SBA loans a 'lifeline' for cash-strapped businesses

For decades, the Small Business Administration has guaranteed financing for companies trying to expand. On Monday, the SBA will begin guaranteeing loans for those struggling to pay their debts.

The program, dubbed ARC for American Recovery Capital loans, will stand behind loans as large as $35,000 to established small businesses with cash-flow problems. Borrowers will have five years to repay, and the SBA will pick up the interest payments.

The SBA said it expects the ARC program to generate 10,000 loans amounting to $350 million.

For some cash-strapped companies, "having this little lifeline will help," said Matthew Rutherford, who teaches management at Virginia Commonwealth University School of Business and studies small-business conditions.

Many small businesses, he said, have been hurt by abrupt declines in sales, which hampered their ability to pay creditors, suppliers and employees. That, in turn, made them much less attractive to their lenders.

Susan Hudson, whose Mid-Atlantic Small Business Finance Inc. lines up SBA-guaranteed loans for companies in Virginia, Maryland and North Carolina, said she has been hearing from small-business owners wanting to know about the ARC loans.

It's not clear how many banks will be interested in making the loans because of their modest size, she said. Small businesses using the SBA's main 7(a) program can borrow as much as $2 million.

As the SBA began rolling out the ARC program last week, bankers at BB&T and Old Point National Bank said their institutions were still studying the details. One crucial requirement is that borrowers be viable businesses, said Melissa Burroughs, chief lending officer at Old Point in Hampton.

The interest rate for ARC loans will float two percentage points above the prime rate, or 5.25 percent currently, and the SBA will pay the borrower's interest directly to his or her lender. The borrower has to make only principal payments.

The ARC program, which was part of the economic stimulus package that took shape in February, is being launched in the wake of a dramatic falloff in SBA-guaranteed lending.

From October through May, the volume of SBA loans in Virginia amounted to less than $80 million. That compares with $235 million of loans made during the fiscal year that ended last Sept. 30.

One reason for the downturn was that banks, especially large ones, had imposed tougher credit standards, said Ronald E. Bew, SBA district director for Virginia. Another was that some entrepreneurs chose not to borrow during an environment of more costly credit. However, the volume of SBA-guaranteed lending has begun to pick up in recent months, Bew said.

Among the lenders that have made SBA-guaranteed loans in Virginia since October, the most active has been BB&T, with 62 loans totaling $12.64 million. SBA loans fit the bank's model for serving small and medium-size companies, said Robert Boyd, the bank's Hampton Roads regional president.

"For those borrowers with viable businesses, there is credit available," Boyd said.

Some non-bank lenders that were major participants in the SBA's loan programs slashed the volume of their lending. For the eight months through May, CIT Business Lending Corp. made only two loans in Virginia, amounting to $1.4 million. That's a fraction of the 31 loans totaling $25 million CIT extended during the fiscal year that ended Sept. 30.

Meanwhile, some small entrepreneurs have been hobbled by banks' cutbacks in home equity lines of credit and the lower ceilings imposed on credit cards, key sources of funding for smaller enterprises.

Tight credit has prompted some small businesses to seek alternative sources of short-term financing, including the sale of their invoices to factoring companies at a discount. Jeff Richardson, whose Virginia Beach company provides funds to small companies by means of factoring, said the volume of his business has been growing as banks in the region scaled back the credit lines for more of their borrowers.

The message from some banks is that their credit standards will remain tight, said Richardson, president of Beach Commercial Finance.

ARC loans may fit the needs of some businesses wrestling with frozen lines of credit and falling sales. However, use of the loans is restricted: They aren't available for start ups and can't be used for business expansion.

Applicants also must document that they will be able to repay what they borrow. That's because the SBA expects the ARC loans to have a higher default rate than its other loans, the SBA's Bew said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com