They Turn Very Slowly
100% risk-free to the lender and interest-free to the borrower – what is not to like about America’s Recovery Capital Loans, the new program of the U.S. Small Business Administration? Well, for one thing, it is hard to find a bank that will underwrite the loans. SBA loans are guaranteed by the SBA, but issued by participating banks. I have called most of the institutions on the SBA’s preferred lender list and I have yet to identify one that has decided it will participate in the program. The banks have identified four problems: first, they have to navigate the thicket of SBA rules with little guidance for this new program. That is a lot of work to do for loans capped at $35,000. Second, while the loans are interest-free for the borrowers, the SBA will pay the lenders prime plus 2%, a lower interest rate than the SBA charges for its other loan programs. Third, 100% of the principal is guaranteed and should the default rate continue to rise, a not unlikely prospect given that unemployment is high and rising, bankers don’t want to be blamed for shifting more losses to taxpayers. Finally, there may be relatively few qualified applicants for this program given the criteria established by the SBA and the risk for small businesses to assume more debt in such an uncertain market.