It is no surprise that Hans Vestberg, who will become Telefon AB L.M. Ericsson's CEO next year, started off an interview about his new post by talking about the global financial crisis. Vestberg, after all, is the Swedish telecommunications gear maker's chief financial officer, and he's had a front-row seat for the worldwide economic malaise.
But Vestberg, who will replace Carl-Henric Svanberg (he's becoming BP's chairman), will face more challenges than the global economy, which may start to rebound as he takes office. A more persistent challenge for Ericsson (ERIC) may well be competition from rivals old and new.
Earlier this month Nokia Siemens, a joint venture of the two telecom giants, agreed to acquire key wireless assets from Canada's Nortel. The purchase will give Nokia Siemens a stronger foothold in the North American market, where Ericsson, the world's largest supplier of wireless telecom equipment, has been a major player.
The Nortel deal "gives Nokia Siemens something else in their arsenal," says Jane Zweig, CEO of the Shosteck Group, a telecommunications consulting group. "And I don't think Ericsson really factored Nokia Siemens in."
Ericsson also faces stiff competition from a pair of Chinese equipment makers, Huawei and ZTE.
Huawei and ZTE have been taking share from established equipment makers such as Ericsson, Alcatel-Lucent (ALU) and others for years. Initially customers had concerns about the quality of the Chinese companies' products. But today, phone operators say, the products from Huawei and ZTE are comparable to those made by longtime gear providers.
0:00 /3:19What's in your iPhone?
Vestberg, 44, says he believes Ericsson has its own set of tools in its arsenal. "Of course, we will always face competition whether they are French American or Chinese," he says. "I think our competitive advantage is our technology leadership. We will compete by having the best technology and the most robust technology."
He also points to Ericsson's strong presence in the services business. As telecom networks have become more complex, a growing number of operators are turning to Ericsson (and others) to basically run their systems and help them migrate from one generation of technology to the next.
Vestberg appears to have the energy for the job. Since joining the company in 1991 he has worked for Ericsson around the world in markets such as China, Chile and Brazil. He was president of Ericsson in Mexico and served as CFO for Ericsson in North America.
Executives and analysts who've met Vestberg describe him as personable and relationship oriented. And because he worked so closely with Svanberg, they say, investors are not likely to see many radical changes in Ericsson's strategy.
Friday, June 26, 2009
Monday, June 22, 2009
Obama's banking end around
One road to regulatory reform runs through Detroit and Utah -- and there are signs the ride could get bumpy.
The Obama administration's financial oversight reform program would force industrial loan companies, or ILCs -- banks owned by the likes of retailer Target (TGT, Fortune 500) and carmaker Toyota (TM) -- to submit to Federal Reserve rules and regulations.
Because Fed rules limit bank ownership, the plan could force big commercial firms to sell their banking arms. Doing so would close a regulatory loophole that has long chafed the Fed, which has no authority over nonbanks.
But the fight over the ILCs is just beginning. Any changes in the law must be enacted by Congress, and Sen. Bob Bennett, R-Utah -- where many of the biggest ILCs are based -- has fought previous efforts to close the loophole. Bennett claims ILCs haven't been a problem during the recent crisis and says eliminating them will make credit less available to consumers.
Meanwhile, Ford Motor (F, Fortune 500) has sought federal permission to turn its Ford Motor Credit unit into an ILC in a bid to cut its borrowing costs as it competes with its government-backed Detroit rivals GM (GMGMQ) and Chrysler. Neither Ford nor the Federal Deposit Insurance Corp., which supervises ILCs, returned calls seeking comment.
Critics of industrial loan companies argue that strengthening the separation of banking and commerce would be a good thing at a time when the federal deposit insurance fund is under pressure.
"The taxpayer subsidies the ILCs have received are just enormous," said Art Wilmarth Jr., a law professor at George Washington University. "The government has to stop the proliferation of these entities."
The case against ILCs, Wilmarth said, can be summed up in four letters: GMAC, a troubled finance company once owned by General Motors that now lists the government as its biggest shareholder.
GMAC "is the poster child for why we shouldn't have commercial ownership of banks," said Wilmarth.
Policymakers frown on commercial ownership of banks because it can lead to poor credit decisions and create more risks to the taxpayer-funded federal safety net.
