More questions than answers now, but $350 billion SBA loan/grant program could be key
Ever since National Economic Council Director Larry Kudlow commented on the $350 billion Small Business Administration (SBA) program in the Senate rescue bill, Pro Farmer analysts have been asking questions regarding if and how the U.S. ag, ethanol and biodiesel sector could be included. The quick answer is yes, but currently there are more questions than answers. First, some key links to the Senate rescue package:
Key links to Senate rescue package
“If you're working with a bank locally, that should happen within 48 or 72 hours because those (SBA) loans are going to be guaranteed,” Kudlow initially told Fox Business Network. “As long as the small business pledges to retain the workers, the loans will be guaranteed. Presumably these firms have relationships with their local banks that will happen very, very fast. So there's a lot of avenues to help small business, but basically, it's going to be guaranteed loans from your local lender backed and guaranteed by the U.S. government, and it should get there pretty fast if you have a relationship with your local bank as almost every small business does. And by the way, those loans will be forgiven, those loans will be forgiven after a period of time.”
Read that last sentence again: “those loans will be forgiven, those loans will be forgiven after a period of time.” That means, in essence, they are grants.
The SBA program of $350 billion could be a great loan/grant facility for ag-related small businesses negatively impacted by Covid-19, said one ag industry consultant, “Agriculture should get its share of this loan program, commensurate with the ag industry's contribution to GDP... putting it at $20 billion to $25 billion.”
The original Senate package would have provided funding for small-business interruptions loans that would come through their 7(a) program via a network of around 1,800 banks, credit unions and other financial institutions approved by the SBA. It has operated with a much smaller pool of money previously — about $25 billion in 2019 and around $23 billion in both 2017 and 2018. The Senate rescue package would be $350 billion. And, the Senate plan would also increase the maximum amount for a standard loan and waive transaction fees for both lenders and borrowers.
Some observers contacted said they believe some ethanol and biodiesel plants would qualify as small businesses in terms of number of employees etc.
One former top USDA official said, “I would agree that ag should qualify for SBA loans but I don't have a sense of how much those SBA loans have been used in the past (particularly by ag interests). Also, not sure how much more favorable those loans would be relative to commercial loans. Grants are a different story but the issue there will be how allocated and what would be the basis for making the grant.”
Another source: “Key to this is eligibility... and the number of requirements involved. The agriculture community will have to study this closely.”
Note... Link to SBA table of size standards.
If you try to go the SBA's internet site, good luck... you will likely see this:
One ag industry analyst informs:
“Historically, SBA loans don’t work particularly well for agriculture. The terms and eligibility portion of the SBA website even says, “Farms and agricultural businesses are eligible; however, these applicants should first explore the Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA.”
“Federal financial assistance to agriculturally oriented enterprises (i.e. businesses engaged in the cultivation of soil, produce of crops, and livestock) is generally made by USDA. Farm-related businesses (those that supply goods and services primarily used in connection with farming) that are not agricultural enterprises are eligible businesses under SBA’s business loan programs.
“Upon first reading of the bill, there is nothing included that would change that sorting. A memorandum of understanding (MOU) with USDA might be necessary.
“The bill does expand Emergency EIDL grants to include Tribal businesses, cooperatives, and ESOPs with fewer than 500 employees or any individual operating as a sole proprietor or an independent contractor during the covered period (January 31, 2020 to December 31, 2020).
“The bill defines eligibility for loans as a small business, 501(c)(3) nonprofit, a 501(c)(19) veteran’s organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act with not more than 500 employees, or the applicable size standard for the industry as provided by SBA, if higher.
“However, even if ag oriented enterprises are included, a few things to keep in mind:
“The minimum amount of time a business needs to be in business in order to qualify for an SBA loan is 2 years. That’s 2 years of tax returns, so really it’s more like being in business for 3 years.
"In order to get an SBA loan you have to prove you’re making a profit. It’s a loan based on the likelihood your business will be able to pay the loan back from future profits after all. How many of our guys are going to be able to show any sort of profit after the last couple of years? (That’s why SBA sends them to USDA in the first place.)
“SBA can be fairly particular even in the best of times. With an onslaught of applications, they’ll probably spend less time per application in the initial screening process.”
Meanwhile, here is an excellent graphic from Dr. John Newton, chief economist at the American Farm Bureau Federation, relative to a breakdown of some of the ag portions of the rescue package:
Note: This is a developing story and we will provide more analysis once additional information becomes available.