Introduction

In recent years the support which agriculture gives to the economy of small towns has been eroding.  At the same time, many farm families are no longer able to earn a living from farming and are seeking other sources of employment in these communities.  Rural Development (RD) as the lead Federal agency in RD programs, is involved in efforts to increase the non-agricultural jobs available in rural towns. Since 1975, RD has provided loan guarantees to assist local lenders to provide the credit needed for expansion and preservation of jobs.  The guarantees allow the lenders to make larger loans available, provide better rates and terms, and bring additional capital into the community through sale of the guaranteed portion of the loan.

 Rural Area Defined

The larger rural communities often provide a source of jobs for smaller nearby towns, so RD has expanded its traditional lending area to include cities of up to 50,000 in population.  The suburbs and urbanizing areas that surround cities of over 50,000 people are ineligible areas.

 Eligibility

Eligibility for a guarantee from RD begins with the determination of the impact on jobs.  RD’s priorities are:

• Saving existing jobs;

• Expansion of existing businesses;

• New plant locations or new business start-up; and

• Businesses which will generate little or no permanent employment other than the entrepreneur.

Loan Size

There is no minimum loan size, and the maximum loan size that will be considered is $25 million. 

The applicant can be an individual, a partnership, corporation, cooperative trust or other legal entity, or an Indian Tribe.  Individuals, and a majority of the owners of other entities, must be U.S. citizens or persons legally admitted for permanent residency in the U.S.

Lenders

The lender must be a state or federally chartered bank, savings and loan association, mortgage company that is part of a bank holding company, or insurance company regulated by the National Association of Insurance Commissioners.  The Federal Land Banks, Production Credit Associations, and Bank for Cooperatives are also considered eligible lenders.

Quality Loans

RD is looking for quality loans that will support a stable employment source. Unprofitable, undercapitalized, and poorly managed businesses are not considered a stable employment source.  The factors which RD looks for in determining loan quality include:

Equity                           

Existing businesses must have a minimum of 10% tangible balance sheet equity at the time the loan is closed.  An existing business is one that has been doing business for at least one year and has completed one full business cycle.  The tangible balance sheet equity is determined in accordance with Generally Accepted Accounting Principals.  Only the assets of the business being financed and held directly liable for the debt are considered in the calculations.

Profitability

The strongest applications are those that can show at least three years of profitability and cash flow adequate to service the debt.

Other applicants will need to demonstrate repayment ability based on realistic projections supported by detailed assumptions used in preparing the projections.  RD may require feasibility studies performed by recognized independent consultants to verify the projections.

Management  

Management must demonstrate experience in the industry and competence in production, marketing, finance, and personnel management.

Collateral

All collateral must secure the entire loan with no separate collateral for the unguaranteed portion of the loan.  Collateral should include hard-asset collateral such as land, buildings, machinery and equipment, but can also include accounts receivable, inventory, and other items of value.  The maximum loan to value ratio is generally 1:1 on a discounted collateral basis.  The amount of collateral discounting is to be determined by the lender in consultation with RD.

Guarantees

Personal guarantees are required from those owning 20% or more from owners, major stockholders, or partners.  Corporate guarantees are required of parent, subsidiary, or affiliated companies unless legally restricted or prohibited by existing contractual obligations.

Eligible Loan Purposes

Many types of businesses, including manufacturing, retail and wholesale trade, services and processing, are eligible.  Purposes for which the loans can be used include:

• Business and industrial acquisitions;

• Purchase of land, machinery, and equipment;

• Construction, enlargement, or modernization;

• Pollution control or abatement;

• Working capital;

• Refinancing when it is necessary to save jobs; and

• Eligible fees and costs.

Ineligible Loan Purposes

There are some uses for which Business and Industry (B&I) loans cannot be used.  The major restrictions are that funds cannot be used to:

• transfer jobs from one area to another and increase  direct employment by more than  50 employees and for projects in excess of $1 million;        

• pay any distribution to an owner or beneficiary who will continue in the business;

• transfer the ownership of a business unless the transfer is necessary to keep the   business from closing or will expand job opportunities;

• finance charitable, religious, or fraternal organizations; and

• finance agricultural production with the exception of specialized crops such as forestry,  commercial  nurseries, aquaculture, hydroponics, mushrooms, or commercial custom feed lots.

Interest Rates

Interest rates will be negotiated between the borrower and lender and are not subsidized by RD.  They may be either fixed or variable.  In determining if the rates are reasonable, RD will take into consideration the rate at which guaranteed loans are being sold on the secondary market.

Repayment Terms

Repayment terms are also set by the lender within maximum terms allowed by RD.  The maximum terms are:

• 30 years for real estate;

• 15 years or usable life for equipment; and

• 7 years for working capital.

All loans must have a fixed repayment schedule.  Lines of credit and revolving loans are not eligible.

Applications

Applications are filed with the lender who then forwards the application to RD requesting the guarantee.  Application forms are available from RD.

Applicants or lenders may also file a pre-application requesting a determination of eligibility from RD.  If it appears that the project is eligible and loan guarantee authority is available, then they will be encouraged to file a complete application.

RD Review and Fees

Once an application is filed with RD, the review by RD will take approximately 30 days.  If the guarantee is approved, RD will issue a conditional commitment to the lender. 

Equipment acquisitions and construction must then be completed before the RD guarantee is issued.  A fee of 2% of the guaranteed portion of the loan is payable to RD when the guarantee is issued.  There is also an annual servicing fee of .25% of the outstanding principal of the guaranteed portion of the loan.

Other Requirements

Information will be required by RD to comply with various laws and requirements.  Environmental reviews may be required and the applicant will be required to supply RD with the information required to complete the review.  Projects must be in compliance with flood plain restrictions, Clean Air Act, Water Pollution Control Act, historic preservation, and equal opportunity requirements.

RD will also consider State development strategies as identified through the intergovernmental consultation process.

This summary of the B&I Loan provides general information and highlights about the program.  It is not intended to include all requirements and regulations.  For complete information, obtain a copy of RD Instructions 4279-A and 4279-B below: 

Business and Industry (B&I) Program Links