Even so, ILCs started cropping up as niche lenders in a few states more than 20 years ago. Regulatory changes a decade ago led to the formation of some giant ILCs, including ones run by Merrill Lynch (now part of Bank of America (BAC, Fortune 500)) and General Electric (GE, Fortune 500).
But among the larger ILCs was a Midvale, Utah-based company called GMAC Automotive Bank, part of GMAC.
Trying not to repeat the mistakes of GMAC
For years, GMAC was a profitable part of General Motors. In 2006, though, GM sold a 51% stake to private equity firm Cerberus as it raised cash to restructure.
Since then, the picture has darkened at both GM and GMAC. GM filed for Chapter 11 protection June 1, after receiving billions of dollars in bailout funds and spending months on the brink of bankruptcy.
Meanwhile, GMAC -- the biggest provider of financing to the carmaker's dealers and customers -- was struggling to raise capital to qualify for its own federal aid.
At the end of December, the Fed cleared GMAC to become a bank holding company, while exempting it from Federal Reserve Board rules that govern a bank's dealings with its affiliates. Since then, GMAC has received some $21 billion in taxpayer support, including Treasury funds and FDIC loan guarantees.
The government justified the move by citing "emergency conditions." It forced GM and Cerberus to sharply reduce their stakes in the company and said the conversion would allow GMAC, the main lender to customers of the troubled domestic automakers GM and Chrysler, to continue to extend credit to consumers.
But not everyone was persuaded by that logic. Taxpayers, Wilmarth said, are now bearing the costs of what is essentially a commercial failure -- the collapse of GM after years of poor strategy and product decisions.
He said the poor results in recent years at GM and GMAC show the two were "propping each other up." GMAC then compounded its auto-lending errors by making a big bet on residential housing via the purchase of lender ResCap, he said. GMAC didn't comment.
"Everything they said wouldn't happen with the ILCs has happened at this one institution," said Wilmarth. "Massive conflicts of interest, spreading subsidies from banks to commercial firms -- all of it has come to pass."
While its Detroit rivals GM and Chrysler have taken tens of billions of dollars in federal funding, Ford has declined to take bailout money.
But if Ford wants no part of the unpopular Troubled Asset Relief Program, the company has signaled it would like to join GMAC in raising low-cost funds by taking bank deposits. GMAC's Ally Bank unit has raised more than $20 billion in deposits, in part by offering above-market certificate of deposit rates.
That's why Ford's credit arm has been seeking industrial loan company status. Getting it would allow the company to borrow more cheaply -- though an approval could complicate the lives of policymakers set on closing the ILC loophole.
"I think they may have a battle on their hands here," said Raymond Gustini, a partner at law firm Nixon Peabody in Washington. "But for now, those who want to eliminate the loophole have the moral high ground."
The Obama administration's financial oversight reform program would force industrial loan companies, or ILCs -- banks owned by the likes of retailer Target (TGT, Fortune 500) and carmaker Toyota (TM) -- to submit to Federal Reserve rules and regulations.
Because Fed rules limit bank ownership, the plan could force big commercial firms to sell their banking arms. Doing so would close a regulatory loophole that has long chafed the Fed, which has no authority over nonbanks.
But the fight over the ILCs is just beginning. Any changes in the law must be enacted by Congress, and Sen. Bob Bennett, R-Utah -- where many of the biggest ILCs are based -- has fought previous efforts to close the loophole. Bennett claims ILCs haven't been a problem during the recent crisis and says eliminating them will make credit less available to consumers.
Meanwhile, Ford Motor (F, Fortune 500) has sought federal permission to turn its Ford Motor Credit unit into an ILC in a bid to cut its borrowing costs as it competes with its government-backed Detroit rivals GM (GMGMQ) and Chrysler. Neither Ford nor the Federal Deposit Insurance Corp., which supervises ILCs, returned calls seeking comment.
Critics of industrial loan companies argue that strengthening the separation of banking and commerce would be a good thing at a time when the federal deposit insurance fund is under pressure.
"The taxpayer subsidies the ILCs have received are just enormous," said Art Wilmarth Jr., a law professor at George Washington University. "The government has to stop the proliferation of these entities."
The case against ILCs, Wilmarth said, can be summed up in four letters: GMAC, a troubled finance company once owned by General Motors that now lists the government as its biggest shareholder.
GMAC "is the poster child for why we shouldn't have commercial ownership of banks," said Wilmarth.
Policymakers frown on commercial ownership of banks because it can lead to poor credit decisions and create more risks to the taxpayer-funded federal safety net.
