Loan Options for the Marine Industry
The USSBA, USDA and USDOT’s Loan Programs
As we launch into 2014, the domestic waterfront continues to fire on all pistons; boatbuilding, charter rates, utilization of tonnage, and so much more. That kind of momentum, however, requires funding to sustain. For smaller operators in need of capital to grow and/or maintain their fleets, sourcing those funds can be tricky. Fortunately – and unlike the Department of Transportation’s Maritime Administration’s Title XI Federal Ship Financing Program of the last few years – the U.S. Small Business Administration and the U.S. Department of Agriculture actually have the funding to make and guarantee loans for the U.S. commercial marine industry. That means that you have options – especially if you find yourself in need of upgrading your fleet due to environmental or subchapter M requirements.
The SBA’s Certified Development Company/504 Loan Program and the USDA’s Business and Industry Guaranteed Loans are, for certain businesses, viable options for marine industry borrowers. Under the mandate to create jobs (at a stated rate of 1 new job per $65,000 in proceeds), grow small business and promote community development, these programs are well supported by current and prior administrations - with a FY 2014 budget of $949 million and $77 billion, respectively. Both have a healthy capacity for loans, loan guarantees and grants with a total of about $52 billion currently available.
Nuts & Bolts: SBA
A CDC/504 loan finances fixed assets for financially healthy businesses, with a typical loan ranging between $200,000 and $5MM. While there is no stated maximum, a project can be in excess of $20MM with the portion above SBA’s $5MM financed by the bank lender. The advance can be as high as 90% with a typical CDC/504 structure being comprised of 10% down payment by borrower, 50% in a guaranteed bank loan and 40% in an SBA CDC/504 loan. Start-up ventures, which are usually difficult to finance due to lack of historic financial performance records, are financeable through a CDC/504 loan. A start-up business should anticipate a lower advance rate of 85% or less in some cases, with personal guarantees required as well.
While amortization periods vary based on the life of the asset financed, the maximum amortization on the CDC/504 portion will probably not be longer than 20 years. The base index rate for the CDC/504 loan utilizes the 10-year Treasury Bill as published in the Federal Reserve H.15 Selected Interest Rate report. Currently the rate is 2.74% (November 27, 2013). Spreads and fees, as appropriate to the credit, are also added to the base index.
Fees and bond sale costs, including a CDC processing fee; the SBA guarantee fee; the funding corporate fee; and the bond broker fee add approximately 3.0% to the project cost. These fees and other soft costs like transportation, surveys, documentation fees, and closing costs are added to the CDC/504 loan portion and are financed over 20 years. Prepayment penalties decline from 3.0% in year 1, to 0.30% in year 10, and 0% thereafter.
CDC/504 loans are securitized and sold as bonds to institutional investors like insurance companies, pension plans and mutual funds. To be considered for a CDC/504 loan an applicant must be “for profit”; operate in the U.S.; have a tangible net worth of less than $15MM with an average net income of <$5MM after taxes for the last two years; be non-speculative or invest in rental real estate; be an “eligible” business using the proceeds for an “approved” purpose; not have funds available from other sources; be able to cash flow the debt from projected operating income; be of “good” character; have relevant management experience and a feasible business plan.
The application process requires the completion of the SBA Loan Application; Personal History Statement; Personal Financial Statement; Business Financial Statements (including P&L and projections); ownership and affiliations statements; business certificates and licenses; loan applicant history; federal income tax returns for prior three years; business narrative; disclosure of leases or loans and other financials and collateral documents as might be required.
USDA: Promoting Qualified use of Water Resources
The stated purpose of the USDA’s Business and Industry Guaranteed Loan program (B&I) is “to improve, develop, or finance business, industry and employment, and improve the economic and environmental climate in rural communities.” It is not intended to guarantee marginal or substandard loans or “for relief of lenders having such loans.” Similar to the CDC/504 program, it is available to an existing or start-up business with the goals of providing jobs, improving the economic or environmental climate, promoting qualified use of water resources and promoting renewable energy.
Rural areas are any areas other than (1) A city or town that has a population of greater than 50,000 inhabitants; and (2) the urbanized area contiguous and adjacent to such a city or town, as defined by the U.S. Bureau of the Census using the latest decennial census of the United States.
For those marine businesses fortunate to be in such rural areas, the USDA’s B&I loan program opens another door to commercial borrowers for the purchase of equipment, machinery, land, buildings, supplies and other purposes consistent with applicable USDA regulations. The maximum loan guarantee ranges from 60% - 80%, depending on the loan amount. The maximum loan amount to one borrower can be as high as $40MM for “rural cooperatives” with a maximum of $10MM being the norm for a private enterprise. Rates may be fixed or variable and are subject to negotiation between the borrower and lender, with USDA approval. Maximum amortization for real estate is 30 years, equipment and machinery is limited to useful life or 15 years, whichever is less. Working capital must be repaid in a term of no longer than seven years.
In addition to the initial B&I loan guarantee fee (typically 3%), an annual renewal fee is paid to the USDA by the lender to keep the guarantee in effect. he maximum fee is currently 0.50% of the outstanding principal balance as of December 31st of the previous year. It is due annually on January 31st, and may vary at inception based on the amount of cost advanced in the loan; e.g. an advance rate of 70% of cost would carry a 0.35% renewal fee.
Wishful Thinking & Interim Help
At some time in the future, when the importance of the United States commercial marine industry is reestablished in the halls of Congress and the office of the Chief Executive, perhaps we may again have a robust marine lending and guarantee program available from the Department of Transportation. In the interim, viable options from the SBA and the USDA are capable of providing financing support to this vital industry.
On the WEB:
Small Business Administration: http://www.sbagov/content/cdc504-loan-program
(As published in the January 2014 edition of Marine News - www.marinelink.com)