SBA Throws Small Biz Another Lifeline: Interest-Free Loans

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Just in time for National Small Business Week (Yes Virginia, there is a National Small Business Week, and it has corporate sponsors!) the Obama Administration announced plans to implement another Small Business Administration program created by the February stimulus, this one designed to give firms behind on their loans a little breathing room. Beginning June 15th, the SBA will guarantee bridge loans up to $35,000 "to established, viable, for-profit small businesses." These "America's Recovery Capital" loans will be free of interest and fees, fully guaranteed by the SBA, and will offer deferred repayment.

"Together with other provisions of the Recovery Act, ARC loans will free up capital and put more money in the hands of small business owners when they need it the most," SBA Administrator Karen Gordon Mills said in a press release. "This will help viable small businesses continue to grow and thrive and create new jobs in communities across the country."

According to the agency, the ARC loans can be used to pay principal and interest on any "qualifying" small business debt, "including mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payable to vendors, suppliers and utilities." (One type of debt that doesn't qualify: an existing SBA-backed loan.*) A loan will be disbursed in installments over six months. Repayment will begin a year after the last installment, and stretch over five years.

Of course, the trick for the SBA is how to determine whether a business struggling to stay current on its debt is "viable." SBA spokesman Mike Stamler wouldn't elaborate on the criteria the SBA will use to make those decisions, but said, "the essential point will be whether the business is struggling with making loan payments, but can reasonably project that it can get back on track with the infusion of ARC loan funds and the benefit of deferred payments." The SBA still hasn't determined where these loans will end up in the creditors' pecking order should a company go bankrupt or otherwise liquidate. In any event, the government's total exposure (and, conversely, its ability to help) will be limited by Congress' appropriation to $255 million. Stamler says the SBA estimates the ARC program will be able to make 10,000 loans with the funding it has. (The agency is counting on average loan size well below the maximum.)

This is the second major initiative announced in recent weeks. On May 1st, the SBA temporarily replaced the size standards that restrict eligibility for 7(a) loans with the more generous limitations of the 504 Community Development Company loan program. The incumbent 7(a) size standards are based on either annual revenue or number employees, and vary widely by industry. Some of those limitations are already quite high; certain industries can have as many as 500 employees or revenue reaching $35.5 million (making them small businesses only in a political sense). As an alternative, through September 2010 businesses will meet eligibility requirements if their net worth is less than $8.5 million or their average after-tax income is under $3 million. The SBA says that these alternate size standards will make an additional 70,000 businesses -- including many car dealers -- eligible for loans.

At that time, the Obama Administration claimed that its measures to free up SBA-backed capital increased weekly 7(a) loan volume by more than 25 percent and brought nearly 450 lenders who had not made SBA loans since last October back to the table.

*An earlier version of this entry reported that bridge loans could be used to repay an SBA-guaranteed loan. However, the stimulus law expressly forbids this.

Last updated: May 18, 2009




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