With many small businesses hurting, the Small Business Administration said it is bracing for a tidal wave of requests for its new deferred-payment, no-fee loan program, which made its debut on June 15.

“We are expecting very high demand. Really, our hope is to use this as not only a bridge but as breathing room for future expenses,” said Eric Zarnikow, SBA associate administrator for capital access, during a June 8 conference call.

The America's Recovery Capital program will provide up to $35,000 in short-term relief for viable small businesses facing immediate financial hardship. Viable is defined as those that in the past were profitable but are currently struggling, yet have been making loan payments or are just beginning to miss loan payments due to financial hardship. Zarnikow said the businesses must prove that they have had positive cash flow for the past two years. Borrowers with loans that are already severely delinquent or with past performance or future cash flow that indicates that the business is not viable may not be eligible, the agency said.

The ARC loans are interest-free to the borrower, carry a 100% guarantee from the SBA to the lender and require no fees paid to the SBA. Loan proceeds are provided over a six-month period, and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can last up to five years. The agency will take a look at an applicant's primary credit score and financial situation to create a hybrid score.

“We understand that these businesses are facing financial hardship, and the credit score might not be the greatest factor [to determine eligibility],” Zarnikow said.

The SBA is bracing for such high demand for the loans that it is limiting loan approvals to 50 per week per financial institution, with no more than 1,000 in total. If the lender does not meet the 50 threshold for a given week, it can roll the remaining amount over to another week, Zarnikow said. The SBA expects lenders to make about 10,000 ARC loans in all.

As an incentive, the SBA said it will pay credit unions and other agency lenders prime plus two percentage point interest throughout the term of the loan. The turnaround on nondelegated loan applications is expected within five to 10 business days. Conventional, commercial business loans and SBA-guaranteed loans made on or after Feb. 17, 2009 are an eligible use for ARC loan proceeds. Non-SBA lenders can also participate if they become approved agency lenders, Zarnikow said.

“As credit unions are increasingly participating with SBA in helping small businesses, we would really welcome and appreciate [their] participation,” said David Hall, SBA public affairs specialist.

The Bel Air, Md.-based Freedom Federal Credit Union is one of those SBA lenders that confirmed it will be participating in the ARC program, a spokeswoman said. The credit union recently earmarked $50 million in SBA lending to help local small business owners gain access to much-needed capital.

The $222 million credit union said it has also streamlined its SBA application process to speed up fund approval and disbursement to established business owners who have been responsible in the management of their business and financial obligations.

“With the new SBA enhancements and Freedom's commitment to get capital in the hands of businesses in our community, the credit union can help small businesses endure the recent economic conditions and get America back on its feet,” said Freedom FCU CEO Rose Ann Lambert.

The ARC loans have been authorized through Sept. 30, 2010, or until the appropriated funds run out?whichever comes first, the SBA said. More lender information can be found at www.sba.gov.

[email protected]