Slow Stimulus

Government-funded Loan Program For Small Businesses Is Sluggish

August 17, 2009|By Eileen Ambrose | Eileen Ambrose,

Ten thousand interest-free loans are expected to be made to small businesses under a new federal program launched in June, but so far many banks aren't participating. Loans are trickling out with only a half-dozen made in Maryland.

The goal of America's Recovery Capital loan program, part of the government's economic stimulus package, is to assist viable, but temporarily struggling, small businesses by offering them interest-free loans of up to $35,000 with lenient repayment terms. Banks started accepting applications for the government-backed loans June 15.

The program runs through Sept. 30, 2010, or until its $255 million appropriation is exhausted. As of last week, 1,191 loans for about $39 million have been approved across the country, according to the Small Business Administration. Of those, six loans worth $175,800 were made in Maryland by five banks.

Among participating banks, some are offering loans only to existing customers, and still might add restrictions.

Some small businesses in Maryland and their supporters say they are frustrated and disappointed by the lackluster response by banks, especially when taxpayers came to the aid of big institutions earlier when they needed a bailout.

"It's unfortunate they don't see themselves as having a role of helping small businesses through this disaster," says Jane Seebold, executive director of Federal Hill Main Street Inc. "This is one situation where we all need to be in it together."

Amy Mutch, owner of a fashion boutique in Federal Hill, got her application into the bank the first day.

"I was told that people would be camping out the night before because they were so afraid that there was just a fixed amount of money that they wanted to be first in line," Mutch recalls. "I obviously didn't camp out, but I had my application pretty much ready to go."

Sales at Amy's Boutique had been growing at a healthy clip until last fall, when the stock market plunge made customers less concerned about clothes and more worried about their pocketbooks. Sales dropped about 30 percent over a few months.

Mutch says the ARC loan seemed like a perfect solution to help with new inventory, and she fit the program's criteria.

To be eligible for an interest-free loan, small businesses generally must be at least two years old and have been profitable for at least one of the past two years. The proceeds must be used to pay down certain debt, including mortgage and small business loans, as well as credit cards and lines of credit used for business. Money is disbursed over six months, and payments thereafter are deferred for 12 months. Borrowers then have five years to repay.

Uncle Sam pays interest to the banks at a rate of 2 percentage points above the prime rate. And if borrowers default, banks must try to collect the debt before being fully reimbursed by the government.

The loan program is well-intentioned, but poorly structured, says Bob Seiwert, senior vice president at the American Bankers Association.

ARC loans are targeted at viable, but troubled, businesses, just when federal regulators are paying more attention to the quality of loans that lenders make, Seiwert says. "Banks don't want to add to their problem-loan list," he says.

Banks also complain that it takes as much paperwork to make one small ARC loan as it does to make a $2 million SBA loan, he says

And though Uncle Sam guarantees the loans 100 percent, banks might not see that money if they don't follow the 31 pages of instructions to the letter, Seiwert says.

Mike Menzies, president of Easton Bank and Trust Co., says the loans aren't complicated, and his bank offers them even though they aren't highly profitable in the short run.

"It helps small businesses, and that's our bread and butter," says Menzies, who is also chairman of the Independent Community Bankers of America. "The ARC loan produces a profit because you end up with a relationship with that customer, and bundled together, that is profitable."

Easton Bank offers the loans to existing customers or those who intend to develop a relationship with the bank beyond the ARC loan.

Some other banks are limiting ARC loans to those who already have loans with the lender. M&T Bank says it's willing to make ARC loans to new or existing customers. Bank of America, which holds the largest market share in the Baltimore area, says it will decide by the end of the month whether to participate.

Mutch applied for her loan at SunTrust, where she has had an account and a small business loan used to launch her shop three years ago.

"My business was growing beautifully the first two years" until the stock market free fall last year, the 53-year-old says. "People were just paralyzed when they saw what happened to their 401(k)s. I watched my numbers drastically drop."

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