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."
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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."