How guaranteed loans can help agribusiness owners
After a turbulent first quarter dominated by sharp stock market declines and a subsequent rebound, the nation’s economic outlook is mixed amid continuing concerns over land values and commodity prices. Although the Bloomberg Commodity Index has shown some improvement — increases of 3.8% in March and 7.9% in April — it’s too early to know whether those gains signal a trend. The index, which tracks returns from raw materials such as crude oil, gold, copper, and foodstuffs, in January declined to its lowest level in at least 25 years.
There are also indications of tightened lending conditions ahead, despite sustained job growth and rising wages. Although the U.S. Small Business Administration reports a 9% year-over-year increase in loan approvals in 2016 compared to the same time in 2015, some research on lending suggests a different scenario could unfold.
According to the Federal Reserve’s most recent Senior Lending Officer Opinion Survey, demand for commercial and industrial loans declined 11.1% since December among large- and medium-sized businesses and 12.7% among small businesses. About 20% of banks surveyed expected to tighten loan standards. Although that decline is the first since 2012, it’s a signal of possible change.
With current low prices for livestock, milk, corn, and soybeans, and predictions of only moderate economic growth through 2016, as well as indications that the Federal Reserve Board might raise interest rates, federally guaranteed loans are attractive options for agribusiness owners looking to expand or improve cash flow.
Three main reasons business owners don’t take advantage of guaranteed loan programs:
- They require more paperwork.
- Fees are higher because of the government guarantee.
- Business owners are unaware guaranteed loan programs are available.
The extra paperwork and higher fees are worth considering, and long-term financing can act as an insurance policy against potential future volatility. Locking in agricultural loan rates at longer amortizations can strengthen balance sheets and help defend against lower commodity prices or declining land values.
Guaranteed loans offer advantages such as longer maturities that can be especially valuable if the economy takes a downturn. Terms for Farm Service Agency (FSA) loans can range up to 40 years, while U.S. Department of Agriculture (USDA) business loans can be for up to 30 years, fully amortized. Maturities for SBA loans are up to 25 years, also fully amortized. In addition, government guaranteed financing programs allow borrowers to lock in rates for up to 30 years, compared to only five years on conventional loans. Long-term, fully amortized loans (and especially at current low fixed interest rates) can help ensure business stability over time.
These government-backed loans are readily available at many banks and other lending institutions, but business owners often don’t realize the array of options:
FSA loans — Available to farmers or ranchers for purchase of a business, operating costs, cattle, equipment, and real estate. These loans, available for up to $1,399,000 depending on the specific program, can also be granted if a natural disaster, such as a drought, flood, or a bad storm, ruined crops or damaged farm buildings or equipment. Interest rates, fees, and terms for farm loans vary, but some terms as long as 40 years depending on the operation and type of loan.
USDA rural development loans — Available to farms and agricultural businesses, as well as other types of firms that meet demographic requirements. To be eligible, the business must be located within a rural area — a population of less than 50,000. With a limit up to $25 million and terms up to 30 years, these loans are attractive to large operations, including manufacturers, for working capital, machinery and equipment, or buildings and real estate. Fees are 3% of the guaranteed amount, which ranges from 60% to 80%, dependent on the amount borrowed, plus a 0.5% annual renewal fee. Interest rates are negotiated with the lender and may be fixed or variable.
SBA loan program — SBA loans are capped at $5 million and can be used for working capital, buying equipment or property, for building construction, or starting a business. They include:
- General small business loans 7(a) — Used to start a business or assist in the acquisition, operation, or expansion of an existing business, including farms. Eligible farm expenditures include fencing, irrigation systems, construction of silos, barns, dikes, dairy, and hog buildings, and buying seed or animals. Terms are up to 25 years for real estate, up to 10 years for equipment, and generally up to seven years for working capital. Fees range from 0% to 3.75%. Interest rates may be fixed or variable and are negotiated between the business owner and lender, subject to SBA rules.
- CDC/504 loans — Certified Development Company (CDC/504) loans are for for-profit companies with a net worth of less than $15 million and average net income less than $5 million after taxes for the preceding two years. They can be used to purchase equipment, machinery, or property, including buildings, for improvements such as grading and utilities or for new construction or renovation. Fees are about 3%, while interest rates are pegged to five- and 10-year U.S. Treasury issues. The project’s assets are used as collateral, but the principal owners must provide a personal guarantee. Terms are up to 20 years and some loans can be linked to job creation.
- Microloan program — Provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers. Microloans average about $13,000 and are administered through nonprofit community-based organizations with lending experience. The loans can be used for working capital, equipment or supplies, furniture, fixtures, machinery, or equipment. Interest rates vary but are generally 8% to 13% for the loans, which require collateral and personal guarantee.
- Disaster loans — Low-interest, long-term loans for physical and economic damage caused by a declared disaster to businesses located within the disaster area. Loan terms are up to 30 years, with interest rates up to 4% if you have no alternative source of credit and up to 8% otherwise.
In some cases, government-backed loans can be stacked with conventional loans, yielding even more options to help business owners achieve goals for expansion and growth.
For more information about government-backed loans, go to:
Ron Markham is market president for Wisconsin Bank and Trust, Member FDIC.
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