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Snowe's Push to End the ARC Loan Program

Senator Olympia Snowe (R-Me.) introduced a bill Nov. 16 to repeal the small business ARC loan program, a stimulus-package initiative she helped create. Too many borrowers are defaulting on the government-backed loans intended to buoy struggling businesses, Snowe says. As the ranking Republican on the Senate Small Business & Entrepreneurship Committee, Snowe originally supported the ARC loan program along with other small business committee leaders in Congress from both parties. But she reversed course because the loans are projected to default at sky-high rates approaching 60%, according to the Office of Management & Budget. "When the program was rolled out, Senator Snowe expressed her concerns to the [Small Business Administration] and the Treasury Dept. over the projected default rate, but the Administration has not yet taken sufficient steps to lower those projected rates," Snowe spokesman John Gentzel said in a statement. When the House voted earlier this month to extend the program, Snowe decided to introduce the bill (PDF) to pull the plug, which she quietly filed Monday. "Her legislation would safeguard taxpayer funds by immediately ending the American Recovery Capital loan program and obligating the balance of the funds back to the Treasury," Gentzel said. Small Business Owners Among the CriticsLaunched by the SBA in June, the $255 million ARC program, for America's Recovery Capital, got a lukewarm reception from small business owners because of the red tape that applicants face, and lackluster interest from lenders. Snowe's bill would cut short the ARC program with just over half the funds committed. The loans are intended to help struggling but viable small businesses survive short-term hardship by freeing up cash flow. Borrowers can apply for interest-free ARC loans of up to $35,000, which they can use to make payments on existing debts for up to six months. They have up to five years to repay the ARC loan, starting one year from when it is fully disbursed. Banks make the loans, but the government guarantees the full amount and pays lenders interest at 2% above prime. The ARC program has faced criticism from opposite fronts. Small business owners say the loans are too difficult to get, with onerous paperwork requirements and many banks not participating. Critics like Snowe say the high default rate shows that taxpayer-backed loans are going to companies that aren't viable. It's similar to the tightrope banks are on, balancing pressure from politicians to ease credit with pressure from regulators to reduce risk. "We had to account for the fact there is some risk, a greater risk than we have in our normal loan program," says SBA spokesman Jonathan Swain. "We provided clear and specific guidance to lenders on how to determine viability." He says the ARC loan program balances the need to steward public funds with the "urgent need of small business" for credit. About $131 Million in Loans MadeSnowe had called the program a "lifeline" for struggling small businesses. "I helped craft this initiative based on the message I heard from numerous business owners across Maine," she said in a statement at the program's launch in June. ARC loans "will act as a bridge for hundreds of small business owners that just need a small infusion of capital to keep their doors open," Snowe said. The program began taking applications June 15. About 4,044 loans had been made through Nov. 13, for a total of about $131 million, according to the SBA—just over half of the $255 million allocated. The ARC program has made up about 12.5% of SBA loan volume since June 15. Snowe's bill to abolish the ARC loan program would not affect borrowers who have already taken out loans. It would rescind any money not yet allocated for loan guarantees. The bill was introduced two days before a White House summit on small business financing planned for Nov. 18, which will bring together officials from the SBA and Treasury to discuss ways to expand access to credit.
Tozzi is a reporter for Bloomberg Businessweek in New York.

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