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.

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).

I routinely hear the statement that small business is the lifeblood of the US economy – producing far more jobs than large businesses.    Over the past few months, I have heard “jokes” and statements to the contrary – indicating that this was not really the case and that small businesses did little to contribute to the economy as a whole.    Obviously, dealing with small businesses on a daily basis, I was skeptical of these statements and decided to do some research on my own.    The result is that small business is far more important to the economy than I could ever have imagined.  Look at the following statistics  (Source:  US Small Business Administration).

• 99.7% of all employers are small businesses,
• Small businesses employ half of all private sector employees, and pay 45% of all private sector payrolls,
• have generated 60% to 80% of all net new jobs over the last decade
• create more than half of the non-farm Gross Domestic Product
• employ 40% of all high-tech workers (scientist, engineers, and computer workers)
• produce 13 times more patents per employee than large patenting firms, and the patents are twice as likely as large firm patents to be among the one percent most cited.

The SBA’s Office of Advocacy estimates that there were a total of  27.2 million businesses in the United States in 2007.  According to data from the 2005 Census, there were 6.0 million firms with employees and 20.4 million without employees in 2005.   There were slightly more than 17,000 large businesses.  Small businesses with fewer than 500 employees represented 99.9 percent of the 27.2 million businesses (including both employers and nonemployers).

This data is important to consider considering the current state of our economy and the mountain of additional regulation being considered at by the Federal Government.    Some of the 17,000 large businesses may be able to afford to absorb the additional cost of regulation, but what about the small businesses?    An SBA study shows that small businesses may have a difficult time taking on more regulation.    On average, an employer with less than 20 employees pays 45% more per employee to comply with federal regulations than does their large business (over 500 employee) counterparts.  When segregated into the types of regulation, the results are even more skewed.  For instance, the smallest businesses (less than 20 employees) on average spent $3,296 per employee on environmental regulations while big bisinesses spent only $710 per employee.    Tax compliance was another area that resulted in a heavy burden on the smallest businesses – where their cost per employee totaled $1,304, compared with just $780 for big businesses.

Statistics like this shed a lot of light on the reasons behind why some of the largest businesses  (such as Wal-Mart) are encouraging more regulation.  It will result in very little difference for them, but will put a great burden on many of its competitors – especially smaller competitors.

Hopefully, they will actually take some time to consider the ramifications of additional regulation before they pass any more legislation that could affect small business negatively.  Small business is without a doubt the lifeblood of the American economy, and we need to do everything we can to allow entreprenuers the opportunity to be successful.    We have to remove burdens and roadblocks to success – not reinforce them.

The Small Business Administration (SBA) announced yesterday that small businesses can now begin submitting applications for its temporary new program called America’s Recovery Capital, or “ARC” for short. These loans are designed to provide a bridge to small businesses that have an immediate financial hardship – and can be for amounts up to $35,000.

The SBA defines a financial hardships as any of the following:

• Loss/reduction of customer base
• Increase in cost of doing business
• Loss/reduction of working capital and/or loss/reduction of short term credit  facilities
• Inability to restructure existing debts due to credit restrictions
• Loss/reduction of employees (intellectual capital)
• Loss/reduction of major suppliers (major suppliers out of business)

Other quick facts are as follows:

• ARC loans are deferred payment loans are 100% guaranteed by the SBA;
• There are no SBA fees associated with ARC loans;
• ARC loans are only available to established, viable, for-profit small businesses;
• ARC loans are disbursed over a period of up to six months;
• Proceeds from ARC loans can be used for payments of principal and interest for existing, qualifying small business debt including, mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payables to vendors, suppliers and utilities;
• The SBA will pay the interest on the ARC loans to the lenders at the variable rate of Prime plus two percent; 
• ARC Loans are interest free to the borrower [This beats the heck out of the 25.9% some of you are paying to Bank of America on your revolving lines];
• Repayment will not begin until 12 months after the final disbursement
• After the 12-month deferral period, borrowers will pay back the loan over a period of five years. 

It will be interesting to see how all of this ultimately goes down.  Based on the details that I have read, there seems to be little risk on the part of the lender; however, many of them have been hesitent to get on board with the program.  A CNNMoney article last week revealed that most SBA lenders hesitant to jump into the program.    While the rate to the lender is variable, it isn’t as high as some of the other SBA loan programs.  This could be a turnoff to some banks, but as an SBA spokesperson pointed out in the CNNMoney article, there is virtually no risk to the lender since the SBA is providing a 100% guarantee. 

Please let me know of your experiences with ARC loans – whether it be finding a lender who is doing these or any pro’s and con’s you have seen through the process.  I know a lot of businesses that will be applying for these in the next few weeks – providing that they can find lenders.

For more information on ARC Loans, visit the ARC Loan portion of the SBA’s Website.