THE EMERGENCY LOAN program launched in the past week by the Small Business Administration is designed to give established businesses some breathing room to pay principal and interest payments on existing debt.

Borrowers, however, may find it difficult to find a bank that is providing the "America's Recovery Capital" interest-free loans.

Some big lenders including Bank of America Corp., KeyCorp's Key Bank unit and Toronto-Dominion Bank, or TD Bank Financial Group, are still on the fence about participating, citing concerns about heavy paperwork and strict rules on applicant eligibility.

"The general consensus is that the lenders aren't too excited about it," says Bob Coleman, publisher of "The Coleman Report," a La Canada, Calif.-based trade publication for SBA lenders. "It's a tremendous amount of paperwork."

The ARC program offers as much as $35,000 for small businesses that have been profitable in the past but are having problems now because of the recession. Borrowers don't have to begin repaying for at least a year, and have five years total to pay back the amount.

For lenders willing to provide the loans, the SBA is paying the interest on borrowers' behalf, plus guaranteeing 100% of the loans in case of defaults.

Low Reward

Lenders, however, must decide if the administrative burden is worth it. Some say the upside is too small, as the interest rate — set at prime plus two percentage points, or currently 5.25% — is low and they won't get principal back for at least one year.

But other top lenders of SBA-backed loans say they are eager to get involved. Wells Fargo & Co., J.P. Morgan Chase & Co., PNC Financial Services Group Inc. and Popular Inc.'s Banco Popular North America unit are participating.

"It may open up additional customers for the bank," says Tom Burke, senior vice president of Wells Fargo SBA Lending, who received 22 calls himself the first day ARC loans were offered.

The SBA plans to release a partial lender list of ARC loan participants by Monday.

Banks that are hesitating, including units of U.S. Bancorp, CIT Group Inc., HSBC Holdings PLC and Live Oak Banking Co., a Wilmington, N.C., bank targeting veterinarian practices, still are reviewing the SBA's guidance on the program or are determining their own guidelines.

"It's frankly a lot of work for a $35,000 loan," says Chris Reilly, president of CIT Small Business Lending Corp. "In concept, it's a good program. I think, in practice, it has some challenges in terms of expeditiously getting borrowers through the application process."

Under the program's rules, lenders must obtain proof of financial hardship from borrowers, including documents that show a 20% decline in sales or a 20% decline in credit lines in the past year, and quarterly cash-flow projections that demonstrate the borrowers' ability to repay.

Lenders also need to verify that ARC loans are used to pay down business debt, including credit-card debt, which could mean parsing borrowers' records to separate business and personal expenses.

The SBA says ARC loans require roughly the same amount of paperwork for banks as its flagship 7(a) loans, which are capped at $2 million.

"Some lenders have commented that this level of documentation is high for such a loan," says Michael Stamler, an SBA spokesman.

But if an ARC loan helps a business owner pay off a larger underlying loan, "then the investment evens out," Mr. Stamler says.

At least one lender, TD Banknorth, has decided against participating, but will continue to offer other SBA-related financing vehicles.

'Upsetting' News

That is unwelcome news to customer Abhay Wadhwa, founder of AWA Architectural Lighting Design of New York, who has seen sales slip as much as 25% in the first two quarters of the year.

"That's upsetting," he says. "We have an account in good standing." Mr. Wadhwa, 39 years old, now has an appointment with HSBC, where he also has an account, to try to secure an ARC loan.

ARC loans are available until Sept. 30, 2010, or until funding runs out. The SBA, authorized to spend $255 million, has set a maximum of 1,000 loans per lender.

Even if some lenders don't participate, demand from struggling entrepreneurs is likely to surpass supply, says Tony Wilkinson, president of National Association of Government Guaranteed Lenders, a lobby group, in Stillwater, Okla.

Write to Raymund Flandez at raymund.flandez@wsj.com