Even so, ILCs started cropping up as niche lenders in a few states more than 20 years ago. Regulatory changes a decade ago led to the formation of some giant ILCs, including ones run by Merrill Lynch (now part of Bank of America (BAC, Fortune 500)) and General Electric (GE, Fortune 500).
But among the larger ILCs was a Midvale, Utah-based company called GMAC Automotive Bank, part of GMAC.
Trying not to repeat the mistakes of GMAC
For years, GMAC was a profitable part of General Motors. In 2006, though, GM sold a 51% stake to private equity firm Cerberus as it raised cash to restructure.
Since then, the picture has darkened at both GM and GMAC. GM filed for Chapter 11 protection June 1, after receiving billions of dollars in bailout funds and spending months on the brink of bankruptcy.
Meanwhile, GMAC -- the biggest provider of financing to the carmaker's dealers and customers -- was struggling to raise capital to qualify for its own federal aid.
At the end of December, the Fed cleared GMAC to become a bank holding company, while exempting it from Federal Reserve Board rules that govern a bank's dealings with its affiliates. Since then, GMAC has received some $21 billion in taxpayer support, including Treasury funds and FDIC loan guarantees.
The government justified the move by citing "emergency conditions." It forced GM and Cerberus to sharply reduce their stakes in the company and said the conversion would allow GMAC, the main lender to customers of the troubled domestic automakers GM and Chrysler, to continue to extend credit to consumers.
But not everyone was persuaded by that logic. Taxpayers, Wilmarth said, are now bearing the costs of what is essentially a commercial failure -- the collapse of GM after years of poor strategy and product decisions.
He said the poor results in recent years at GM and GMAC show the two were "propping each other up." GMAC then compounded its auto-lending errors by making a big bet on residential housing via the purchase of lender ResCap, he said. GMAC didn't comment.
"Everything they said wouldn't happen with the ILCs has happened at this one institution," said Wilmarth. "Massive conflicts of interest, spreading subsidies from banks to commercial firms -- all of it has come to pass."
While its Detroit rivals GM and Chrysler have taken tens of billions of dollars in federal funding, Ford has declined to take bailout money.
But if Ford wants no part of the unpopular Troubled Asset Relief Program, the company has signaled it would like to join GMAC in raising low-cost funds by taking bank deposits. GMAC's Ally Bank unit has raised more than $20 billion in deposits, in part by offering above-market certificate of deposit rates.
That's why Ford's credit arm has been seeking industrial loan company status. Getting it would allow the company to borrow more cheaply -- though an approval could complicate the lives of policymakers set on closing the ILC loophole.
"I think they may have a battle on their hands here," said Raymond Gustini, a partner at law firm Nixon Peabody in Washington. "But for now, those who want to eliminate the loophole have the moral high ground."
Saturday, June 20, 2009
Investors bet on Detroit housing market
As Detroit home prices crash, sales are heating up. But with all of the plant closings and layoffs, who's buying? Investors -- some of whom are snapping up five and 10 houses at a time.
"I have investors from all over the country and the world," said Jeremy Burgess, co-founder of Urban Detroit Wholesalers, which buys undervalued homes to rehab and rent or to sell to other investors. "One Lithuanian woman just bought a second house."
"Most of the local investors are out of money," added Mike Shannon, who specializes in Detroit foreclosures and has clients from New Zealand, Australia, England and other places.
Recently a Californian purchased 178 properties, mostly one at a time, and most for under $10,000. Another has purchased six Detroit properties since September and hopes to begin buying five a month.
"The capital needed to get in the Detroit market is so low," said Jason Imbruglio, a 29-year-old from Tacoma, Wash., who has bought three homes so far.
Two years ago, he paid $12,000 for a two-family house with two bedrooms and a bath in each unit. He spent $18,000 repairing it for a total cost of about $30,000. Imbruglio has kept tenants in both apartments most of the time and charges $1,100 a month. After taking into account the 10% he pays a management company, plus utilities, property taxes and maintenance costs, he says he is making double-digit profits.
Plentiful opportunities
The city's average home price has sunk by a third to less than $80,000. But these cheap houses have got sales jumping, with volume up 23% in April compared with April 2008.
And there is no secret to finding cheap properties. Burgess said he buys through regular sellers and other investors and off the local multiple listing service.
