The REAP program provides guaranteed loan financing and grant funding to agricultural producers and rural small businesses for renewable energy systems or to make energy efficiency improvements. Agricultural producers may also apply for new energy efficient equipment and new system loans for agricultural production and processing.

Benefits of the REAP Guaranteed Loan Program include:

Legal Lending Limits

Some community and midsize banks with lower legal lending limits may find the REAP Guaranteed Loan Program useful for expanding their commercial lending business. The Federally guaranteed portion of a REAP loan does not count toward a bank’s legal lending limit. By utilizing the REAP 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 REAP Guaranteed Loan Program, the capital risk weight is “preferred” – much lower than for nonguaranteed loans.

Community Reinvestment Act (CRA)

Loans made through the REAP 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 REAP 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 REAP 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 REAP 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 REAP 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 REAP guaranteed loans that generally have better rates and longer terms than a conventional loan. Businesses receiving REAP loans may become repeat customers. Furthermore, REAP 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 REAP 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 REAP 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.

Agricultural producers

• An entity directly engaged in production of agricultural products where at least 50 percent of their gross income coming from agricultural operations.

• Small businesses

  • Must be located in eligible rural areas and one of the following:

    • Private for-profit entity (sole Proprietorship, Partnership, or Corporation)

    • A Cooperative [including those qualified under Section 501(c)(12) of IRS Code]

    • An electric utility (including a Tribal or governmental electric utility) that provides service to rural consumers and operates independent of direct government control)

    • A Tribal corporation or other Tribal business entities that are chartered under Section 17 of the Indian Reorganization Act (25 USC 477) or have similar structures and relationships with their Tribal entity without regard to the resources of the Tribal government.

  • Must meet the Small Business Administration size standards in accordance with 13 CFR 121.

NOTE: Agricultural producers and small businesses must have NO outstanding delinquent federal taxes, debt, judgment or debarment.

Normally, projects seeking a REAP 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

Funds may be used for the purchase and installation of renewable energy systems, such as:

• Biomass (for example: biodiesel and ethanol, anaerobic digesters, and solid fuels).

• Geothermal for electric generation or direct use.

• Hydropower below 30 megawatts.

• Hydrogen.

• Small and large wind generation.

• Small and large solar generation.

• Ocean (tidal, current, thermal) generation.

Funds may also be used for the purchase, installation and construction of energy efficiency improvements, such as:

• High efficiency heating, ventilation and air conditioning systems (HVAC).

• Insulation.

• Lighting.

• Cooling or refrigeration units.

• Doors and windows.

• Electric, solar or gravity pumps for sprinkler pivots.

• Switching from a diesel to electric irrigation motor.

• Replacement of energy-inefficient equipment.

Energy Efficiency Improvement applications must contain an Energy Audit, or Energy Assessment (depending on Total Project Costs) that complies with Appendix A to RD Instructions 4280-B

Agricultural producers may also use guaranteed loan funds to install energy efficient equipment and systems for agricultural production or processing.

• There is an initial guarantee fee, currently 1 percent of the guaranteed amount.

• There is a guarantee retention fee, currently 0.25 percent of the outstanding principal balance, paid annually.

• Reasonable and customary fees for loan origination are negotiated between the borrower and lender.

The lender, with Agency concurrence, will establish and justify the guaranteed loan term based on the use of guaranteed loan funds, the useful economic life of the assets being financed and those used as collateral, and the borrower’s repayment ability. The loan term will not exceed 40 years.

• Interest rates are negotiated between the lender and borrower.

• Rates may be fixed or variable.

• Variable interest rates may not be adjusted more often 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 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.