Part of the Obama Stimulus Plan included a provision called “America’s Recovery Capital” program that outlined leans that would be made to support small businesses. The Small Business Administration (SBA) has stated that these loans would begin being funded in mid June, but banks appear to be hesitant to participate in a program that doesn’t appear to benefit them in any way.

The terms of the loans as outlined by the SBA included provisions that would allow small businesses to borrow up to $35,000 without paying interest for 12 months. Small business loans are designed to be used for debts that have accumulated as the business cycle has slowed over the past several months. The loans are supposed to be made to businesses that are “viable” but suffering financial hardship. The definition of “viable” in this case is that the business has to have been profitable at least once in the past 3 calendar years. Potential lenders see the risk in making the loans, and wonder where their reward is for taking that risk.

The SBA has indicated that they will pay interest to banks participating in the program to subsidize the loans, but they have not clearly indicated the rate of interest that they are willing to pay. They also have not clearly outlined whether the bank will have to take losses for small businesses that go under without paying off their interest free loan.

One of the benefits for banks is that their customers who are small business owners are more likely to survive the downturn and be profitable banking customers in the future. Some bankers look at participating in the program as a way to give back to their community and prop up local businesses that will make them money down the road. Other banks are asking for a breakdown of the costs and risks associated with the program before agreeing to participate.

More details are expected to be available in early June, and the loans should start being extended to business owners on June 15^th if the details of the program can be worked out.

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Tags: banks, interest free, Loans, SBA

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