Federal Credit & Loan Guarantee Programs

As the financial crisis unfolded, much attention was focused on emergency programs designed to stabilize banks and enable lending. The federal government has for many years run a range of permanent programs to expand the availability of credit to a broad range of borrowers. These programs provide support to a wide variety of projects.

Some of this is directed to individuals, particularly housing and education loan programs. Several programs provide support to businesses engaged in activities federal policymakers have chosen to subsidize. Many of these programs, however, broadly apply to a wide variety of businesses. Some of these programs involve tens of billions of dollars in direct loans or loan guarantees, which significantly reduce the cost of debt financing. There usually is some cost to acquiring these loans or loan guarantees. Recipients generally are required to fund a part of the estimated cost incurred by the federal government arising from all defaults under a program.

This memorandum is an overview of the permanent credit programs available to businesses.

Department of Transportation (DOT)

Railroad Rehabilitation & Improvement Financing (RRIF) Program. The RRIF program finances development of railroad infrastructure and is administered by the Federal Railroad Administration (FRA) in DOT. The law authorizes the FRA to issue direct loans and loan guarantees for up to $35 billion in projects at any given time.

Eligible entities for RRIF funds include railroads, joint ventures that include at least one railroad, and limited rail freight carriers with the purpose of creating a rail connection between a facility and a second rail carrier. RRIF funding may be used to acquire or improve intermodal or rail equipment and facilities, refinance outstanding debt incurred for the purposes listed above, and establish new intermodal or railroad facilities. RRIF funds may not be used for railroad operating expenses.

RRIF funds may cover up to 100 percent of an eligible project's costs, and loans are permitted for terms of up to 25 years. Entities receiving RRIF assistance must pay the credit subsidy cost when RRIF loans or loan guarantees are issued.

Shipyard Construction and Modernization. The Federal Ship Financing Guarantee Program was established by Title XI of the Merchant Marine Act of 1936 (Title XI). The Title XI program guarantees loans to finance a vessel or shipyard improvement project constructed in the United States. The Title XI program is administered by the Maritime Administration within DOT (MARAD).

Applicants to this program are limited to individuals or entities with the ability, experience, financial resources, and other qualifications necessary for the adequate operation and maintenance of an eligible vessel or shipyard. Vessels eligible for Title XI financing include commercial shipping vessels, offshore oilrigs and support vessels, and floating dry docks. Title XI extends to technological improvements to these vessels, novel techniques and processes designed to improve shipbuilding, and related industrial production that advances U.S. shipbuilding.

A loan guarantee may be entered into up to one year after the commissioning of the project or vessel. Loan guarantees are limited to 87.5 percent of the actual cost of the project or vessel.

Transportation Infrastructure Finance and Innovation Act Credit Program (TIFIA). The Transportation Infrastructure Finance and Innovation Act of 1998 created the TIFIA federal credit program to support transportation projects with secured direct loans, loan guarantees, and standby lines of credit. These funds may be used by a publicprivate partnership for road or rail infrastructure projects.

Projects eligible for TIFIA are broadly defined as surface transportation projects, road and rail infrastructure and vehicles, or intermodal transfer facilities. A project must cost $50 million or onethird of the federal highway funds apportioned to the state in which the project is located for the most recent fiscal year. Any credit instrument issued must be repayable, at least in part, from tolls or user fees that are also used to secure project obligations.

State or local governments, public authorities, publicprivate partnerships and any other entity that undertakes a project authorized by the secretary of transportation is eligible for TIFIA. Any applicant not a state or local government must have a project sponsored by the applicable state or local government where the project will be located. TIFIA credit support cannot be more than 33 percent of the reasonably anticipated eligible project costs.

Department of Energy (DOE)

Title XVII Loan Guarantee Program (Title XVII). The Title XVII program provides loan guarantees to support renewable energy, transmission, advanced nuclear, and clean coal and carbon sequestration projects. Renewable energy projects include wind, solar, biomass, geothermal, tidal, and ethanol. Title XVII grants authority to DOE to guarantee up to $100 billion in loans, including $18.5 billion for advanced nuclear projects. The size of the loan guarantee is limited to no more than 80 percent of the costs of an eligible project.

Title XVII is administered by DOE solicitations for a subset of specific technologies. Open solicitations currently seek commercial and innovative renewable energy projects. Eligible applicants for solicitations are usually the project sponsor or developer, and, sometimes, the lender. DOE has created a program under Title XVII where the lender for the project will be the applicant for the loan guarantee under certain solicitations. DOE created this program with the intent of streamlining the application process for obtaining funding under Title XVII.

