ARC Loans?  Remember those?  (See my prior post from June 16th:  ARC Loans Are Ready To Go – If You Can Find a Lender.)    While the Simulus Act did very little to help small businesses, it did have a provision  allowed for these ARC (America’s Recovery Capital) Loans through the Small Business Administration.  These were to be quick and easy loans for viable small businesses that have hit tough times due to the recession.  In theory, the loans would get them through the tough times.  Plus they were interest free for the borrowers (the government paid the interest).

The Small Business Administration is reporting few ARC Loans approved in the Charlotte, NC market.
The Small Business Administration is reporting few ARC Loans approved in the Charlotte, NC market.

If this provision of the act would have been properly executed, it would have been one of the few provisions in the act that had more benefit than cost associated with it.  Unfortunately, there just are not that many loans being made – especially in the Carolinas (where I am).

As of August 24, 2009, there have only been 16 ARC loans approved in all of North Carolina since the program was launched in June.  The numbers are worse in South Carolina where only 10 ARC loans have been approved.  (For a listing by State visit this link.  I am not sure how often they update the list.)  This is despite overwhelming demand from the small business community.

Some states have experienced a higher rate than we have locally, with Minnesota leading the way with 236.  I still contend that this is a tiny number compared to how many small businesses are demanding these loans, and how many of them need these loans.  I also wonder how many of them are not even aware that these loans exist.

Several reasons exist for this epic failure within the Stimulus Bill.

First, it isn’t worth the work for the banks.  There is a lot of red tape and paperwork on the banks end to participate in the program.  Sure, the payment of the loan is guaranteed, but will it cost more to place the loan than the bank will make off of the interest during its term.  The Charlotte Business Journal quoted Lee Cornelison, the NC district director for the SBA, as saying, “Normally, they [the banks] go through all this paperwork for a $1 million loan.  Now they’re being asked to do the same amount of work for a $35,000 loan.  That’s part of the problem.”

Another reason for the failure goes back to the risk/reward analysis for the bank.  While the loans are guaranteed by the government many of the banks are complaining about the small amount of interest that they get on these loans – prime plus two percent.   The bank still must spend time and money servicing these accounts and in the event that the borrower doesn’t pay – they must spend valuable resources trying to collect.  The guarantee doesn’t happen once a borrower misses a payment.  It will not happen until the borrower fully defaults on the loan.  Because of the cost associated with collections, many banks are shying away from the program.  The Office of Management & Budget projects that 56% of ARC loans will default.

A third reason for the failure of this program goes back to the red tape.  Even if a loan is being paid on time, banks are required to submit a monthly report to the federal government regarding how much was disbursed on the loan and what the bank is owed.  Since the banks do not have a process in place for this, it would require investing time and capital into setting up a special process.  Considering the low payoff for the bank and the fact that it is a short term program (ending in Septemeber 2010), it is unlikely that most big banks want to try to jump this hurdle.

Let me know your thoughts on this.  Do you know of anyone that has gotten one of these loans?  We have helped a few clients go through the process of applying, but have yet to have any approved (or declined for that matter).