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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
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