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Defense launches $1B loan program for critical tech companies

October 24, 2024
By: Jason Rittenberg

The Office of Strategic Capital within the U.S. Department of Defense announced the availability of $984 million for equipment financing for projects to develop critical technologies. Companies can have their loans sponsored by another public or nonprofit entity, which appears to be a means of supplementing applications from companies that are otherwise too new or financially risky. Loan applications will be available from January 2 to February 3, 2025, and the office anticipates making 10 loans from $10-$150 million. Whether the terms will offer any benefits beyond capital access (e.g., low interest rates) is unclear, but the announcement provides many other details about the program.

Technology covered by the loans can be in one of 31 “critical” categories, which range from advanced manufacturing to quantum sensing. Funded projects are intended to advance America’s national security or economic interests and to attract private capital to tech with public interest. Individual loan evaluation criteria[1] include information about the degree to which likely purchasers of the specific technology product and any partners in the project, with an apparent preference for projects that also engage the private sector.

Eligible applicants are individuals, several types of for-profit entities, state, municipal, and tribal governments, and “any other governmental entity… including a special purpose district or public authority.” Further, applicants can be sponsored by another entity, and this possibility is specifically noted in the sections about operational history—the office prefers to see at least three years—and project regulations.

The costs of this capital currently are unclear. The Office of Strategic Capital reserves the right to charge fees for outside review, but these are not specified in the announcement. Interest rates will be no less than a Treasury yield (which term is not specified) and will be informed by “market interest rates” and “credit risk of the transaction.” For context on possible rates, current 10-year Treasury rates are 4.24%, and October’s maximum SBA 7(a) fixed loan rate is 13% (these loans also max out at $5 million).

As covered previously in the Digest (see links below), the Office of Strategic Capital has expanded, with support from Congress, since its launch in 2022. In the past two years, the office co-created a Small Business Investment Company-Critical Technologies (SBIC-CT) license with the U.S. Small Business Administration, was codified in the FY 2024 defense bill, and then received an appropriation to launch a technology loan program in the FY 2024 funding bill.

The direct loan program[2] is likely only the first portion of the office’s financial offerings. Clear signs of a forthcoming loan guarantee program include the office being authorized to guarantee commercial loans, the Federal Register notice mentioning the possibility of future programs, and the office only just closed a request for information focused on lenders’ interest in participating in a loan program with the agency. This pattern would also follow the example of providing both loans and guarantees established at other agencies, including the U.S. Department of Agriculture and U.S. Department of Energy.

 

[1] None of the critical technology sectors are eligible if the entire sector’s primary market is the public sector. This is a statutory requirement, but the office notes they do not expect it to be a barrier to any of their named tech sectors.

[2] For federal loan programs, it can be helpful to think of “direct” as referring to the applicants’ relationship being with the agency (i.e., not mediated through a commercial lender) and not the financial vehicle. From the agency’s accounting perspective, “direct” loans also are guarantees—but of a loan from a U.S. Treasury entity rather than a bank. Operationalizing the funding as a guarantee is why agencies can leverage a small appropriation (Defense received just $49.2 million for this program in FY 2024) to support a similar volume of direct and guaranteed loans.

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