According to a lending tally released this month, the Small Business Administration has been able to grant more than 1,000 emergency loans to struggling companies since it launched the much-anticipated America’s Recovery Capital program in mid-June.
Although the banks are still cautious about participating, the list confirms that the program is likely to hit its goal of making 10,000 loans by the time it ends in late 2010.
Out of 8,200 FDIC-backed banks in the U.S. around 400 lenders are currently making ARC loans. This small number could increase if it included top-tier SBA lenders with national reach. But out of SBA’s 10 most active lenders this year, only three have issued ARC loans. These three are Wells Fargo, PNC Financial and Zions Bank.
A striking geographic disparity has also been revealed by the SBA’s data. Two Midwestern states, Minnesota and Wisconsin, have a lot of participating lenders and have together generated 28% of the ARC loans made to date. In contrast to this, 14 states, including Alabama, Oregon and South Carolina, each have fewer than five lenders participating in the program.
The program makes interest-free loans of up to $35,000 available to business owners in order to relieve them temporarily of payments due on other debts. Lenders have been hesitant since the ARC loan concept first came as part of February’s stimulus bill. The loans are being insured by the SBA, which means that the government eats the debt if the business defaults. The agency is also covering the interest on the loans, paying banks two percentage points over the prime rate.
The banks are still holding back although the loans are 100% guaranteed for banks. The SBA has forecasted a 56% default rate. Keeping in view the time required to examine applications and manage the loans, and if a loan turns bad, pursuing reimbursement from the SBA consumes more administrative resources.
The Bank of America is still working to determine whether they will participate in the program. According to a spokesperson, It will require some changes to their infrastructure, which takes time and is costly, thus they need to evaluate whether it makes sense for them.
The SBA’s guidelines for the program are also restrictive. According to their requirements, borrowers must have been in business for at least two years and be cash-flow-positive in one of the last two years. Some proof should also be shown to the bank that demonstrate financial hardship, such as a revenue drop of 20% or more. Finding businesses that are healthy enough to qualify for ARC loans but damaged enough to need them has proved challenging.
Wells Fargo is one of the rare banks that is willing to take ARC applications from businesses that don’t have an account at one of its branches. Whereas Webster Bank has taken the more common route of restricting the loans to existing customers looking to pay down debts the bank already holds. This has made some new customers for Webster, even though the bank won’t extend them an ARC loan.
