Low-interest loans available for PA mushroom industry.

As part of Pennsylvania Governor Ed Rendell's Economic Stimulus Package passed by the state legislature in January 2005, the First Industries Fund was created. This fund brought a huge public investment to the Commonwealth's biggest industries--agriculture and tourism. The bond-funded initiative made available $150 million to these industries, with $100 million going to agriculture and $50 million to tourism.

The $100 million investment in agriculture is directed to opening and expanding existing Department of Community & Economic Development programs to farmers, farmers' markets and agribusiness. The programs to agriculture include two loan programs that have been used by nonagricultural small businesses for many years--the Small Business First Fund and the Machinery & Equipment Loan Fund. Additionally, the First Industries Loan Guarantee Program was created, providing a 50 percent guarantee to commercial lenders for projects up to $2.5 million. Included was a grant program for planning purposes, but the $10 million allocated has already been exhausted.

The loan programs at the heart of the First Industries Fund are meant to stimulate the agricultural economy through lower-interest loans to agricultural producers and processors who are making investments in land, buildings machinery and equipment. The programs are not meant to replace the relationship the borrower has with their commercial lender, but to reduce risk for the lender. This may make possible a project that might not have been approved without the programs. It is common for the state loan to take a subordinated lien position behind the primary lender.

The Small Business First Fund can finance up to 50 percent of the eligible project cost, or $200,000, whichever is less, for the purchase of land and buildings and machinery and equipment. The maximum term for land and buildings is 15 years, while the term for machinery and equipment is a maximum of 10 years. The current interest rate is 5 percent, fixed for the life of the loan. The state offers a 1 percent interest rate reduction if the project property if located within an Agricultural Security Area, or is preserved as part of the Pennsylvania Farmland Preservation Program.

The Machinery and Equipment Loan Fund can also finance up to 50 percent of projects costs, up to $5,000,000. The longest term possible is 10 years, determined by the useful life of the items being financed. Both new and used equipment are eligible.

There are a few important considerations to keep in mind about these programs. To be eligible, the project has to be a new endeavor; the state does not refinance existing debt. As the plans for the new project come together, it is a good idea to contact the economic development agency well in advance so they can help in structuring the financing. The funding from the state takes about four months from application to closing, so bridge financing from the primary commercial lender often is needed until the state's funds come through, but that all needs to be arranged well in advance. Also, the programs have fees. The Machinery and Equipment Loan fund has a commitment fee of 1 percent of the state's loan. The Small Business First is underwritten by the local economic development agency in the county where the project is located and the fees will vary from county to county but usually include commitment and legal fees.

For more information about these and other programs, contact Sue Milshaw.

Sue Milshaw

Chester County Economic

Development Council

610/458-5700, ext. 239

smilshaw@cceconomicdevelopment.com

RELATED ARTICLE: How the Programs Work

XYZ mushroom grower wishes to purchase some new air handling equipment in the amount of $1,000,000. The grower is working with a commercial lender and is considering using the Machinery and Equipment Loan Fund (MELF).

Scenario A: 100 percent of the project is funded by the commercial lender at an 8 percent interest rate and 10 year term.

Commercial Loan: $100,000 @ 8 percent for 10 years

Annual Debt Service = $145,593

Scenario B: The borrower finances 50 percent with the commercial lender and 50 percent with MELF. Let's assume that the borrower's farm is located in an Agricultural Security Area.

Commercial Loan: $500,000 @ 8 percent for 10 years = $72,797

MELF Loan (second lien): $500,000 @ 4 percent for 10 years = $60,747

Total Annual Debt Service for both loans = $133,544

Annual Savings through use of MELF program = $12,049