The United States Department of Agriculture (USDA) guarantees loans for small businesses in rural areas through its Business & Industry Loan (B&I Loan) Guarantee Program. This loan program is designed to expand access to capital for rural businesses. In this article, we’ll tell you everything you need to know about USDA Business Loans including:
- When to Get a USDA Business Loan
- How to Qualify for a USDA Business Loan
- What can USDA Business Loans be used for?
- Loan amounts, interest rates, fees, and other terms on USDA Business Loans
- Where to apply for a USDA Business Loan
- Other USDA small business programs and resources
Another popular government loan guarantee program is the SBA loan program. SBA loans are open to small businesses in both rural and urban areas. Click here to apply for an SBA loan with SmartBiz, our recommended SBA lender.
When to Get a USDA Business Loan
The USDA B&I loan program can be a good option for rural small businesses that are unable to qualify for a bank loan or SBA loan. For example, if you’re starting a brand new business in a rural area, getting a bank loan can be very difficult, but because of the USDA guarantee, a lender may be willing to extend you a B&I loan. The interest rates on USDA business loans are typically lower and the terms longer than conventional bank loans.
The USDA B&I loan program is relatively small. In 2015, the USDA guaranteed $1.04 billion through 369 B&I loans to rural small businesses. For purposes of comparison, in 2015, the SBA guaranteed 12,257 loans through its 7a loan program, which amounted to about $4.4 billion.
The reason for the sharp difference is that the USDA loan program often runs out of money before the year is over. Congress authorizes funding for the program every year, but demand often exceeds the amount of money set aside. However, now’s a good time to apply. A Farm Bill passed by Congress in 2014 is only now in full swing, and over $500 million has been set aside to aid rural businesses.
USDA business loans are better for larger projects. In 2011, the average loan size of a USDA business loan was $2.7 million. If you need a relatively small loan, it may be better to try for an SBA loan. In 2015, the average SBA 7a loan was $371,628.
How to Qualify for a USDA Business Loan
The USDA itself does not make loans. You must go through a bank or financial institution to apply for a B&I loan. However, the USDA does set minimum eligibility requirements for B&I loans. There are three main eligibility requirements:
- Your business must be located in a rural area. The USDA defines rural area as an area with fewer than 50,000 inhabitants. Your main office can be located anywhere, as long as the project you’re funding with the loan proceeds is in a rural area. To find out if your town is in an eligible area, click here and type in the address of your project.
- Good credit history. Banks typically work with borrowers who have a FICO score of at least 680. If you don’t know your latest credit score, click here to find out your credit score for free. If your business is already up and running, it should also have a good business credit score.
- Tangible balance sheet equity of at least 10 % (20 % for startups) at loan closing. Tangible equity is comprised of things like equipment, real estate, and cash. Intangible assets such as goodwill and trademark rights do not count. You should use a pro forma balance sheet when making this calculation, meaning that the B&I loan you’re applying for should be included as a liability. Click here for step by step instructions on calculating tangible balance sheet equity.
In addition to the above, in order to be eligible for a USDA business loan, government or military employees may own no more than 20 % of your business, and US Citizens or permanent residents must be majority owners of your business. To find out more about eligibility criteria, contact your local USDA office.
What can USDA Business Loans be used for?
USDA business loans can be used for a variety of business purposes, including the following:
- Business conversion, renovation, and modernization
- Purchase of commercial real estate, buildings, or other commercial facilities
- Purchase of equipment, machinery, or commercial leasehold improvements
- Purchase of supplies or inventory
- Startup costs and working capital
- Debt refinancing when new jobs will be created by your project
- Business and industrial acquisitions when the loan will keep the business from closing or will save or create jobs
Loans cannot be used for charitable organizations, religious institutions, lending or insurance businesses, and golf courses and race tracks. To find out more about excluded businesses, contact your local USDA office.
Terms on USDA Business & Industry Loans
Many of the terms on USDA Business Loans are negotiated between the bank making the loan and the borrower. However, since the USDA guarantees repayment on a portion of the loan, the terms are typically quite favorable for borrowers. In addition, the USDA does set certain guidelines that banks have to follow.
The maximum you can borrow is usually $10 million (it’s higher for certain types of projects). There’s no set minimum, but there are limits on how much you can borrow based on the value of your project and what you’re using the loan funds for. The maximum loan-to-value cannot exceed the following:
- 80 % for real estate
- 70 % for equipment
- 60 % for accounts receivable and inventory
For example, if you’re planning to use the USDA loan to buy tractors that have an appraised value of $100,000, the maximum loan you can receive is 70 % of that amount, or $70,000.