Many are buying in buying in bulk, snapping up properties bundled together and sold by lenders. However, that is becoming less lucrative, according to Burgess. "The quality of the bulk stuff is significantly lower than it was a year ago," he said. "Back them 70% of the houses bought in bulk were nice. Now, 80% or 90% are not."
What he focuses on when selecting properties is the neighborhood. He looks to own in some of the city's stable, blue-collar communities with high homeownership rates, such as Warrendale, University District and Grandmont.
"In the good areas, rents are actually going up," said Burgess. "I just had a house rent for $950 that I was thinking I would get $850 for."
The bad areas, ones with vacant homes and foreclosed properties, such as the Brightmoor district, are no-go zones for Burgess. Rents and values are low in those communities -- and falling.
"I wouldn't touch anything, not even for a dollar, in those areas," he said.
Making it work
In general, Shannon said investors are "looking for long-term investment of five to 10 years. They sock away some profits [on rentals] and wait for prices to appreciate."
To make sure they have a steady rent roll, some investors are getting their properties qualified to be Section 8 housing, which is the housing voucher program run by the federal government to help low-income families. Under this program, some tenants can rent units in private housing with the government picking up part or all of the cost, which must be "fair-market rent."
"You put in a Section 8 tenant and collect $850 to $1,200 a month on a three-bedroom home," said Shannon, who specializes in foreclosure properties.
Another option is to work with local nonprofits to sell rehabbed units to credit-damaged - but worthy - buyers. These organizations identify families and offer them credit-repair counseling and assistance finding an affordable financing so that they can buy the investors' rehabbed properties.
"We shifted away from speculative investing into restoring affordable housing," said investor David Butler, who buys through Burgess.
The deals are often structured like a lease-option contract, with the tenant/buyers paying rent on the property plus a premium charge that is applied to the future sale price. They buyers complete the purchases when they get affordable mortgage loans.
To keep costs down, Butler looks to pay no more than $45,000 for a property, including repairs and any back taxes. When finished these homes typically appraise for about $80,000. Because his company partners with a nonprofit, it accepts narrower margins, about 12%. Normally, buy-rehab-flip investors prefer margins of 35% or more.
"I have investors from all over the country and the world," said Jeremy Burgess, co-founder of Urban Detroit Wholesalers, which buys undervalued homes to rehab and rent or to sell to other investors. "One Lithuanian woman just bought a second house."
"Most of the local investors are out of money," added Mike Shannon, who specializes in Detroit foreclosures and has clients from New Zealand, Australia, England and other places.
Recently a Californian purchased 178 properties, mostly one at a time, and most for under $10,000. Another has purchased six Detroit properties since September and hopes to begin buying five a month.
"The capital needed to get in the Detroit market is so low," said Jason Imbruglio, a 29-year-old from Tacoma, Wash., who has bought three homes so far.
Two years ago, he paid $12,000 for a two-family house with two bedrooms and a bath in each unit. He spent $18,000 repairing it for a total cost of about $30,000. Imbruglio has kept tenants in both apartments most of the time and charges $1,100 a month. After taking into account the 10% he pays a management company, plus utilities, property taxes and maintenance costs, he says he is making double-digit profits.
Plentiful opportunities
The city's average home price has sunk by a third to less than $80,000. But these cheap houses have got sales jumping, with volume up 23% in April compared with April 2008.
And there is no secret to finding cheap properties. Burgess said he buys through regular sellers and other investors and off the local multiple listing service.
Many are buying in buying in bulk, snapping up properties bundled together and sold by lenders. However, that is becoming less lucrative, according to Burgess. "The quality of the bulk stuff is significantly lower than it was a year ago," he said. "Back them 70% of the houses bought in bulk were nice. Now, 80% or 90% are not."
What he focuses on when selecting properties is the neighborhood. He looks to own in some of the city's stable, blue-collar communities with high homeownership rates, such as Warrendale, University District and Grandmont.
"In the good areas, rents are actually going up," said Burgess. "I just had a house rent for $950 that I was thinking I would get $850 for."
The bad areas, ones with vacant homes and foreclosed properties, such as the Brightmoor district, are no-go zones for Burgess. Rents and values are low in those communities -- and falling.
"I wouldn't touch anything, not even for a dollar, in those areas," he said.
Making it work
In general, Shannon said investors are "looking for long-term investment of five to 10 years. They sock away some profits [on rentals] and wait for prices to appreciate."
