Why ARC Loans Are Risky

The rule of thumb on any SBA loan is that, if there is collateral available, it must be pledged against the loan.  This means that if the loan is not repaid, the lender can place a lien on your collateral.    In addition, businesses must have an acceptable business credit score, as determined by the SBA, and all principles owning 20% or more of a business must personally guaranty the loan. 

Businesses must also weigh the responsibility of adding another loan to their current financial responsibilities.  Even though ARC loans are interest-free, repayment is necessary.  While the ARC loans allow them to restructure their business plans in order to remain viable, simply trading one loan for another is not a viable option.  The purpose of the purpose of the American Recovery Capital Program, and the American Recovery and Reinvestment Act is RECOVERY.  Although small business owners may qualify based on their presenting a solid debt repayment plan, the future is always uncertain.  There is no guarantee that planned future revenues will remain on the up swing or the economy wouldn’t change again, making repayment more difficult than anticipated. 

There is also the concern over the risk of adding more debt that the American taxpayers must assume.  Specifically, will the whole idea behind the ARC loans to stabilize small business backfire and add more cost to American taxpayers because the government is assuming much of the risk if the businesses that borrow the money cannot repay the loans?

ARC may have a market where borrowers are having difficulty with their debt and their business plan provides support that future revenues are on the up swing and debt repayment can be achieved in the future, with the use of a no interest loan in the short term. If you are currently experiencing this type of challenge, then a serious discussion with your lender might be the solution for the bank to participate in this lending initiative.