| The AR Cash Program (Arkansas Credit Reserve
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
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.
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
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