SBA ARC Loans: What Counts as a 'Viable' Small Business?
Despite the federal recovery efforts to increase lending to small businesses, the loans many small businesses have waited on are the Small Business Administration (SBA) emergency ARC loans designed to help struggling businesses temporarily bridge the financial gap. The SBA has released more details about which businesses will be eligible for the loans, set to become available next week.
As discussed previously, the ARC loans, to come from private lenders, will be for up to $35,000. Borrowers will not have to make any payments for a year after disbursement. After that, they'll have 5 years to pay off the loan. Recipients may use the funds to pay down debt (except other SBA loans made before February 17, 2009). The SBA will pay lenders prime plus 2% interest on the loans, but borrowers will need to repay only the principal.
In terms of eligibility, these loans are designed for small "viable" businesses with "immediate economic hardship." The first thing to know is that ARC loans are not for new businesses. Even if a start-up seems "viable," businesses must have been in operation for at least 2 years to qualify.
So, what exactly do "viable" and "immediate financial hardship" mean?
As detailed by the SBA, to be viable, a business must be an established, for-profit business with financial statements that demonstrate it was profitable in at least one of the past 3 years (or since opening if in operation less than 3 years). It also means being able to project sufficient cash flow to meet current and future loan payments over a 2 year period from loan approval. Though ARC loan funds can go toward existing debt, the borrower cannot be more than 60 days past due on any debt to be repaid with the ARC funds. The borrower will also need to have "an acceptable credit score as determined by the SBA."
According to the SBA, lenders must confirm an applicant's immediate financial hardship. Some example of indicators are: declining sales, frozen credit lines, difficulty meeting payroll, paying rent, and difficulty making loan payments. The SBA lists as its categories for determining hardship: "loss or reduction of revenue in 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."
- SBA Call-in Training on ARC Loans: June 9 - 12 [pdf] (SBA.gov)
- Applying for an ARC Loan (SBA.gov)
- ARC Loan FAQ for Businesses and Lenders [pdf] (SBA.gov)
- SBA Lenders Brace for Rush of Recovery Loan Requests (Credit Union Times)
- The SBA Sees a Lending Shift (Business Week)
- Small Business Accounting & Financial Management (FindLaw)
- Loan Modification (provided by the Reno Law Firm)