To make sure they have a steady rent roll, some investors are getting their properties qualified to be Section 8 housing, which is the housing voucher program run by the federal government to help low-income families. Under this program, some tenants can rent units in private housing with the government picking up part or all of the cost, which must be "fair-market rent."
"You put in a Section 8 tenant and collect $850 to $1,200 a month on a three-bedroom home," said Shannon, who specializes in foreclosure properties.
Another option is to work with local nonprofits to sell rehabbed units to credit-damaged - but worthy - buyers. These organizations identify families and offer them credit-repair counseling and assistance finding an affordable financing so that they can buy the investors' rehabbed properties.
"We shifted away from speculative investing into restoring affordable housing," said investor David Butler, who buys through Burgess.
The deals are often structured like a lease-option contract, with the tenant/buyers paying rent on the property plus a premium charge that is applied to the future sale price. They buyers complete the purchases when they get affordable mortgage loans.
To keep costs down, Butler looks to pay no more than $45,000 for a property, including repairs and any back taxes. When finished these homes typically appraise for about $80,000. Because his company partners with a nonprofit, it accepts narrower margins, about 12%. Normally, buy-rehab-flip investors prefer margins of 35% or more.
Monday, June 15, 2009
Improving access to health insurance: $1 trillion
Two key proposals to improve access to health insurance could reduce the ranks of the uninsured but cost $1 trillion over 10 years, according to preliminary estimates released Monday by the Congressional Budget Office.
The estimates are the first in a series over the next few months that will attempt to quantify the costs and benefits of various health reform options. President Obama, citing the huge part health care spending plays in the economy, has made passing reform this year a top priority.
The report by CBO, an independent agency that scores legislative proposals for lawmakers, focuses on proposals to create health insurance exchanges and subsidize the cost of insurance for some households.
The agency estimated that the exchange and subsidies could reduce the number of uninsured people by roughly 16 million by 2015. It is estimated there would otherwise be 51 million uninsured that year.
The CBO estimates are based on parts of a health reform bill from Democrats on the Senate's Health, Education, Labor and Pension Committee, chaired by Sen. Ted Kennedy, D-Mass.
The committee will start debating and amending that bill on Wednesday.
Under the bill, the federal government would give grants to states to set up insurance exchanges that consumers could use to comparison shop for health insurance. And it would offer subsidies of varying levels to help families with incomes up to 500% of poverty level (roughly $110,000) to pay for coverage.
The federal government would also subsidize small businesses that offer health benefits but have workers with low wages.
The CBO stressed that its estimates are preliminary for several reasons:
* They only reflect analysis of one part of the health committee bill. So they aren't a comprehensive look at the potential costs and savings of all measures in that bill.
* They do not reflect the likely interactions that will occur with other elements of comprehensive health reform that may be included -- such as an expansion of Medicaid or the creation of a public insurance plan, which is the most controversial issue in the health reform debate.
* In addition, the CBO has not yet finished its analysis of all the bill's elements, such as a proposal to let parents cover their children as dependents until they're 27.
The health committee bill is hardly the last word on health reform. Other congressional committees have jurisdiction over other parts of health care reform.
One is the Senate Finance Committee, which will oversee the tax proposals intended to help pay for the overhaul of the health care system.
0:00 /2:18Boosting health reform
The finance panel's chairman, Sen. Max Baucus, D-Mont., is expected to release a draft of his health reform bill this week.
The estimates are the first in a series over the next few months that will attempt to quantify the costs and benefits of various health reform options. President Obama, citing the huge part health care spending plays in the economy, has made passing reform this year a top priority.
The report by CBO, an independent agency that scores legislative proposals for lawmakers, focuses on proposals to create health insurance exchanges and subsidize the cost of insurance for some households.
The agency estimated that the exchange and subsidies could reduce the number of uninsured people by roughly 16 million by 2015. It is estimated there would otherwise be 51 million uninsured that year.
The CBO estimates are based on parts of a health reform bill from Democrats on the Senate's Health, Education, Labor and Pension Committee, chaired by Sen. Ted Kennedy, D-Mass.
The committee will start debating and amending that bill on Wednesday.
Under the bill, the federal government would give grants to states to set up insurance exchanges that consumers could use to comparison shop for health insurance. And it would offer subsidies of varying levels to help families with incomes up to 500% of poverty level (roughly $110,000) to pay for coverage.
