[Code of Federal Regulations]
[Title 7, Volume 15]
[Revised as of January 1, 2005]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR4279.131]

[Page 700]
 
                          TITLE 7--AGRICULTURE
 
  CHAPTER XLII--RURAL BUSINESS-COOPERATIVE SERVICE AND RURAL UTILITIES 
                   SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 4279_GUARANTEED LOANMAKING--Table of Contents
 
                  Subpart B_Business and Industry Loans
 
Sec. 4279.131  Credit quality.

    The lender is primarily responsible for determining credit quality 
and must address all of the elements of credit quality in a written 
credit analysis including adequacy of equity, cash flow, collateral, 
history, management, and the current status of the industry for which 
credit is to be extended.
    (a) Cash flow. All efforts will be made to structure or restructure 
debt so that the business has adequate debt coverage and the ability to 
accommodate expansion.
    (b) Collateral. (1) Collateral must have documented value sufficient 
to protect the interest of the lender and the Agency and, except as set 
forth in paragraph (b)(2) of this section, the discounted collateral 
value will be at least equal to the loan amount. Lenders will discount 
collateral consistent with sound loan-to-value policy.
    (2) Some businesses are predominantly cash-flow oriented, and where 
cash flow and profitability are strong, loan-to-value coverage may be 
discounted accordingly. A loan primarily based on cash flow must be 
supported by a successful and documented financial history.
    (c) Industry. Current status of the industry will be considered and 
businesses in areas of decline will be required to provide strong 
business plans which outline how they differ from the current trends. 
The regulatory environment surrounding the particular business or 
industry will be considered.
    (d) Equity. A minimum of 10 percent tangible balance sheet equity 
will be required for existing businesses at the time the Loan Note 
Guarantee is issued. A minimum of 20 percent tangible balance sheet 
equity will be required for new businesses at the time the Loan Note 
Guarantee is issued. Tangible balance sheet equity will be determined in 
accordance with Generally Accepted Accounting Principles. Modifications 
to the equity requirements may be granted by the Administrator or 
designee. For the Administrator to consider a reduction in the equity 
requirement, the borrower must furnish the following:
    (1) Collateralized personal and corporate guarantees, including any 
parent, subsidiary, or affiliated company, when feasible and legally 
permissible (in accordance with 4279.149 of this subpart), and
    (2) Pro forma and historical financial statements which indicate the 
business to be financed meets or exceeds the median quartile (as 
identified in Robert Morris Associates Annual Statement Studies or 
similar publication) for the current ratio, quick ratio, debt-to-worth 
ratio, debt coverage ratio, and working capital.
    (e) Lien priorities. The entire loan will be secured by the same 
security with equal lien priority for the guaranteed and unguaranteed 
portions of the loan. The unguaranteed portion of the loan will neither 
be paid first nor given any preference or priority over the guaranteed 
portion. A parity or junior position may be considered provided that 
discounted collateral values are adequate to secure the loan in 
accordance with paragraph (b) of this section after considering prior 
liens.
    (f) Management. A thorough review of key management personnel will 
be completed to ensure that the business has adequately trained and 
experienced managers.

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