Many lenders are attracted to the secondary market that exists for B&I guarantees. Investors will pay premiums and servicing fees for the guarantees, which make lending profitable. This incentive attracts commercial lenders to rural communities where they otherwise might be reluctant to lend. Borrowers also often feel the secondary market's benefits because lenders can justify longer terms and lower, sometimes fixed, interest rates.

In fiscal year 2005, ending this past Sept. 30, B&I lending nationwide totaled almost $700 million. This was down from higher levels -- $900 million to $1 billion -- seen between 2000 and 2004. The decline was largely caused by federal-budget reductions.

Increased funding authority is expected in 2006. With the recent institution of a quarter-percent annual guarantee-renewal fee, the B&I program now depends less on federal-budget allocations. In fiscal year 2006, it is expected to have the authority to guarantee more than $800 million in rural-business lending. Activity levels should rebound.

B&I underwriting criteria are straightforward. New business ventures must be supported by an independent feasibility study. Borrowers are typically required to contribute 20 percent to the project's cost. Existing businesses need only contribute 10 percent and sometimes less, if they bring strong equity to the project. Typical loan to values are 80 percent for real estate secured projects. Personal guaranties are required of all owners with at least 20-percent ownership interest.

Each state has a USDA Rural Development state office that delivers the program. Interested lenders should contact their state office to identify eligible rural areas and loan-processing contacts. The program historically has been especially active in states such as California, Ohio and Pennsylvania. Other states also have taken steps to improve their processes and are expecting significantly increased B&I activity.

Jeff Deiss is the business and co-op program director in Oregon for USDA Rural Development. For more information about the B&I program, contact your state's USDA Rural Development office. A complete directory of state contacts can be accessed from www.rurdev.usda.gov/recd_map.html. Reach Deiss at (503) 414-3367 or jeff.deiss@or.usda.gov.

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