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Failure To Lend

By Marc Tracy

One of our favorite bloggers, Robb Mandelbaum, gets tapped for the Big Leagues today for a B1 (front page of the business section) New York Times story on the America's Recovery Capital program. Mandelbaum's article gives the whole issue absolutely definitive treatment, and is well worth your time.

As we've previously discussed (here and here), the problem with ARC--under which "viable" small businesses with pre-existing bank debt can apply for interest-free loans from banks but backed 100% by the Small Business Administration--is that the banks have surprisingly little incentive to participate in the program, as they are being paid only prime interest rate minus 2% by the government for their troubles. That is crappy inducement, especially considering that it costs time, effort, and money to administer the program, and considering that a 100% guarantee doesn't always end up being a 100% guarantee (damningly, even Mills acknowledged that the guarantee ends up actually going into effect only 95% of the time!). So, yes, the program is off to a slow start.

Interestingly, the SBA claims that ARC was actually designed to trickle out slowly, in order that it can last through September 2010, Mandelbaum reports. "We like the fact, actually, that they will be spread out over time. We have no doubt that we will make 10,000 loans," SBA head Karen G. Mills tells him.

Mandelbaum also does a splendid job going into detail on one of the program's most bizarre features: the fact that its eligibility only extends to small businesses that are both struggling with bank debt and yet also are "viable". Viability is defined, apparently, by having been in business at least two years; maintaining positive cash flow (though not necessarily a black bottom line) in at least one of the past two years; and possessing a two-year cash flow projection that indicates continued solvency. So right there you're eliminating both the too-successful and the not-successful-enough, and instead opening the program only to those businesses that just so happen to hit the regulatory sweet spot.

And the banks--again, unsurprisingly, and frankly understandably--tend to use those guidelines more as excuses to reject loan applications than to accept them.

We would only add one more beef with have with the program, which is a fault more of design than of execution: its exclusion to those without pre-existing bank debt makes it seem just as much a sop to banks with outstanding loans as it is to actual small businesses.

Meanwhile, in a complementary blogpost (as opposed to what you're currently reading, which is of course a complimentary blogpost--har har har), Mandelbaum reports the actual stats--a paltry 1,127 ARC loans have been made by a little over 400 banks--and divines the seemingly inexplicable fact that fully one-third of these loans were made in the three Midwestern states of Minnesota, Iowa, and Wisconsin. Unfortunately, the country we come from is not called the Midwest, and in the full 50 states, the ARC's trajectory seems decidedly downward-sloping.

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