Department of Agriculture (USDA)

Rural Energy for America Program (REAP). The REAP program issues loan guarantees to promote commercial financing of renewable energy projects for agricultural producers and small businesses. REAP is administered by the USDA's Rural Development program. Eligible purposes for guaranteed loans include the purchase and installation of renewable energy facilities, biomass fuel systems, ethanol or biodiesel facilities, and energy efficiency improvements. Entities eligible for REAP are agricultural producers or rural small businesses.

A REAP guaranteed loan cannot exceed 75 percent of the eligible project costs, up to $25 million. The maximum percentage of loan guarantee ranges from 85 percent of the total loan for loans of up to $600,000 down to 60 percent for loans of $10 million or more.

Business & Industry (B&I) Loan Guarantee Program. This program guarantees loans on private projects in rural areas for promoting employment; improving the economy or the environment; promoting the conservation, development, and use of water for aquaculture; and reducing reliance on nonrenewable energy resources by encouraging the development and construction of solar and other renewable energy systems.

Any business located in rural areas with a population of 50,000 or less may apply for a B&I loan guarantee. Loan proceeds may be used for operating and financing activities including buying businesses when it will keep the business from closing; expanded job opportunities, business conversion, enlargement, repair, modernization, or development; buying and developing land, easements, rights of way, buildings, or facilities; and buying equipment, leasehold improvements, machinery, supplies, or inventory.

B&I guarantees are available for loans of up to $10 million, with an 80 percent guarantee on loans of up to $5 million and a 70 percent guarantee on loans between $5 million and $10 million. In certain instances, loans up to $25 million may be 60 percent guaranteed with USDA approval.

Biorefinery Assistance Program (Biorefinery Program). The Biorefinery Program is for the development of advanced biofuels in rural areas with a population of 50,000 or less. The Biorefinery Program is administered by USDA's Rural Development program.

Any business may apply. Eligible projects are commercialscale biorefineries that adopt technologies to produce an advanced biofuel. Advanced biofuels include renewable biomass like cellulosic ethanol or butanol. The principal amount of the guaranteed loan may not exceed $250 million. The loan guarantee cannot exceed 80 percent of the loan.

Other USDA Programs. The USDA has other loan programs targeting development in rural communities. They offer private grants, direct loans, and loan guarantees for improving and expanding telecommunications services; improving the generation, transmission, and distribution of electricity; improving rural telemedicine and distance learning services; and improving and expanding broadband in rural areas.

Small Business Administration (SBA)

The SBA caters to small businesses. Credit availability under its programs is usually limited to enterprises that do not exceed specified levels of market capitalization and net income. Credit support may still be available to affiliates of larger enterprises based upon their individual circumstances. The SBA maintains two general credit programs and several additional programs with specified public policy objectives.

7(a) Loan Guarantee Program (7(a) Program). The 7(a) Program provides loan guarantees for small businesses to obtain financing. Eligible businesses qualify as small businesses based on revenue and employee count. The majority of businesses are eligible for financial assistance from the SBA, the most notable exception being financial institutions engaged in lending or investment activity.

The 7(a) Program can guarantee up to 80 percent of a loan up to $150,000 or 70 percent of a loan between $150,000 and $2 million. A loan under the 7(a) Program can be used for short and longterm capital investment, working capital, refinancing indebtedness, and buying an existing business.

Certified Development Company/504 (CDC/504). The CDC/504 loan program provides longterm financing through special entities fostering economic development in a community. CDCs are nonprofit corporations that work with the SBA and private sector lenders to provide financing to small businesses. Unlike the more flexible 7(a) Program, proceeds of a CDC/504 loan may only be used for fixedasset projects, including land and land improvements, construction of facilities, or purchase of machinery and equipment.

CDC/504 loans, backed by an SBAguaranteed debenture, must be for at least $25,000 and can be up to 50 percent of a project s cost. The maximum amount available depends both on the number of jobs that will be created as a result of the project and the ability of the project to address specific public policy goals. The maximum amount of assistance is limited to $2 million for any one borrower.

Other SBA Programs. The SBA has established other loan programs that target specific objectives, including assisting U.S. companies that (1) generate export sales and need additional working capital to support these sales and (2) are planning, designing, or installing pollution control mechanisms.