Rural Development: Rural Business-Cooperative Service Business Loan Losses Page: 7 of 29
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within its existing market to repay its loan. These businesses became
delinquent on their loans between 1 and 51 months, and the Service paid
losses of $3.2 million on these loans.
* One borrower obtained a loan of $262,000 to complete the purchase of an
ongoing business that appeared successful. When the loan was made, the
Service's regulations stated that Service officials could waive the
feasibility study requirement if they provided a thoroughly documented
justification showing that the financial interests of the lender and the
government were protected. However, the borrower's loan file did not
contain documentation of a decision to waive a feasibility study. This
borrower became delinquent within 15 months, and the Service paid a loss
of $178,000 on the loan.
The following four cases illustrate situations in which feasibility studies
would have assisted the Service in deciding whether to guarantee a loan:
* An Ohio borrower. This borrower obtained a $1.7 million loan with an
80-percent guarantee in September 1994 to finance the purchase,
expansion, and modernization of a trout hatchery and farm. According to
the lender, this business was a start-up project. Relying on background
information on the industry and an analysis of financial projections for the
proposed business, the lender endorsed a loan to this borrower. However,
the lender stated that its evaluation of the project was limited in scope and
that it had been unable to find reliable industry financial standards for
comparison with the company's projections. Despite these limitations, the
Service stated in its project summary that a feasibility study was not
necessary because the lender had evaluated the project. About 3 months
after obtaining the loan, in December 1994, the borrower defaulted on a
loan payment and thereafter was continuously late in making payments.
The borrower filed for bankruptcy in June 1996, and the Service paid a
loss of $270,000 on the loan.
* A Louisiana borrower. This borrower obtained a loan of about $1.5 million
with an 80-percent guarantee in January 1995 to refinance existing debt
and provide working capital to expand the borrower's business of
manufacturing engines for marine vessels. The company had been
weakened financially by the research and development expenses of
developing a new engine-a type of pump engine described as a "totally
new" propulsion system for the pleasure boat market, including jet skis,
inboard boats, inboard/outboard boats, and outboard boats. Although the
company was introducing a new product in a market segment that was
also new for the company, the loan file shows that a feasibility study was
not obtained. The company had sales and warranty problems and sold its
GAO/RCED-99-249 Rural Business and Industry Loans
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United States. General Accounting Office. Rural Development: Rural Business-Cooperative Service Business Loan Losses, report, August 25, 1999; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc290922/m1/7/: accessed May 26, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.