Make loan program lender-friendly

A new, but controversial small-business lending program began last month.

The U.S. Small Business Administration’s “America’s Recovery Capital Loan Program,” known as ARC, is intended to help struggling small-business owners. It funds payments on loans, vendor notes, equipment leases and even credit cards. Furthermore, SBA wants you to borrow up to $35,000 without interest or loan fees. Your principal payments begin 12 months after the loan is made.

“We expect these loans to be in high demand,” says Karen Mills, SBA’s administrator.

ARC is not a direct loan from SBA. Instead, the agency guarantees 100 percent against default and relies on its approved lenders to fund the program. Yet, lenders have their misgivings.

“This is not something we will be participating in at this time,” Terry Crispen says about opting into ARC. He is senior vice president of Panama City, Fla.-based Borrego Express Capital Lending, one of three lenders making SBA’s community express loans in Georgia.

That is disappointing because community express lenders are the most likely ones to embrace ARC. They have learned how to make small-business loans under $50,000 by using streamlined underwriting. Other SBA lenders have difficulty lending under $100,000 profitably.

SBA is requiring more traditional underwriting requirements for ARC loans.

“Underwriting the old fashion way has never been cost effective on $35,000,” Tim Jochner says. He is CEO of Superior Financial Group in Walnut Creek, Calif., and has funded hundreds of community express loans in Georgia. “It’s a great idea but as presented [ARC] has a lot of roadblocks for lenders,” he says.

He says there are accounting issues and software challenges of “split-billing the customer for principal [payments] and SBA for interest electronically.”

But the biggest problem is that lenders are prohibited from selling ARC loans to secondary-market investors as they would other SBA loans. “Liquidity is huge,” Jochner says. He needs to sell ARC loans to replenish his lendable cash. “Without liquidity it’s rough.”

Meanwhile, Danny Alphonso says, “The bank has not yet decided if we will join the [ARC] program.” He is first vice president of Innovative Bank’s SBA department. The Oakland, Calif.-based bank was the first lender to make community express loans in Georgia.

Ever since SBA announced ARC, struggling small-business owners have been clamoring to get theirs. But many do not realize that ARC’s guidelines restrict the loans to “viable small businesses that are experiencing immediate financial hardship,” and they must have previously demonstrated adequate cash flow. Additionally, they must show that ARC will give them the relief they need to achieve stability.

Bankers say that determining a struggling business’ viability is tricky. “A default rate that is likely to be higher than 7(a),” says SBA’s Mike Stamler, comparing ARC to the agency’s basic lending program. And notably, SBA’s inspector general is tasked with reviewing defaulted loans for possible denial of the agency’s guaranty. So lenders are concerned that SBA will second-guess their decisions.

“The demand is there,” Stamler says. “I can guarantee you, all of the money Congress has appropriated for loans under the Recovery Act will be used up by borrowers.”

Congress allocated $350 million and it is estimated that 10,000 loans will be funded nationwide. But it takes more than SBA serving up the program to its lenders and small-business borrowers, and expecting them to bite.

First of all, borrowers would accept ARC even if they had to pay the loan fees and interest. The key is rolled fees and interest into the loan amount and deferring them for 12 months. That means SBA would have more funds available to rescue more businesses.

Secondly, the agency could make lenders feel more comfortable by offering an expedient review process prior to loan funding rather than putting its lenders through the agency’s “witch hunt” to deny its guaranties after the borrowers default.

And most importantly, SBA must allow the banks to either sell the loans in the secondary market or pledge the guaranteed loan as collateral so that the lenders can raise capital to make more loans.

Unless SBA makes these modifications, lenders say they will reserve ARC loans only for their best clients and leave others to fend for themselves. One exception is Wachovia. It started taking ARC applications last week.

Jerry Chautin is volunteer business counselor with SCORE Atlanta.