Simplifying Rural Credit

A streamlined USDA loan program could help community banks meet the credit needs of underserved rural businesses

By Mark M. Brodziski

The U.S. Department of Agriculture has a number of economic development programs designed to strengthen rural economies and create jobs. One of the USDA’s most effective programs is the Intermediary Relending Program, or IRP. Community banks will find the program easier to use as a complementary funding source due to recent changes made by the USDA.

Historically, if a business was unable to obtain the full amount of a loan it needed from its bank, it had to apply to other sources of financing. This often resulted in businesses working with several lenders and intermediaries to co-fund projects, and required separate loan applications and paperwork for each participant or lender.

The USDA’s announced changes will enable businesses to work with one lead lender that will participate with other lenders to make a single, jointly funded loan. These IRP program changes reduce the paperwork burden of the intermediaries and allow them to develop stronger partnerships with community banks and other commercial lenders.

Launched in 1985, the IRP works to reduce poverty, increase economic activity and promote job creation in rural communities by providing low-interest direct loans to nonprofit corporations, public agencies, Native American groups and other defined intermediaries. For example, a borrower may use the loan for a community development project; to start, purchase or expand a business; or to create and save jobs. Borrowers may also use loan funds to lease real estate or a facility; construct, expand, repair or modernize a facility; purchase or lease machinery; purchase inventory and supplies; or fund working capital.

The intermediaries use the loans to establish revolving loan funds. The proceeds from those funds are loaned to businesses in economically and socially disadvantaged rural communities. One of the primary benefits of the IRP revolving loan fund is that it provides financial resources to businesses that may not be able to get a loan, either partially or fully, through traditional lending sources. As businesses repay their loans, the intermediaries re-lend the money to other businesses, resulting in a continuous flow of capital that helps support job growth and economic development.

Presently, the IRP portfolio consists of nearly 500 intermediaries with total capitalization of IRP revolving loan funds exceeding $650 million, including $300 million that is immediately available for relending.

How it works

The IRP provides low-interest loans to eligible intermediaries. The intermediary uses the loan funds, along with a 10 percent to 25 percent matching equity contribution, to capitalize or recapitalize a revolving loan fund. It then repays the loan on 30-year terms with earnings from the revolving loan fund. The intermediary establishes its own service territory, lending policies, procedures and forms subject to the USDA’s approval and program regulations. Intermediaries also establish their own credit standards, collateral requirements, and rates and terms.

Community banks can work with an IRP intermediary to help finance a loan that they would not want to finance totally on their own. An IRP intermediary’s loan to an ultimate recipient or the intermediary’s portion of a participation in a loan cannot exceed $250,000. Historically, the average loan amount has been less than $100,000. The project must be located in a rural area, and loan funds must be used for eligible purpose in accordance with the IRP regulations.

For example, an IRP intermediary in Morrison County, Minn., which operates a $2.3 million IRP fund, recently co-funded an expansion project with a local community bank for a local manufacturer of aluminum products. The bank provided a loan of $331,000, and the IRP intermediary provided a loan of $49,000 gap funding in a junior lien position. The business used the loan funds to purchase machinery and equipment and added 10 employees. Rather than write two or more separate loans, the USDA’s announced changes will enable the lender, the bank or the IRP intermediary to act as the lead lender and participate a portion of the loan to the others.

The Rural Business-Cooperative Service, part of USDA Rural Development, administers the IRP through 47 Rural Development State Offices. USDA Rural Development staffs throughout the country are committed to working with community bankers and other lenders to reach its joint mission of helping rural businesses, individuals and communities. endmark

Mark M. Brodziski is director of the specialty programs division of the U.S. Department of Agriculture’s Rural Development–Rural Business Cooperative Service.