A best kept secret

New SBA lending program aims to help certain businesses endure the troubling waters of the current economy

Story by Amie Schaenzer

 IT MIGHT SEEM LIKE ONE of the government’s best-kept secrets.

The American Recovery Capital Loan program was rolled out on June 15 to Wisconsin businesses as part of President Obama’s federal stimulus package. The program, offered through the U.S. Small Business Administration, is providing up to $35,000 in interest-free, deferred payment loans to qualified applicants and is also waiving any set up fees or administration charges – a typical nuisance for borrowers – to those who qualify, said Carol Wilkerson, regional communications director for the SBA in Chicago.

“It’s designed to give small businesses who are suffering during these hard economic times a way to keep their doors open,” Wilkerson said.

The temporary first-time program is meant to infuse struggling businesses with the funds to pay down existing debt. The loans can be used for payment of principal and interest for up to six months on existing – and qualifying – small business loans, which is followed by one year with no repayment required. After that, only the principal is paid back to the lender over a 5-year period.

The ARC loan is one of many recovery initiatives rolled out as an SBA recovery program, all with the purpose of freeing up the lending market and getting capital flowing again for small businesses across the country.

A bit of a slow start

DESPITE WHAT SEEMS TO BE a very attractive financial package, the ARC loan program is off to a seemingly slow start since it launched late this past spring.

Up through mid-August, 1,375 loans have been doled out nationwide. That amounts to $44.8 million of the $255 million allocated for the program, Wilkerson said. 

In Northeast Wisconsin, just seven ARC loans have been issued so far, said Eric Ness, district director for the SBA in Wisconsin.

Many believed the loans would go much faster. Wilkerson said she can see the pace starting to pick up as more lenders become more comfortable with offering the ARC loan and more small businesses apply. 

“I think the word is starting to get out there about the loan,” Wilkerson said.

The loans can be used to pay down secured and unsecured conventional loans, such as mortgages on property; revolving lines of credit; capital equipment leases; notes payable to suppliers or utilities; and credit card obligations owed by businesses, though documentation requirements for credit card debt is stringent.

ARC loans are designed for businesses experiencing financial hardships for reasons such as a loss or reduction of customer base, increases in the cost of doing business, a reduction in capital or a loss of employees or major suppliers. 

The loans are available until funds run out or Sept. 30, 2010. 

Though it’s hard to predict how long such funding will be available, local financial consultants believe the money will be available for awhile.

QuickStart in Menasha has been working as a third-party consultant since the program debuted, offering assistance to businesses and financial institutions preparing the rigorous ARC loan paperwork. The business finance assistance consultancy is among one of the only firms in the state helping small business owners through what QuickStart president and owner Kent Nelson said is a very complicated application process.

Nelson said the manual provided by the SBA to explain eligibility requirements consists of 35 pages of “legal mumbo jumbo.” 

While his firm has received over 100 calls in the past month from interested businesses, a screening process has weaned out those that might not be eligible while others do not move forward for other reasons. As of mid-August, no QuickStart clients had received an ARC loan, but about a dozen were in the process of applying for the funds or awaiting approval of their application. Those businesses include a gas station, bar, restaurant, hair salon and a painting contractor.

“It’s like anything. In theory it works but once put into practice, it’s not that simple,” Nelson said of the ARC loan application and administration process.

The loans are not meant for startup businesses. A qualifying business must prove that it has been profitable in the past but has only recently began to struggle. That business must also be able to project that it will again be financially viable in the future.

That is not always so easy to prove, Nelson said. Because of stringent requirements, there is a fine line between which businesses qualify for the ARC loan and which do not.

Of the seven businesses receiving an ARC loan in northeast Wisconsin as of mid-August, none were interested in discussing their experiences with the ARC loan program for this article due to the sensitive nature of their current financial situation. 

The list of companies receiving assistance through the ARC loan program is not subject to public open records statutes.

Getting banks on board

BESIDES A COMPLICATED APPLICATION process, banks that typically handle SBA loans are shying away from providing the ARC loan program, notably the larger publicly traded, multi-state banks. ARC loans are still provided by commercial lenders – just like many of the other SBA lending programs – but the interest payments, the fees and the guarantee are picked up by the SBA.

Only a handful of financial institutions in northeast Wisconsin have been actively marketing the ARC loan program with their business clients. There are two main reasons why many banks have not been willing to sign off on the ARC program. Mainly, the complicated and time-consuming process reaps little benefit for the lenders. SBA’s measure to waive any fees means the banks are not pulling in the typical amount of revenue it needs to cover the administration expenses to adequately process such a loan. The bank receives interest from the loan – paid by the federal government – but with interest rates at all-time lows, the interest doesn’t amount to much at all.

“It’s not very lucrative for the banks,” Nelson said. “We’ve seen more community banks providing the ARC loan because this is just not cost effective for the big banks.”

Another downfall, Nelson said, is that many of the banks fear the consequences that might occur if the business owner defaults. Though the loans are said to be 100 percent guaranteed by the SBA to the lender, Nelson said there could be risks for the banks to be held liable if any inaccuracies are found in the documentation.

To make matters stickier, business owners interested in applying for the ARC loan typically must belong to a financial institution that is on board with the program, Nelson said. He said banks are much more likely to assist a customer since they have all their paperwork on hand and know about their financial past, leaving less risk to the lender. 

For that reason, Nelson said those interested in applying for an ARC loan should first check with any financial institution they do business with to see if it’s on board with the program and providing customers with the opportunity to apply for ARC loans. 

John Hintze, vice president of First National Bank ~ Fox Valley, said his four branches from Oshkosh to Appleton have provided the ARC loan since it’s June launch. He admits assisting customers apply for the loan is a lot of work, but said it wasn’t a tough choice for his bank to sign up.

“We are a community bank so we are going to do what’s in the best interest for the community,” he said. “If a program fits, then we will work hard to get it done.”

Hintze said the $35,000 maximum loan through the ARC program isn’t necessarily large enough for many of his customers, who may have monthly loan payments equal to that amount. But the amount is plenty sufficient for others, and in one case Hintze said FNB’s willingness to offer an ARC loan helped lure in a new business client whose regular bank wasn’t participating in the program. So far, FNB has helped two customers obtain an ARC loan.

“But there is a very defined and minute group of people that apply,” Hintze said. “There are good people out there that need assistance, and if this program fits them, great.”

Amie Schaenzer is a freelance writer based in the Fox Valley.