The August 2020 edition of the Fogel Law Group FOCUS provides some insight into the government-guaranteed loan program operated by the United States Department of Agriculture (“USDA”). Known as Business and Industry Loans, or B&I Loans, these USDA Loans (“USDA Loans”) are credit facilities that are available to small businesses, non-profits, cooperatives, and other eligible entities operating in rural areas throughout the United States. Like other government lending programs, USDA Loans are guaranteed in part, the USDA providing the loan guaranty. The primary focus of the USDA Loan program is to encourage the development of small businesses and creation of jobs in lesser-developed communities. USDA Loans can be utilized for a variety of purposes, such as business modernization, debt refinance, permanent working capital, construction of industrial or manufacturing facilities, commercial real estate acquisitions and improvements, and even business acquisitions if the end result will save or create jobs within the affected community. And, like most government loan programs, the USDA provides significant requirements regarding eligibility matters and use of USDA Loan funds.

While the SBA 7(a) and USDA Business Loan programs have many similarities, the eligibility requirements for a USDA loan are more specialized. In order to qualify, a prospective borrower must be located in a “rural” area (“rural” is typically defined as any area outside of a city or town with a population of fewer than 50,000 people). Note that, while the borrower’s headquarters may be based within a larger city, the USDA Loan project must be located in an eligible rural area. Also, the owners of the business must have good credit histories, the borrower’s financials must demonstrate specific tangible balance sheet equity positions, and the USDA Loan must be collateralized – all in compliance with the USDA lending rules. Collateral for a USDA Loan may include real estate, equipment, inventory, accounts receivable, or any combination thereof. The term of the USDA Loan will be determined, in part, by the collateral used for the facility. Interest rates may be fixed or variable (but not adjusted more than quarterly) and are negotiated between the lender and borrower, subject to review by the USDA.

While SBA Loans and USDA Loans have existed for many years, earlier this year, the President signed the CARES Act (“Act”) which, in part, provided for new loan programs designed to aid borrowers adversely affected by the COVID-19 pandemic, including the SBA’s Paycheck Protection Program (“PPP”), with which it seems that most of the country has been involved; and the USDA Business and Industry Cares Act Program (“BICA Loan”). Under the BICA Loan program, the USDA provides a 90% guarantee of the eligible loan. BICA Loans must be utilized by a borrower to prevent, prepare for, or respond to the effects of the COVID-19 pandemic. BICA Loans are available to eligible borrowers in the traditional USDA credit market.

While BICA Loans are not eligible for forgiveness like PPP loans are, BICA Loans are typically larger credit facilities that provide permanent working capital at attractive interest rates. Unlike PPP loans (which are unsecured), BICA Loans must be secured and the collateral must have documented value sufficient to protect the interest of the lender and the USDA. Also, collateral value must be at least equal to the BICA Loan amount; and hazard insurance equal to the loan amount or depreciated replacement value (whichever is less) is required on collateral. Further, while there are no business or personal guarantees with PPP loans, BICA Loans normally require personal and business guarantees. However, the collateral requirements under BICA Loans are usually “best available” junior liens on real property and FF&E owned by the applicant borrower. In addition, the USDA will accept real property or equipment appraisals that were completed within two years of the date of BICA Loan application. USDA Loans and BICA Loans have some differences as well, including: (1) the maximum term of a BICA Loan is 10 years; (2) the BICA Loan must be repaid in full and amortized by the maturity date (balloon payments are not permitted); and (3) interest payments may be deferred in the first year, while principal payments may be deferred for up to 3 years. Like with USDA Loans, interest rates on BICA Loans may be fixed or variable (but not adjusted more than quarterly) and are negotiated between the lender and borrower, subject to review by the USDA.

Applications for BICA Loans began on May 22, 2020, and are accepted from lenders through USDA local offices year-round. The program is available to eligible borrowers until September 21, 2021, or until all of the funds earmarked for it are exhausted. Perhaps a USDA Loan, or a BICA Loan, is the financing solution for you or your client.