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The Lowdown on ARC Loans Everything you need to know about the SBA's new loan program.

By Mark Deo

Opinions expressed by Entrepreneur contributors are their own.

The Small Business Administration recently released "lender guidelines" for America's Recovery Capital (ARC) Loan Program. While the program was announced back in May, thousands of small-business owners have been pouring into banks seeking information about the $35,000 interest-free, deferred-payment loans, only to be turned away empty-handed.

"We are on target to issue the guidance and begin training, and have been reaching out to lenders regarding some of the specifics of that guidance. Guidance and forms are now available through," says Eric Zarnikow, associate administrator for Capital Access, the SBA department overseeing the ARC loan program. He added that borrowers can begin applying for these loans beginning June 15 the SBA, will be able to provide about 10,000 ARC loans to small businesses across the country, through its lenders.

What are ARC Loans?
ARC loans will be up to $35,000 and available to established, viable, for-profit small businesses suffering "immediate financial hardship" in order to provide some temporary financial relief so they can keep their doors open and put their cash flow back on track. It is intended for businesses that need short-term help to make their principal and interest payments on existing qualifying debt (including conventional loans, credit card obligations, notes owed to suppliers and utilities).

So what exactly is a "Viable business?"
Zarnikow says the SBA defines a viable business as "a for-profit business with evidence of profitability or positive cash flow in at least one of the past two years." Businesses must provide three years of financial statements, cash flow projections based on reasonable growth over two years and demonstrated ability to meet current and future debt obligations, including future repayment of the ARC loan. Also, the borrower must certify that they are currently no more than 60 days past due on any loan paid with an ARC loan and they must have an acceptable business credit score as determined by SBA."

How does the SBA define 'immediate financial hardship?'
The SBA is requiring businesses to show evidence of a "change in the financial condition" such as declining sales, frozen credit lines, difficulty meeting payroll, paying rent or difficulty making loan payments. The lender must analyze and confirm that a hardship exists. The SBA has several categories for determining hardship status such as the loss or reduction of revenue in the preceding year, increase in business costs in the preceding year, changes in operating ratios, loss of working capital or short-term credit lines and/or inability to restructure debt due to recent credit restrictions.

How do ARC loans work?
The loans are 100 percent guaranteed by the SBA and made by existing SBA 7(a) lenders. They have no SBA or lender fees associated with them (unless the lender must secure collateral as part of the loan). The disbursement period (up to six months) is followed by a 12- month deferral period with no repayment of principal. After the deferral period, the borrower pays back only the ARC loan principal over a five-year period. ARC loans are available through SBA-approved lenders as long as funding is available or through Sept. 30, 2010, whichever comes first, and cannot be used to make payments on another SBA-guaranteed loan, with the exceptions of loans made with an SBA guaranty after Feb. 17, 2009.

What do the banks think of ARC loans?
While the borrower will not have to pay interest, the SBA will pay the monthly interest at the rate of prime plus 2 percent to the lender on behalf of the borrower. The Office of the Inspector General has already released information cautioning banks that they will be looking very closely at how carefully the banks follow SBA guidelines and will not hesitate to issue repairs and denials after loans are funded. This means that banks may extend loans yet be on-the-hook for defaults without subsidy from the SBA. As a result, numerous SBA banks have expressed hesitation in participating in these loans.

Bob Coleman who provides training and publishes reports for participating SBA banks conducted a survey of bankers in which some participants say they are "scared to death" to participate in such a program.

With over 30 million small businesses in the U.S. and only 10,000 loans available, demand is expected to exceed supply. The SBA is limiting participation to 50 loans per week per lender and will accept a total of 1,000 loans per institution over the course of the program.

For more information about the program, visit

Mark Deo

Mark Deo is author of The Rules of Attraction: Fourteen Practical Rules to Help Get The Right Kind of Clients, Talent and Resources to Come to You. A leading advocate of small business, he has appeared on CBS, FOX Business, NPR and MSNBC and his articles have been published by Business Week, Entrepreneur, Fortune and CNN/Money. He is CEO of the SBA Network, Inc., a small business growth-management firm in Los Angeles, Calif.

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