• SBA Recovery Loans – More Than Half Likely to Default

What the government didn’t learn from the FannieMae (FNMA), they’ve now applied to small business lending, sadly, with equal effect. As part of the 2009 American Recovery and Reinvestment Act, the government authorized the Small Business Administration (SBA) to offer interest-deferred loans to small businesses that were having trouble making loan payments. The theory is that these American Recovery Capital (ARC) loans would save small businesses from closing their doors because of a loan default; thus it would save jobs. In order to encourage commercial banks to make these loans, the SBA—and ultimately U.S. taxpayers—provides a 100% guarantee of principal.

All of that sounds very noble, but any commercial lender or business investor will tell you it never works to throw good money after bad. New business capital should always go to something the creates net income such as expanding a business, investing in inventory, improving processes, etc. When you use new money to pay for historical problems, the outcome is almost always bad.

Not surprising then, that less than six months into the ARC loan program, default rates are approaching 60%. Why then, you might ask, did the House recently vote to continue the program. Fortunately, some in Washington are questioning the sanity of that decision. Earlier this week, Senator Snowe (R-ME), ranking Republican on the Small Business Entrepreneurship Committee, a wary supporter of the original bill, finally put her foot down and introduced legislation to close the program down.

To date, about half of the funds allocated to the ARC program have already been spent. That totals about $131 million in loans. At a default rate of 60%, that’s about $80 million in taxpayer money up in smoke.

John Tozzi at Business Week has more on the story here: Snowe’s Push to End the ARC Loan Program.

Technorati Tags: Small Business Loan, SBA, ARC Loan, American Recovery Capital