I really hate to be so negative, but if we look at a couple simple facts, the entire ARC (America's Recovery Capital Loan Program) is a $350 million mess waiting to happen. This entire process is flawed from top down. It sounded good on the campaign trail (it always does), but 9 months later, what do we know?
1 - We have about 14 million small businesses (9 employees or less) in the US that collectively employ about 43 million individuals. President Obama is hoping they can help lead the way out of the current recession by providing a minuscule fraction of them small business loans up to $35,000, provided it is used to eliminate other debt.
2 – Many banks do not have the capacity to make these business loans, but more importantly, they do not want to make the loans as there is no ability to charge any fees or generate any income. It sounds great from the podium to say "no fees" but without incentive, it is just a distraction while many banks are trying to heal their balance sheet.
3 – The SBA doesn’t really want to make these small business loans. Publicly they will say differently, but the SBA loans default rate in 2006 was 2.4%, which jumped to 4.8% in 2007. 2008 saw a record of 12% default which would be a complete disaster for a lending company charging 25% interest. The typical small business loan through the SBA loan program has a current interest rate around 6%. They (we) cannot afford more losses, regardless of the rhetoric.
So, the SBA can’t afford to make these small business loans, the banks do not want to make the loans, it is not a solution for the business owner’s problem or a solution to the recession. So, why develop and promote the ARC program? Well, it allows our government to show they are responsive and the Democratic Party can appeal to the small business owner in advance of the next election. It is a shame they are willing to blow a third of a billion dollars in that pursuit.
So, that is the problem. Let's talk about solutions for business owners who need working capital or a small business loan to really grow their company. My next post will outline four real world options that usually result in a small business loan or working capital: Business Cash Advance, Equipment Lease, Secured Small Business Loan and SBA loan program.
If you have any experience with these programs, I welcome your comments.