Many employers don’t realize the U.S. Department of Agriculture (USDA) offers a guarantee program to improve, develop or finance business, industry and employment, and improve the economic and environmental climate in rural communities.
Your company doesn’t need an agricultural focus to get a USDA loan, either.
“It’s a form of financing that’s often overlooked,” says Romona Davis, vice president of SBA Commercial Lending at Ridgestone Bank, soon to be Byline Bank. “It could be the difference between getting a rural project financed or not because it gives lenders extra incentive.”
Smart Business spoke with Davis about the USDA Business and Industry Guaranteed Loan Program available to business owners.
Who qualifies for USDA lending?
USDA guarantees allow private lenders to provide financing to those located in: (1) any area other than a city or town with a population of less than 50,000 or (2) urban areas under the Local and Regional Food System Initiative. The borrower’s headquarters may be in a larger city as long as the project is in an eligible rural area.
Lenders may request a guarantee for for-profit businesses, nonprofits and cooperatives, federally recognized tribes, public bodies or individuals. Borrowers may not include government or military employees that own more than 20 percent, or organizations where the majority owners aren’t U.S. citizens or permanent residents.
Do these loans work like U.S. Small Business Administration (SBA) loans?
Both programs offer guarantees, but they’re vastly different. The USDA guarantee is higher, but the program is more limited and could have longer turnaround. All applications are sent to the USDA for approval, as compared to submission through an SBA preferred lender.
The USDA program can be used for:
- Purchase/development of land, easements, right-of-ways, buildings or facilities.
- Purchase of equipment, leasehold improvements, machinery, supplies or inventory.
- Refinancing existing debt that will create new jobs and meet other conditions.
- Business and industrial acquisitions when the loan will keep the business from closing and/or save or create jobs.
- Business conversion, enlargement, repair, modernization or development.
Unlike SBA, USDA guaranteed loans cannot be used for working capital lines of credit, golf courses or projects involving more than $1 million and relocation of 50 or more jobs.
What else do business owners need to know?
Collateral can consist of real estate, equipment, inventory and accounts receivable. The discounted collateral value is normally at least equal to the loan amount.
The maximum amount of a loan guarantee is 80 percent for loans of $5 million or less; 70 percent for loans between $5 million and $10 million; or 60 percent for loans exceeding $10 million, up to $25 million.
The loan terms, amortization and underwriting guidelines vary, but typical terms might include:
- Up to 30 years on real estate, up to 15 years or useful life on machinery and equipment, and up to seven years for permanent working capital loans.
- Loans are fully amortized, no balloon payment permitted.
- Reduced payments may be scheduled in the first three years.
Interest rates are negotiated between lender and borrower, subject to agency review. Rates can be fixed or variable.
Applicable fees include an initial guarantee fee equal to 3 percent of the guaranteed amount, and an annual renewal fee, currently 0.5 percent of outstanding principal. Overall, reasonable and customary fees are negotiated with the lender.
The proposed operation must demonstrate realistic repayment capability. If it’s a new entity, a feasibility study may be required.
Business owners and/or personal guarantors must have a good credit history. At loan closing, an existing business must have tangible balance sheet equity position of 10 percent or more, or 20 percent or more for new businesses. Key person life insurance may be required.
To learn more, contact your lender or state’s Rural Development Field Office.
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