Smart Borrower Blog

Weak Small Business Rescue Plan Unlikely to Deliver Relief

Where is the government's promised help for small businesses, some of the hardest hit entities of this economic downturn? According to the Small Business Administration, the newly created "America's Recovery Capital Loan Program" went into effect on June 15, offering interest-free loans for as much as $35,000 to qualified businesses.

This new loan program, made possible as part of the original stimulus billed passed by Congress in February, seems doomed to failure, however, from the very beginning. First, only a limited number of loans will be offered – 10,000 to be exact. Try to match that up with the more than 30 million small businesses in the country.

Second, these loans are to be made by private lenders but guaranteed by the government. Lenders are not allowed to charge any fees for loan origination and while the government will be paying the interest on the loan, the specified is only prime plus 2, a pretty minimal rate compared to most private lending loans.

Also, not only will banks not get a ton of interest on these loans, but they will also have to wait an entire year without compensation as borrowers have 12-months of deferred payments in order to pay down their debts.  
As Catherine Lyons posted on the Los Angeles Times blog,

"Banks are being offered next to nothing by the government to make what most lenders regard as puny loans. SBA lenders want bigger loans that make banks more money, and a higher interest rate.The SBA is dangling a few carrots in front of lenders, but it doesn't seem to be enough to persuade them there's a benefit for more than just the borrowers and Washington."

And with very few major banks signed on at this point, any real benefit to the economy from this program is likely to be very limited.