The owner of an industrial business park on a coastal, deep-water port had obtained a bridge loan to provide financing for three years. His business park was a large facility in a rural area with tenants that needed to ship products by boat, which costs significantly less than land or air transportation.
The bridge loan on the property had expired and the lender was threatening foreclosure. The interest rates on the bridge loan were very high, and the business park owner needed a new longer-term, lower-cost financing solution in order to keep his unique business park operational.
The business park owner had successfully operated multiple companies and commercial real estate properties. But, his financial position took a major hit during the 2008 housing crisis. One of his businesses was a profitable loan servicing company that serviced mortgage loans. As the housing marketing collapsed, he had to write off millions of dollars in loan payments as homeowners went into mortgage default. He had to sell some of his commercial real estate and restructure his debt to prop up the struggling servicing business.
Because his financial statements showed losses from the servicing businesses, he could not obtain a conventional business loan from a bank. The three-year bridge financing with unfavorable terms had been the only form of credit he had been able to obtain to keep his business park open.
At the time his bridge loan expired, his servicing company was recovering. But he was now highly leveraged, despite still having a high net worth due to the value of land surrounding the business park that he owned. Even though he now had more stable cash flow and sizeable assets, many banks thought his credit profile looked risky.
The business park owner was referred to VITAL Financial Services and an analysis of his financials was performed. VITAL determined that his cash flow, the positive trajectory of the servicing business, and asset value made him a candidate for a USDA Business & Industry (B&I) loan. B&I loans are designed to provide businesses in rural areas access to credit at reasonable terms. Under the B&I program, a bank makes the loan and the USDA provides a loan guarantee of up to 80%.
VITAL engaged one of its partner banks to make a $5 million USDA B&I loan, which was approved by the USDA. The bank’s risk was offset with the USDA guarantee and the value of the land parcel, which was used as collateral to secure the loan.
The terms on a conventional business loan would have typically been 15-20 years, but the USDA B&I loan offered 30-year terms at much lower interest rates than his previous bridge loan. Between the longer terms and lower interest rates, his monthly payments were reduced significantly, keeping cash flow positive as his servicing company recovered. He was able to continue leasing the unique business space to his tenants at reasonable rents.
Not only did this stabilize his financial situation, but left him well-positioned for the future if decides to expand onto the additional land, sell, or refinance into a different solution.
Benefits for the Lender
The bank that made this loan was able to sell the guaranteed portion and generate more than $539,000 in noninterest income. The borrower also utilized the VITAL community bank for the main operating account for the business park. More than $1.5 million annually moved through the account with an average daily balance between $50,000 and $100,000.
Learn more about VITAL’s comprehensive SBA loan services.