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                                                                                                                                    AR Cash Program


Program Description

  The AR Cash Program (Arkansas Credit Reserve Program)

    The Arkansas Development Finance Authority has a new tool to help small businesses in Arkansas gain access to needed capital. Act #1222 of 2013 adopted by the General Assembly established the AR Cash Program. Through the new AR Cash Program the Authority will partner with Arkansas financial institutions to create a loan loss reserve for loans made to small businesses that the bank would like to lend money to, but feels it needs a little more cushion to offset risk with the loan.

     Whenever a financial institution makes a loan, it has to set aside a certain percentage of that loan to cover any potential losses from a default.  Financial institutions prefer to set aside as little funding as possible because these funds sit idle.  This set aside is called a loan-loss reserve.  The AR Cash Program is a loan portfolio insurance for these lenders.  Every time they enroll a loan in AR Cash, the Authority and the small business will contribute to a loan loss reserve.  This reserve insures the portfolio of small business loans enrolled by a bank in the AR Cash Program against defaults and incurred loan loss expense.  Furthermore the financial institution has an incentive to provide additional small business loans to those needing smaller amounts of funding to underserved customers and to those Arkansans living in underserved communities.

     The following is an example of how the program works.  For loan amounts between $4,000 and $65,000, the AR Cash Program provides a fixed amount of $2,000 into a lenders portfolio of enrolled loans.  The borrower provides 1 percent of their loan amount.  The AR Cash Program is owned by the Authority.  It will stay in place for the benefit of the lender as long as the lender continues to make loans and there is risk to the bank in the portfolio of enrolled loans, otherwise the reserve returns to the Authority.

     ADFA is currently looking for interested lenders in Arkansas to participate.  This is a great way for for community lenders to reach out to potential borrowers they may currently be unable to assist.

     The following is an example of the financial impact of the AR Cash Program from the perspective of a small business owner.  Let's say you needed $10,000 to add new racks to your clothing store.  You would go to the bank and apply for the loan.  If the bank wanted to make the loan but needed more cushion to offset perceived risk with the loan, they would enroll the loan in the AR Cash Program.

    For example:

Loan Amount:  $10,000
AR Cash Program Match: $2,000
Borrower Fee:  1% ($100)
Amount contributed to the loan loss reserve account:  $2,100

     Now assume the bank makes 20 business loans similar to the one described above.

Total loan portfolio:  $200,000
Total AR Cash Program Match:  $40,000
Total Borrower Fees:  $2,000
Amount contributed to the loan loss reserve account:  $42,000

     Why is this important to a bank?  If they suffer a high percentage of loss rates in the loan portfolio, they have a sizable loss reserve on which to draw to cover any of their losses in the portfolio of loans and the cost of doing the business of making small loans is manageable. 

For more information contact:

Bev Lambert
(501) 682-5912
bev.lambert@adfa.arkansas.gov