests to do so. One official at a major SBA lender, who declined to speak publicly, said that the loans’ small size and bureaucratic overhead mean they probably won’t be a “profitable, effective solution” for his bank.

Potential borrowers are also clamoring for specifics. The SBA hasn’t said yet said precisely which businesses and what kinds of debt will qualify for ARC loan relief, though it has begun filling in the outlines of its plan. This week the agency said it considers a “viable” small business to be one that has been profitable in at least one of the past three years. ARC loans can be used to pay down a line of credit, a credit card, or a bank loan, but the stimulus bill’s rules forbid the loans from being used to make payments on SBA-backed loans made before February of this year.

More details will be communicated to banks by June 8, according to SBA officials. The agency expects ARC loans to be available to borrowers by June 15.

That date can’t come soon enough for some potential applicants. “There’s no question this loan is a big issue for us,” said Jay Cullimore, president of Tropical Lights Inc., an online lighting retailer. “It’s been effort to stay alive and grow.”

After six years in business, Cullimore took out $20,000 line of credit in mid-2008 for his Fort Lauderdale, Fla.-based business. Now, nearly a year later, his sales are down 50%, he’s had to lay off four employees, and the interest rate on his credit line has zoomed from 7% to 25%.

Cullimore approached his bank, which participates in the SBA’s loan-guarantee programs, for more details on ARC loans, but the bank was unable to give him any guidance on when or how he might be able to apply.

“I can’t believe any bank would be unhappy that I’d be able to pay down the line, but it feels like the SBA is an insider job,” Cullimore said. “If you don’t know people who are connected, you won’t get it.”

Borrowers can apply for an ARC loan from any lender that certified for participation in the SBA’s programs. If his own bank doesn’t get on board, Cullimore plans to seek a loan from another.

In the stimulus bill, Congress allocated $255 million to support the ARC loan program. That money covers only the program’s subsidies, for interest payments and defaults, allowing the money to stretch to support a larger dollar-volume of lending. The SBA is still calculating how much the program will be able to lend, but it forecasts that the ARC loans will be available to 10,000 small businesses.

“We believe the lenders are ready to go,” said Eric Zarnikow, the SBA’s associate administrator for capital access. “We believe many have been looking at portfolios and customers and good candidates for ARC loans already. We have the expectation they’ve already thought about it.”

Some have. At Webster Bankin Waterbury, Conn., Bob Polito is anxious to start making loans. He trusts the SBA to draw up reasonable policies, and he’s willing to settle for whatever interest rate the agency sets for the loans.

“We want to make sure [the ARC loans] are beneficial to us, but there’s also the goodwill aspect of just helping our borrowers,” said Polito, Webster Bank’s director of government-guaranteed lending. Come June 15, when the SBA begins backing ARC loans, he plans to pounce.

“I’ll be at my computer signed into the server at midnight to make sure we get those funds to borrowers who will benefit,” he said. “The only concern I have is that the funds will go too quickly.” 

limomangary’s thought and response on this article:

as i read this article i saw obvious points in which my level of confidence, in the possibility of this money reaching the hands of SBO’s (small business owner’s) most in need, grew smaller and smaller. the article reads of bankers, most but not all, that are not interested in offering bailout assistance to the SBO level of borrower. take a look at some of the quotes: the 1st two are from the blog & banker comments mentioned in this article

1. “‘Interest free to the borrower?’ Why would we do that?, wrote one commenter.”
2. “There needs to be greater clarification on what will motivate the banks to make these loans. We have scarce resources, another banker wrote.”
3. “One official at a major SBA lender, who declined to speak publicly, said that the loans’ small size and bureaucratic overhead mean they probably won’t be a “profitable, effective solution” for his bank.”

This quote in the article is especially troubling to me, read between the lines of the bolded area: “ARC loans are intended to go to businesses that are ‘viable’ but also suffering financial hardship, and until the SBA offers more specifics, bank officials say they are leery about making the correct call on which applicants they should green-light for loans.”

in other words this may turn out ot be another non-inclusionary program that really isn’t a bail out for the SBO’s, the ones that really need cash. these quotes show a general lack of interest in the small business arena by some of the same people that just accepted TARP money…money given to them for doing nothing but being a central part of the mess of things of this economy and the struggles most are enduring! if one can not see the “civic value”, as quoted by one person in this article, then they have no intrest in developing the communities in which their banks hold interest and locations. certainly they are in the money & paper business with the purpose of turning profits, but the sheer fact that a good number refuse to see beyond the need to float the major enterprise and reach down to the small biz that can possibly become an enterprise one day is just the sad state of our current system of capitalization. our country was founded and ascended to greatness because of capitalism but it was done so in a way that didn’t box out the people that could one day be a part of that cycle of growth thorugh capitalism. today there isn’t that same prevailing feeling and effort, even by some of the same people that just were handed $$$ to cure their mistakes!

most of this post has been dedicated to critical comments on matters within this article, but i do need to take a moment to commend guys like Bob Polito of Webster Bank in Connecticut on his comments: “We want to make sure [the ARC loans] are beneficial to us, but there’s also the goodwill aspect of just helping our borrowers,” said Polito, Webster Bank’s director of government-guaranteed lending. Come June 15, when the SBA begins backing ARC loans, he plans to pounce. I’ll be at my computer signed into the server at midnight to make sure we get those funds to borrowers who will benefit, he said. The only concern I have is that the funds will go too quickly.”  now whether his comments and efforts are altruistic, philanthropic, or even capitalistic he seems to “get it”; the “it” factor is to succeed in the future you need and want as many other people to do the same…there needs to be both people creating ideas and businesses and people with money to consume the products and services that are being provided, if too many people get left behind well then eventually everybody looses! i will still remain optimistic that the plan will come to fruition and prove beneficial; keep checking back to see what updates come down the pike.

Thanks again for stoping by the blog; here’s to prosperity for us all!