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The Ugly Truth About ARC Loans

The federal government under the Obama Administration and the Bush Administration before it has bent over backwards to bailout America’s largest mismanaged companies from banks to automotive makers to insurance companies to investment houses. And, when they’re not bailing out big business, they’re bailing out mismanaged states. The latter is why the vast majority of the Recovery Act dollars are being floated through states before… never mind, there is no before. The dollars are just flowing into state coffers, period.

Now, maybe you’re thinking that small business is getting a piece of this stimulus spending. After all, you’ve heard the countless news stories about that great SBA program, the American Recovery Capital (ARC) Loan:

ARC loans can be used to make payments of principal and interest, in full or in part, on one or more existing, qualifying small business loans for up to six months. ARC loans provide an immediate infusion of capital to small businesses to assist with making payments of principal and interest on existing debt. These loans allow borrowers to redirect cash flow from making loan payments to investing in their businesses, to help sustain the business and retain jobs. For example, making loan payments on existing loans with proceeds from an ARC loan can allow a business to focus more funds on core operations, such as buying inventory or making payroll.

ARC loans are interest-free to the borrower, carry a 100 percent guaranty from the SBA to the lender, and require no fees paid to SBA. Loan proceeds are provided over a six-month period and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years.

Hey, I own a small business, actually three, and wow, what a great deal. After all, I’m part of the original MTV generation. “Money for Nothing” was practically a theme song of my high school years. So, forget my limited government, no bailout philosophy. Sign me up for the free money. After all, look how quickly the federal government has been able to put billions upon billions of dollars in the pockets of big business. How difficult can it be for me to get my hands on a small $35,000 loan? Well, it turns out very difficult.

Diego Iorio sounds like the kind of small business owner the government’s new ARC loans are made for. His two-employee audio gear retailer, SIRS Electronics, had been profitable through last year, with 2008 revenue nearing $500,000, but his projections for this year are down 40% to 50%. Although he has not missed any payments yet, SIRS, based in McAllen, Tex., has $140,000 in debt split among credit cards and payments owed to vendors. “We are in a very delicate situation right now,” the 41-year-old Iorio says.

He prepared 200 pages of paperwork, including financial statements and tax returns going back three years, and applied for an ARC loan through Wells Fargo (WFC) just after the program launched June 15. The loans, made by banks and fully guaranteed by the government, give small businesses up to $35,000 interest-free to pay off other debts for up to six months, with repayment deferred for a year after that. But Wells Fargo rejected Iorio’s loan application because his personal credit score, at 649, was below the 680 the bank requires. To Iorio, it’s a catch-22: His score had been above 700, but it suffered when he took on debt to support the business.

Let me bring this to a more personal level. I called a business banker in town I’ve known for years when this money finally became available. He told me his bank would only be considering making the loans to current bank customers. Okay, fair enough. So, I called one of the banks with which I have a business account. As luck would have it, it was none other than Wells Fargo.

Wells Fargo told me they couldn’t give me information over the phone or email me about the program, and that I would have to stop into a branch. Okay, no problem I had a deposit to make anyway. So, off I went to my local branch. I made a deposit into my business account and when the nice lady behind the counter asked me if there was anything else. I said, “Yes, I’d like to apply for an ARC loan.” She looked at me quizzically. So, I explained what an ARC loan was. She thought she might have heard of that. Unfortunately, she said she’d have to take down my name and number and have someone get back to me later that day about how to apply for the loan. So, off I went.

Well, two and half weeks went by and I still hadn’t heard anything back. I decided to go back into the bank. I signed the book, took a seat and waited 30 minutes for a banker to become available to see me. She called my name, and we sat down at her desk. As luck would have it, it was the same nice lady that had taken my deposit during my previously mentioned visit. I told her why I was there, and her response was, “Oh right, I remember you.”

She then took out a piece of paper and said, “You’re going to have to call this number and talk to a business banker. We don’t have a business banker at this branch, so no one here can actually give you information on ARC loans.” I asked if I was going to have to go into that branch and repeat the process, and she said, “Oh no, he’ll be able to tell you over the phone whatever you need.”

Hmm, couldn’t help but wondering if he could help me over the phone, why I ever had to go in to the branch in the first place. Well, I called the guy and got voicemail. No surprise. He did return my message that same day, and after I told him what I was looking for, he said, “I can send it to you, but you should know it’s a 25-page application.”

“No problem,” I thought. Although, since I’m in the business of billing for my time. I was beginning to doubt this whole money for nothing concept. I’d already spent a couple of hours looking into this thing. Heck, I was thinking this might take less of my time if I could just be called to testify in front of Congress and then walk away with a much bigger check. I would even know not to take the company jet. Granted, I don’t own or have access to one, but I still would know not to take it.

So, the guy emails me the ARC application. Hmm, they could answer my question over the phone and email the application. Still wondering why I had to go into a branch. Sure enough, it was 25 pages long. But, I actually didn’t have to spend too much time filling it out because I didn’t get past the first page, which contained this fact listed under the section, Facts about the ARC Loan Program and Wells Fargo::

ARC loan funds are to be used for payments of principal and interest for up to six months on existing, qualifying small business loans, capital leases, business credit cards and vendor loans. Wells Fargo will only fund Wells Fargo business credit cards transactions of $5,000 or higher.

As luck would have it, I don’t have business credit cards with Wells Fargo. But, this all got me to thinking. First,
why couldn’t Wells Fargo include these facts on their website? Next, exactly who is this loan fund supposed to benefit?

Apparently, it’s not intended to benefit me the small business owner. In fact, it looks like another gift for large banks. Specifically, it looks like a way for a bank like Wells Fargo to convert their unsecured credit card debt of $5,000 or higher to a 100% guaranteed loan backed by the SBA at prime, plus two percent. Not a huge profit by credit card standards, which is probably why the bank is only interested in converting their own credit card debt.

Despite the lip service paid over and over again to small business driving the economic engine needed to bring us out of the deepening recession. Nothing could be further from the truth. When it comes to small business, the only interest the federal government has is how to increase taxes on those businesses.