The USDA Guaranteed Loan program offers flexibility to Lenders and Borrowers in rural markets. But what about unconditional personal guarantees on commercial loans guaranteed by the USDA?
Under RD Instruction 4279-B, §4279.132 Personal and corporate guarantees, …”The Agency may grant exception for existing businesses only when the Lender request it and documents to the Agency’s satisfaction that collateral, equity, cash flow and profitability indicate an above-average ability to repay the loan”
The USDA Regulation are specific in stating that personal and corporate guarantees are required for those owning 20 percent or more of the Borrower.
In situations where ownership is structured to avoid a personal guarantee, for example six individuals owning 16.7% of an entity, then the State USDA Office could potentially require all to personally guarantee the loan.
However, this is not always the case. Let’s take an example of a Yacht Club, or a group of boat enthusiasts who want to purchase a marina and are willing to buy into a corporation to make that happen. This corporation could have 100 owners, each owning 1%!
The small business lender and the USDA will closely examine some of the key elements in determining whether recourse would be required, such as:
- Is the proposed commercial loan request collateralized by Commercial Real Estate and/or Equipment?
- Does the business generate enough cash flow to demonstrate above average debt service coverage? Average debt service coverage ratio is usually around 1.25x.
- Any other mitigating factors
At a 50% LTV and excellent cash flow generating a Debt Service Coverage of 1.50x or better, personal guarantees should probably be waived. The same argument could be made at a 60% or even 70% LTV, depending on the circumstances. The Lender and the Borrower’s ability to clearly evidence the mitigating factors for a non-recourse USDA guaranteed loan will make a difference.
At the end of day, the Borrower needs to make a compelling case to show that the need for unconditional personal guarantees is not necessary. No one project can be evaluated in a vacuum.
Ultimately, both the Lender and the USDA make the final decision; in our experience as an active participant in USDA Guaranteed Loan Program, the USDA is open minded and will always work with Lenders and Borrowers to develop a mutually agreeable and prudent lending solution.