Obama's Free Money by Igor Serbinin and Bob Akright

10/15/2009 17:24


Is your business suffering immediate financial hardship? Have you been running for at least two years and now started to run out of credit? Your traditional lender is saying no to loan requests that used to be no problem in the past? You’ve already borrowed everything from your friends and family that they could have given you? If this sounds familiar then you are not alone and this is not personal. According to the Federal Reserve’s most recent Senior Loan Officer Opinion Survey, 75% of domestic banks said they are tightening credit for small firms-up to 70%.[i] In addition, credit card companies are also either tightening their terms or cutting small business off entirely. Id Fortunately, since June 15, 2009 the Small Business Administration (“SBA”) came up with ways of providing temporary alternative financing for your small business with programs that didn’t exist in the pre-crisis economy.  

            The SBA American Recovery Capital (“ARC”) program is created under the American Recovery and Reinvestment Act designed to provide interest-free loans to struggling viable small businesses. Your lender making such loan to you is 100% guaranteed by the federal government. In addition, the federal government does not charge your lender any loan origination fees therefore this savings is directly passed on to your business. The SBA will pay the monthly interest at the rate of Prime plus 2% to the lender on behalf of the borrower. Obviously this program benefits both sides; borrowers as well as lenders who might otherwise not consider offering additional loans!

            The SBA’s ARC program can provide up to $35,000 in short-term relief cash to on-going small businesses facing immediate financial hardship to help overcome the current downturn on the market and return to profitability. Proceeds from the loan may be provided over a 6-month period and repayment of the principal does not have to start for one year after the last disbursement of the proceeds. This is truly a great deal with each qualifying small business limited to one ARC loan.

            The Small Business Administration is not by itself making ARC loans but through SBA lenders like Bank of America, KeyBank or Wells Fargo. However, any current non-SBA lender may become a participant by working with their SBA district office. Community Banks and Credit Unions that are not currently SBA lenders can also become SBA lenders in order to make ARC loans. 

            In order to qualify for such loan your business must be small, viable and experiencing immediate financial hardship. In certain cases even if you are not in default on any existing debt obligation you may still be eligible for an ARC loan to pay principal and interest on your existing small business loans. This may enable your business to redirect cash flow from making loan payments to investing in your business; by keeping your doors open, retaining existing jobs and growing in the future.

            In limited circumstances an ARC loan can even be used to pay a home equity line of credit and credit card debt if the debt is for business purposes. It appears that the only thing an ARC loan will not do is to establish a line of credit unless it is used for legitimate business purposes. Small business loans/debts qualifying and eligible for assistance under ARC program include secured and unsecured conventional loans (mortgages, term and revolving lines or credit), capital leases, notes payable to vendors/suppliers, utilities, credit card obligations for business purposes and others. 

            Viability of your company for qualification purposes can be demonstrated with financial statement showing profitability or positive cash flow in at least one of the past two years. Future cash flow projections based on reasonable growth going out two years should show that the business will be able to meet current and future debt obligations, including future repayment of the ARC loan and operating expenses. The borrower must also certify that business is no more than 60 days past due on any loan being paid with an ARC loan and demonstrate an acceptable business credit score.

            Immediate financial hardship can be shown by declining sales, frozen credit lines, difficulty meeting payroll, paying rent, difficulty making loan payments and other similar adverse financial circumstances. Such circumstance may also include loss or reduction of customer base, reduction of intellectual capital and when your major supplier goes out of business. Your bank will be analyzing and presenting evidence of your financial hardship in the following non-conclusive categories recognized by SBA such as loss or reduction of revenue in preceding year, increase in business costs in the preceding year, changes in operating ratios, loss of working capital or short term credit lines, and inability to restructure debt due to recent credit restrictions. 

            The process for obtaining ARC loan is intended to be swift under the SBA guidelines. The turnaround on your loan application is expected to be within five to ten business days. As of today Colorado has processed only 19 ARC loans. In comparison since the beginning of the program in June of 2009 Iowa processed 132 such loans, Minnesota processed 323 and even Wyoming with population of half a million people had issued 19. Therefore the train is still here don’t be the one who missed it.

            The SBA recommends starting the process of applying for an ARC loan by contacting your current lender.[ii] We have found that some lenders will assist potential borrowers in the local office, while others are handling ARC loans centrally on a national basis. Regardless, it all starts with making that first call.