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."
Mutch says sales have leveled off, yet the ARC loan would give her the breathing room to do some long-term planning. She applied for $35,000, which she wants mostly to use to pay down a line of credit so she won't have to resort to credit cards to buy new inventory.
