Benefits of the B&I Guaranteed Loan Program include:

Legal Lending Limits

Some community and midsize banks with lower legal lending limits may find the B&I Guaranteed Loan Program useful for expanding their commercial lending business. The Federally guaranteed portion of a B&I loan does not count toward a bank’s legal lending limit. By utilizing the B&I Guaranteed Loan Program, lenders can make larger loans to some customers than they might otherwise be able to provide. The amount applied against the bank’s legal lending limit is the nonguaranteed portion of the loan.

Capital Requirements

The Federal guarantee lowers a lender’s risk-weighting for capital reserve requirements. Under the B&I Guaranteed Loan Program, the capital risk weight is “preferred” – much lower than for nonguaranteed loans.

Community Reinvestment Act (CRA)

Loans made through the B&I Guaranteed Loan Program have the potential to receive CRA consideration as either a loan to a small business or a community development loan, provided they meet the geographic requirements of the CRA regulation.

USDA is an equal opportunity provider, employer and lender.

Profitability

There are several ways that the B&I program can help increase bank profitability. By minimizing credit risk and expanding the universe of business loans that they can originate, this product allows banks to earn fees and interest on loans they might not have otherwise made. Additionally, the guaranteed, and, to a lesser extent, the nonguaranteed, portions of a B&I loan can be sold into the secondary market or participated. This process can generate fees and loans can be sold for a premium, depending on rate, maturity, and market conditions.

Liquidity Management

Liquidity management policies for lenders typically direct them to have sufficient assets on their books that can be easily converted to cash if needed. There is a secondary market for the guaranteed portion of B&I loans. By selling these loan portions, lenders can help manage liquidity issues, which can enable them to recycle funds for new loans or use the proceeds for other purposes.

Mitigating Risk

The B&I Guaranteed Loan Program generally provides a 60 percent to 80 percent Federal guarantee on business loans depending on the size of the loan. This is a guarantee against loss. If there is a loss on the loan after liquidating the collateral, USDA will reimburse the lender for a portion of the loss, on a pro-rata basis, based on the percentage of guarantee.

New Business Development Opportunities

Lenders can offer eligible applicants B&I guaranteed loans that generally have better rates and longer terms than a conventional loan. Businesses receiving B&I loans may become repeat customers. Furthermore, B&I borrowers may open additional accounts with their lending institution, establishing full banking relationships, such as checking and payroll accounts.

Borrowers can benefit from better pricing and terms with the B&I loan guarantee in place than are typically given with conventional loans. The loans must be fully amortized, without calls or balloon repayment structures. Longer terms can reduce additional loan fees that may be incurred in the future on shorter term loans or balloon loans. The interest rates for the loans are negotiated between the lender and the applicant and may be either fixed or variable (or a combination of fixed and variable).

In order to ensure that the business itself is solvent, the Agency requires that the borrower demonstrate minimum levels of tangible balance sheet equity. Specifically, a minimum of ten (10) percent is required for existing businesses. Twenty (20) percent is required for new businesses. A minimum range between twenty-five (25) and forty (40) percent will be required for energy projects.

Only business assets are included in the analysis. Appraisal surplus, bargain purchase gains, and intangible assets are not considered. Owner subordinated debt may be included when the subordinated debt is exchanged for cash injected into the business and remains in the business for the life of the guaranteed loan. The B&I guaranteed loan may be for an amount to finance 100 percent of the borrower’s capital needs if the business can meet collateral and equity requirements.

Businesses with facilities located in rural areas that save or create jobs. Most types of businesses are eligible, including those engaged in the manufacturing, wholesale, retail and service industries. Eligible entities include partnerships, individuals, cooperatives, for-profit and nonprofit corporations, including publicly-traded companies, tribal groups, or public bodies. Any size business may be eligible, but there are certain industries that may be restricted.

Normally, projects seeking a B&I guaranteed loan need to be located in eligible rural areas, which include all areas other than cities or towns larger than 50,000 people and the contiguous and adjacent urbanized area of such cities or towns. Cooperative organizations and local foods projects may be funded in both rural and urban areas in certain circumstances. Eligibility of a site may be determined by entering the address at the following website: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

Loan proceeds may be used for essentially any business purposes, including but not limited to the following:

• Business acquisitions, construction, conversion, expansion, repair, modernization and development

• Purchase of equipment, machinery, and supplies

• Startup costs and working capital

• Projects supported by New Markets Tax Credits

• Debt refinancing under certain conditions

The debt refinancing must improve cash flow while creating or saving jobs. If a lender wishes to refinance a loan already in its portfolio, the loan being refinanced must be closed and current for at least the past 12 months and may not exceed 50 percent of the overall loan unless the loan is Federally guaranteed.

There is a one-time USDA guarantee fee, currently set at three (3) percent of the guaranteed principal amount, due when the guarantee is issued.

There is also an annual renewal fee required to maintain the guarantee. The rate of the annual renewal fee (a specified percentage) is established by Rural Development in an annual notice published in the Federal Register and is currently set at 0.50 percent. The rate is the rate in effect at the time the loan is approved and will remain in effect for the life of the loan. All program fees are the responsibility of the lender but are typically passed on to the borrower. Other typical lender costs may also be assessed by the lender.

Loan terms are negotiated between the lender and borrower but are subject to program maximums that vary with the purpose of the loan. Terms may be blended, as appropriate:

• Working Capital - 7 years

• Machinery and Equipment - 15 years or useful life, whichever is less

• Real Estate - 30 years

Interest rates for loans may be fixed or variable or a combination of fixed and variable. The rate is negotiated between the lender and the borrower and will not be more than those rates customarily charged to other borrowers in similar circumstances. Variable rates cannot be adjusted more frequently than quarterly.

Collateral must have a documented value sufficient to protect the interest of the lender and the Agency. Lenders must discount collateral consistent with the sound loan-to-value policy outlined in program regulations, and the discounted collateral value must be at least equal to the loan amount.

The maximum percentage of guarantee is based on loan size. The scale of maximum percentages is:

• 80 percent guarantee on loans up to and including $5 million

• 70 percent guarantee on loans greater than $5 million up to and including $10 million

• 60 percent guarantee on loans greater than $10 million

A limited amount of guarantee authority for guarantees of up to 90 percent is available for loans of $5 million and less that are high-priority projects.

In addition to servicing the loan, lenders must meet all the reporting and other communications required by the B&I Guaranteed Loan Program. These include the following:

• The lender must report the outstanding principal and interest balance on each guaranteed loan semiannually. The lender is required to report on defaulted loans each month.

• At the USDA’s request, the lender will meet with USDA staff to ascertain how the guaranteed loan is being serviced and that the conditions and covenants of the Loan Agreement are being enforced. These lender meetings are typically held annually.

• The lender must obtain the borrower’s annual financial statements and submit them to the USDA. The lender must also analyze the borrower’s financial statements and provide a written summary to USDA. Lenders are also asked to provide an annual report of the number of jobs employed by the borrower.

The lender works with the borrower to submit an application to the Rural Development State Office where the business is located. The Agency will meet with all parties and make a preliminary determination of project eligibility. The Agency will also work with the lender based on information submitted in the complete application. If the Agency finds the project eligible and creditworthy, the Agency will issue a Conditional Commitment, approving the loan guarantee subject to conditions. After the lender closes the loan, the Agency will issue the Loan Note Guarantee after verifying that all conditions have been met.