Emergency loans: Will banks play ball?
The Small Business Administration will soon launch an emergency loan program for businesses burdened by debt, but potential lenders want more details before they commit to participating.
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 is 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 Bank in 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." 
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