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A Fix for ARC Loans: Microlenders


By now difficulties with the Small Business Administration’s ARC Loan program are well known. These are small loans up to $35,000, 100% guaranteed by the government, and interest-free to the borrower. They can be used only to make payments on existing debt, and they’re intended to give some breathing room to viable companies facing short-term financial hardship.

While the program has worked for some, many banks aren’t participating because making ARC loans involves a lot of underwriting for relatively little payoff. Banks have to make sure a loan meets SBA standards to qualify for the guarantee, and it’s a lot of work for a small loan. There’s a high default rate expected, and it’s expensive for banks to recovery the government guarantee for loans that default. ARC loan applications also demand heavy documentation from the business owner.

Could microlenders better administer ARC loans? They’re used to dealing with smaller loan sizes. Since most are nonprofits, they don’t need to make as much on each deal as commercial banks do. They’re used to doing some hand-holding with small business owners as well, which would benefit struggling businesses. And the SBA already has relationships with microlenders through a separate microloan program that the agency just expanded.

Most of the ARC loans so far have been made by small and mid-size banks, along with some credit unions. It’s not clear to me whether microlenders who already work with the SBA’s microloan program can make ARC loans or would need special approval to do so. But given the difficulty many business owners face applying for ARC loans, and the reluctance banks have demonstrated to make them, couldn’t microlenders play a constructive role here?


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