In general, interest rates on USDA loans track interest rates on SBA loans and bank loans, so they are typically around 5-9 %. Interest rates for USDA business loans may be fixed or variable. The rate is negotiated between the lender and the borrower and may not be higher than rates ordinarily charged for similar loans. The USDA will review the interest rate to make sure it’s not unreasonably high. If the loan has a variable rate, the rate cannot be adjusted more frequently than every quarter.
There are three different borrower fees on USDA B&I Loans:
- Initial guarantee fee = 3 percent of the guaranteed amount of the loan. Initially, the lender pays the USDA this fee but then passes it on to the borrower at closing. This fee may be rolled into your loan.
- Annual renewal fee = 0.5 percent of the outstanding loan amount. This is usually paid by the borrower every year.
- Other bank fees. Banks may charge application fees, servicing fees, appraisal fees, or other fees.
Banks may also charge a prepayment penalty for the loan.
Fees change periodically. You should ask your lender or local USDA office for the latest information.
Loan Repayment Terms
As with the amount of the loan, the maximum term of the loan depends on what you’re using the loan for:
- Maximum term on real estate is 30 years
- Maximum term on equipment is useful life or 15 years, whichever is less
- Maximum term on working capital (e.g. inventory) is 7 years
USDA business loans are fully amortizing loans, which means you pay down principal and interest over the term of the loan. At the end of the term, the loan is fully paid off. There are no balloon payments.
Collateral & Personal Guarantee
Lenders will ask you to provide collateral on a USDA business loan. This can be a combination of business assets and personal assets. Normally, the lender will discount the value of collateral. For example, real estate worth $100,000 may only be counted as $80,000 for purposes of providing collateral. The USDA says that “The discounted collateral value will normally be at least equal to the loan amount.” In other words, if you are taking out a $250,000 loan, you must have collateral that’s worth at least that much after the lender discounts it.
In addition to collateral, anyone who owns 20 % or more of the business will have to sign a personal guarantee. This means the lender can seize your personal assets if the business is unable to pay back the loan, and the collateral is insufficient to repay the debt.
Where to Apply For a USDA Business Loan
Not all banks make USDA loans. If there’s a good bank that you already have a business checking account with or another account with, however, it doesn’t hurt to ask if they do USDA loans. The USDA provided us with the list below of the top lenders for USDA Business & Industry Loans. These lenders have expertise in making USDA loans and may be able to help you get a loan more quickly:
USDA Business Loan Volume in FY 2015
Cedar Rapids Bank & Trust Co.
Bank of Montgomery
Stearns Bank N.A.
Community Bank of Florida, INC
MVB Bank, INC.
1st Manatee Bank
One of the downsides of a USDA business loan is that it can take one to three months to complete the full application and funding process. The first thing the lender will do is submit a Pre-application form (see page 3 of link) to the USDA for approval containing a description of, your business and your loan request. If USDA approves your eligibility for the loan, then the USDA will send a representative to meet with you and your lender at the project site. If the project seems feasible, then the lender will submit a complete application on your behalf. The application should include supplemental documentation, such as credit reports and environmental studies.
Other USDA Loan & Grant Programs
The Business & Industry Loan Guarantee Program is the USDA’s main loan program for small businesses. However, the agency has other loan and grant programs that your business may be eligible for:
- Rural Microentrepreneur Assistance Program – Microloans are available to rural nonprofit businesses, as well as for-profit businesses with fewer than 10 employees. These are fixed-rate loans of up to $50K. Contact your state USDA office to apply.
- Rural Business Development Grants – Nonprofit businesses can apply for grants through this program. Applications are accepted through regional offices once per year.
Your state office is an important resource when it comes to USDA business loans and grants and can help you identify different programs that you might be eligible for.
USDA business loans can be an excellent source of capital for small businesses in rural areas. The loans typically have low interest rates, long repayment terms, and they can be used for a variety of business purposes. If you’re interested in obtaining a USDA business loan, we encourage you to reach out to your local USDA office or local lender to learn more.
As mentioned above, the SBA loan program is another government guaranteed loan program, and it’s open to a wider range of small businesses than USDA loans. If you’re interested in an SBA loan, we recommend applying with SmartBiz.