Access to capital is important for all small businesses, including the food and farm businesses that bring locally and regionally produced food into rural communities, schools, and markets. Fortunately, there is a federal loan guarantee program, the Business and Industry (B&I) Loan Guarantee Program, which specifically supports these types of local entrepreneurs.
Qualified projects can include on-farm businesses as well as commercial or cooperative enterprises, like the Hendersonville Community Co-op in North Carolina. The Hendersonville Co-op started as a buying club in the seventies, and later evolved into a 3,000 square foot retail space. The space served the community well for 13 years, but when the co-op needed to expand, they were able to use a B&I loan to make it happen.
“Programs like the B&I Loan Program support our work, so that we’re not feeling that the price point is always job number one,” said Gretchen Cummins, Outreach Coordinator for the cooperative. “If we make food available that is real, and if we can source it on a larger scale because of programs like B&I, we can put it on shelves and make it affordable, and we can bring in a larger portion of our local demographic, and we can bring in our community members who are on tight budgets or are socially disadvantaged.”
The U.S. Department of Agriculture (USDA) administers the B&I program through its rural development mission area. As a subset of the overall B&I program, the Local and Regional Food Enterprise program provides up to approximately $45 million each year in loan guarantees for food enterprise projects.
On Friday, June 3, USDA released its final rule for the B&I program, codifying a variety of changes aimed at improving program delivery, making the regulation easier to understand, and reducing the number of loan defaults.
The final rule follows the publication of a proposed rule, which was released in September 2014. The proposed rule was subject to a public comment period, during which 233 commenters submit 717 comments.
The National Sustainable Agriculture Coalition (NSAC) submitted comments to the proposed rule, making recommendations on access to loan guarantees for Community Development Financial Institutions (CDFIs) and local and regional food enterprises.
Overall, the final rule is a mixed bag, with USDA agreeing to some of our recommendations but rejecting others.
USDA adopted NSAC’s recommendation that additional outreach be conducted to borrowers and lenders of small loans. This outreach is important in order to make borrowers and lenders of smaller loans better aware of the abbreviated application option for loans of $600,000 and less in advance of developing a proposal. USDA plans to develop specific program implementation instructions to improve outreach and education, which NSAC will monitor and provide feedback upon as things develop.
USDA also responded positively to our recommendation that feasibility studies conducted with funding from other USDA programs – such as the Value-Added Producer Grants (VAPG) and Rural Cooperative Development Grant (RCDG) programs – be accepted as fulfilling the B&I program’s new feasibility study requirement so long as they are up-to-date and account for recent market conditions. The preamble of the final rule clarifies that feasibility studies conducted for other USDA programs may be used to fulfill this requirement, so long as the study includes an evaluation of the economic, market, technical, financial, and management feasibility and an executive summary that reaches an overall conclusion as to the business’ chance of success.
This is good news for businesses that are utilizing more than one USDA program for which they may have already completed a feasibility study, such as Penny Brown-Huber of Iowa Choice Harvest, who used a B&I loan to help her company set up a sweet corn processing plant.
“We wanted to do something more significant for the food system,” said Brown-Huber. “Here in Iowa we’ve been great with farmers markets and direct-to-consumer, but that doesn’t open up new markets for farmers or for consumers. So we developed a business plan – and with the help of the Business and Industry Loan Guarantee Program we got a plant set up and began processing sweet corn from Iowa.”
Recommendations Not Adopted
We are disappointed that USDA rejected two important recommendations that would have expanded access to loan guarantees for CDFI’s and local and regional food enterprises.
First, the final rule maintains a requirement that new businesses have a minimum of 20 percent Tangible Balance Sheet Equity (TBSE). This requirement presents a significant barrier for new local and regional food enterprise projects, which often lack tangible assets, and is particularly problematic for non-rural projects, for which land, equipment, and materials tend to be more costly than in rural areas.
As we noted in our comments on the proposed rule, the Small Business Administration’s (SBA) 7(a) loan guarantee program, by comparison, has no such TBSE requirement. Instead, SBA considers invested equity when evaluating applications, but leaves it to lenders and borrowers to work out the specific terms. This is a system we feel would also benefit the B&I program, as well as its borrowers and lenders. Fortunately, the final rule does allow borrowers to meet the equity requirement in the form of cash, including borrowed cash under certain conditions, which will each the burden on some businesses.
Second, by codifying an additional layer of eligibility requirements for non-regulated lenders, the final rule makes it harder for CDFIs – primary lenders for local and regional food projects – to participate in the program. Under the final rule, CDFIs must now renew their status as an eligible lender on a three-year basis, provide audited financial statements annually, and must have completed 10 loans over five years worth $1 million each. The final rule also requires CDFIs and other non-regulated lenders to have a line of credit issued by a regulated lender, such as a traditional bank, and to submit their audited financial statements annually. USDA estimates that these changes will increase the cost of becoming an approved non-regulated lender by roughly $1,600.
We appreciate USDA’s consideration of all of the comments submit during the review process, and will continue to work with agency staff to make the B&I program successful and supportive of local farm and food businesses.