The federal government would also subsidize small businesses that offer health benefits but have workers with low wages.
The CBO stressed that its estimates are preliminary for several reasons:
* They only reflect analysis of one part of the health committee bill. So they aren't a comprehensive look at the potential costs and savings of all measures in that bill.
* They do not reflect the likely interactions that will occur with other elements of comprehensive health reform that may be included -- such as an expansion of Medicaid or the creation of a public insurance plan, which is the most controversial issue in the health reform debate.
* In addition, the CBO has not yet finished its analysis of all the bill's elements, such as a proposal to let parents cover their children as dependents until they're 27.
The health committee bill is hardly the last word on health reform. Other congressional committees have jurisdiction over other parts of health care reform.
One is the Senate Finance Committee, which will oversee the tax proposals intended to help pay for the overhaul of the health care system.
0:00 /2:18Boosting health reform
The finance panel's chairman, Sen. Max Baucus, D-Mont., is expected to release a draft of his health reform bill this week.
Wednesday, June 10, 2009
Lenders hesitant on small biz stimulus loans
Struggling small business owners can begin applying next week for an interest-free debt-relief loan through a new Small Business Administration program -- if, that is, they can find a bank to process their application.
The new "America's Recovery Capital" (ARC) loan program, authorized by February's stimulus bill and slated to launch on June 15 after four months of planning, aims to make small, government-backed loans available to viable companies laid low by the recession. (For full details on ARC eligibility and loan terms, click here.) But the loans will be made and managed by SBA lenders, and so far, few have jumped on board.
Before the details of the program were released on Monday, lenders were hesitant to commit, concerned that there wasn't enough economic incentive for them. Now, with key details about how the program will work finally available from the SBA, many haven't retreated from their initial wariness.
"While we have received a few requests from our customers, we are still leaning against it," says John Handmaker, president of Quadrant Financial, a small business lender based in Louisville. "The guidance from the SBA indicated rates and terms, which have provided some clarity, but we're not 100% certain about what we need to be careful of. We don't feel we have a solid grasp of the standard operating procedures and rules, and we're not going to jump in until we really understand it."
One deterrent for the banking community is the interest rate for the loans. While the loans are interest-free for borrowers, the SBA will pay lenders an interest rate of prime plus 2%. For the month of June, that's 5.25% -- a lower interest rate than the SBA sets for its other loan programs.
"The SBA provided for a variable but fair rate," says SBA spokeswoman Hayley Matz. "It's important to remember that these loans carry virtually no risk to the lender -- they are 100% guaranteed by SBA in terms of principal, and the SBA is paying the interest."
Talk back: What do you think of ARC loans?
As the lenders debate the merits and potential pitfalls of making ARC loans, small business owners that need the money are wondering where to turn. Mack Sullivan, for example, is poised on a starting block, ready to run through lenders' doors with his application on June 15.
Sullivan's tourism literature company, Due South Publishing, based in St. Simons Island, Ga., was profitable for the five years leading up to 2008. Then, the companies that advertised in Due South's publications began cutting back dramatically.
"The credit-card debt we have has accumulated primarily for just cash-flow management. As revenues have come down, we used it as a cash advance credit line, to pay for a publication we just printed, or expenses and payroll," Sullivan's says. At the same time, the interest rates on his four cards have doubled in recent months. The highest is now at 25.9%.
With an ARC loan, Sullivan hopes to pay off the debt on those cards, which costs him about $2,000 a month. That move, he says, will put the company on more stable footing and position it to launch new products when the economy rebounds.
When Sullivan contacted Bank of America (BAC, Fortune 500), his past lender, a representative told him the bank hasn't yet decided if it will participate.
"If they do it, I want to be first in line," Sullivan says. "But I started contacting other SBA lenders in the meantime, and I talked to the senior vice president of another bank who said she doesn't think her bank will do it."
Sullivan's says his next step will be to start calling every lender on the SBA's preferred lender list until he gets a hit.
If he gets as far as CountryBank USA in Cando, N.D., he may be in luck. While CountryBank hasn't yet made a final decision, CEO Terry Jorde says her bank will probably participate in issuing ARC loans.
Jorde believes the weak financial incentives and uncertainty surrounding the program are outweighed by the needs of the community. "The interest rate is irrelevant. We're only dealing with $35,000," she says, referring to the maximum allowable ARC loan size. "The more important point is helping businesses survive. Those businesses may have $150,000 loans from us in the future. It's that long-term goal that's making us want to help them survive in the short run."
