SBA Offers Loans, Banks Won’t Participate

As part of the 2009 Recovery Act the Small Business Administration (SBA) “designed a deferred-payment loan program to help small businesses make payments on existing debt”.

Called the America’s Recovery Capital (ARC) Loan Program, it’s a Federally guaranteed, deferred-payment loan of up to $35,000, no-interest, no payments for 12-18 months, then paid off over the following 5 years.

The program was funded with $255 million but only $65 million has been spent.

Why? Banks are just not signing up for the program, that’s why.

Small business owners in Florida are complaining, according to the St. Petersburg Times. Commenters on the article complain that they can’t get a new loan.

First, let’s read the fine print – a must with any government program. The ARC says it’s for “existing debt”. There may be other programs for new small business loans, but the ARC is for alleviating already incurred debt.

Others ask why should the banks participate when they don’t make any money on a no-interest loan?

While the loans may be no-interest, they are guaranteed and the banks still make money because the “SBA will pay monthly interest to the lender at reasonable rates throughout the term of the loan”. In other words, the taxpayer pays the interest.

So, again, why aren’t the banks signing up? One reason it put forward by Jim Parrish of the University of South Florida’s Small Business Development Center in Tampa.

Parrish said he understands banks’ reluctance, citing a report from the U.S. Governmental Accountability Office that estimated 56 percent of the borrowers may not repay the loans.

“The banks don’t want to fool with these loans that, truthfully, they don’t make any money on,” he said. “Because of all the handling costs, it’s not profitable … and they might turn around and half of them could go bad.”

(St. Petersburg Times)

So the interest paid to the banks barely covers the cost of the paperwork administering the loans, and doesn’t cover the added paperwork of getting reimbursed when half the loans go bad.

Still, according to SBA stats more loans are going to less populated states than places like Florida, New York and California.

If you are a small business owner and are interested, check out the specifics at the SBA’s American’s Recovery Capital Loan page.