The USDA B&I loan guaranty program, historically underfunded and a difficult program to actually close loans through, is gaining renewed popularity under President Obama’s American Recovery and Reinvestment Act of 2009 (“Recovery Act”). With Recovery Act funding, the USDA can guarantee up to 90% of a loan – 80% is normally the maximum guarantee. The one-time guarantee fee – normally 2% – is reduced to 1% and the annual renewal fee also is waived for loans made with Recovery Act funding. Most important, the program has guaranty capacity. Here’s a quick overview of the program:
Purpose and Benefits: The B&I program’s purpose is to create jobs while promoting private investment and economic development in rural areas. In the program, a private lender serves as the USDA’s “customer,” making the loan to the business. Lenders use their own documents, security instruments and commercial underwriting requirements on the loans. The USDA, in return, guarantees a large portion of the loan. This guarantee is equivalent to a federally-backed security and provides a strong incentive for lenders to make loans and provide better rates and terms to borrowers. The guarantee also means businesses have a better chance of getting the financing and terms they need.
Eligibility: Businesses must be located in areas of fewer than 50,000 people to meet rural eligibility requirements. Applicants can be individuals, partnerships, federally-recognized Indian Tribes, corporations, cooperative trusts or other legal entity. Individuals and a majority of the owners must be U.S. citizens or permanent legal U.S. residents.
Eligible Loan Purposes: Loan funds can be used for land, machinery and equipment purchases, pollution control and abatement, working capital, business and industrial acquisitions, construction, enlargement, or modernization and refinancing when necessary to save jobs. The program can support most legal businesses, but farms, golf courses and gambling establishments are not eligible.
Loan Limits and Guidelines: The maximum loan limit is $25 million for individual businesses and $40 million for cooperative organizations. USDA Rural Development’s state office can approve loans up to $10 million. Loans in excess of $10 million must be sent to Rural Development’s national office for approval.
“What is great about this program is the larger guarantee limits,” said Michael D. Sneden, Executive Vice President at ValueXpress. “The alternative government guarantee program, the SBA 7(a) program, has a guarantee limit of $1.5 million, so larger loans that need the support of a guarantee are often out of luck. But the B&I loan guarantee program can be a solution in rural areas. Furthermore, the definition of ‘rural’ is broader than you might think.”
On the USDA website you can input any zip code to determine eligibility.
“The other nice feature of the program,” noted Sneden, “is that income properties can be eligible.”