Quadrant Financial's Handmaker disagrees, saying that while his bank sees value in the program, closing a $35,000 SBA loan can be just as hard and administratively burdensome as closing a much larger loan. He plans to use other tactics, such as loan-payment deferrals and moratoriums, to help customers while also making money for the bank.
"Many of the clients we've talked to don't want to incur additional debt," he says. "If we can achieve same ultimate result, to help with cash flow at end of the day, then we can protect loans we've got without stepping into a program we don't fully understand."
The new "America's Recovery Capital" (ARC) loan program, authorized by February's stimulus bill and slated to launch on June 15 after four months of planning, aims to make small, government-backed loans available to viable companies laid low by the recession. (For full details on ARC eligibility and loan terms, click here.) But the loans will be made and managed by SBA lenders, and so far, few have jumped on board.
Before the details of the program were released on Monday, lenders were hesitant to commit, concerned that there wasn't enough economic incentive for them. Now, with key details about how the program will work finally available from the SBA, many haven't retreated from their initial wariness.
"While we have received a few requests from our customers, we are still leaning against it," says John Handmaker, president of Quadrant Financial, a small business lender based in Louisville. "The guidance from the SBA indicated rates and terms, which have provided some clarity, but we're not 100% certain about what we need to be careful of. We don't feel we have a solid grasp of the standard operating procedures and rules, and we're not going to jump in until we really understand it."
One deterrent for the banking community is the interest rate for the loans. While the loans are interest-free for borrowers, the SBA will pay lenders an interest rate of prime plus 2%. For the month of June, that's 5.25% -- a lower interest rate than the SBA sets for its other loan programs.
"The SBA provided for a variable but fair rate," says SBA spokeswoman Hayley Matz. "It's important to remember that these loans carry virtually no risk to the lender -- they are 100% guaranteed by SBA in terms of principal, and the SBA is paying the interest."
Talk back: What do you think of ARC loans?
As the lenders debate the merits and potential pitfalls of making ARC loans, small business owners that need the money are wondering where to turn. Mack Sullivan, for example, is poised on a starting block, ready to run through lenders' doors with his application on June 15.
Sullivan's tourism literature company, Due South Publishing, based in St. Simons Island, Ga., was profitable for the five years leading up to 2008. Then, the companies that advertised in Due South's publications began cutting back dramatically.
"The credit-card debt we have has accumulated primarily for just cash-flow management. As revenues have come down, we used it as a cash advance credit line, to pay for a publication we just printed, or expenses and payroll," Sullivan's says. At the same time, the interest rates on his four cards have doubled in recent months. The highest is now at 25.9%.
With an ARC loan, Sullivan hopes to pay off the debt on those cards, which costs him about $2,000 a month. That move, he says, will put the company on more stable footing and position it to launch new products when the economy rebounds.
When Sullivan contacted Bank of America (BAC, Fortune 500), his past lender, a representative told him the bank hasn't yet decided if it will participate.
"If they do it, I want to be first in line," Sullivan says. "But I started contacting other SBA lenders in the meantime, and I talked to the senior vice president of another bank who said she doesn't think her bank will do it."
Sullivan's says his next step will be to start calling every lender on the SBA's preferred lender list until he gets a hit.
If he gets as far as CountryBank USA in Cando, N.D., he may be in luck. While CountryBank hasn't yet made a final decision, CEO Terry Jorde says her bank will probably participate in issuing ARC loans.
Jorde believes the weak financial incentives and uncertainty surrounding the program are outweighed by the needs of the community. "The interest rate is irrelevant. We're only dealing with $35,000," she says, referring to the maximum allowable ARC loan size. "The more important point is helping businesses survive. Those businesses may have $150,000 loans from us in the future. It's that long-term goal that's making us want to help them survive in the short run."
Quadrant Financial's Handmaker disagrees, saying that while his bank sees value in the program, closing a $35,000 SBA loan can be just as hard and administratively burdensome as closing a much larger loan. He plans to use other tactics, such as loan-payment deferrals and moratoriums, to help customers while also making money for the bank.
"Many of the clients we've talked to don't want to incur additional debt," he says. "If we can achieve same ultimate result, to help with cash flow at end of the day, then we can protect loans we've got without stepping into a program we don't fully understand."
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