USDA Business Loans: All Your Options in One Place
One of the main goals of the Department of Agriculture is to improve the economy and quality of life in rural America. So it makes sense that it is the second-largest government backer of small business loans, following only by the U.S. Small Business Administration.
For the past five years, the USDA’s rural development department has provided an average of $1.5 billion to $2 billion in loans and loan guarantees each year to small, rural businesses. The loans target businesses in rural areas with fewer than 50,000 residents.
These businesses can have a harder time accessing capital, technology, transportation and services. And the owners are more likely to deal with poorer infrastructure — such as roads, water supply and telecommunications — as well as face tough competition for skilled employees against higher-paying jobs in cities and suburbs.
What are USDA business loans?
The USDA has multiple types of funding to help revitalize rural areas and three programs designed specifically for rural, small business owners.
Business & Industry Loan Guarantees
Under this program, the USDA partially guarantees between 60 percent and 80 percent of loans for rural small businesses made through approved lenders, including federal or state-chartered banks, savings and loans, farm credit banks and credit unions.
Business and industry loans can go up to $25 million but generally range from $200,000 to $5 million. The average size of this loan is about $3 million. The terms depend on the type of loan and typically range from seven to 30 years. The lender determines interest rates. Approved uses for the loan funds include:
- Business enlargement, repair or modernization
- Purchase and development of land or buildings
- Purchase of equipment, machinery, supplies or inventory
- Debt refinancing if it improves cash flow or creates or saves jobs
- Business and land acquisition if it creates or saves jobs
Intermediary relending program
Under this program, the USDA offers 1 percent interest loans to intermediaries in rural areas, which in turn lend that money to local business owners. The loans go up to $250,000 or 75 percent of the cost of the project, whichever is less, for a maximum term of 30 years.
The rates and terms of the loan are up to the intermediary. You can use loans from the intermediary relending program for the same purposes as loans issued through the business and industry loan program. Additionally, you can use intermediary relending loans to fund startup costs and working capital, pollution control, transportation services and feasibility studies.
Rural microentrepreneur assistance program
These are small loans given to nonprofit community lenders who make the loans to small rural businesses. The loans are capped at 75 percent of a project’s cost for a maximum of $50,000.
Eligible businesses must have 10 or fewer full-time employees. Business owners can use the loans for multiple purposes, including debt refinancing, equipment purchases and real estate improvements. The interest rate is fixed and the maximum loan term is 20 years.
Who’s eligible for a USDA business loan?
The main eligibility requirement for USDA business loans is that your project or business must be located in a rural area. You can check if your business qualifies by looking up your address here. Companies with headquarters in larger areas can still apply for the loans if the project itself is located in an eligible area.
For-profit businesses, nonprofit businesses — a departure from SBA loans, which aren’t available for nonprofits — cooperatives, federally recognized tribes, public bodies and individuals are all eligible to apply for the loans. Some additional USDA business loan requirements include:
- Borrowers must be U.S. citizens or legal permanent residents.
- Private-entity borrowers must demonstrate that loan funds will remain in the U.S. and the facility being financed will primarily create new or save existing jobs for rural U.S. residents.
- The USDA requires collateral that has a value at least equal to the amount of the loan.
- Personal and corporate guarantees are normally required from all owners, partners (except limited partners) and major shareholders (those with a 20 percent or greater interest).
Along with the USDA requirements, business owners also have to meet the lender’s requirements. Many traditional lenders, such as banks and credit unions, require a personal credit score of 680 or higher, two years of business operation and $100,000 in annual revenue. Because the USDA is guaranteeing a portion of the loan, however, it lowers the risk for lenders, so they are typically more likely to approve a loan for a borrower with a newer business or less annual revenue.
Looking for business funding? Learn more small business loans here.
Costs and benefits
As with all loans, the better your credit history, the longer time you’ve been in business and the larger your annual revenue, the lower your loan interest rate will likely be. Because other lenders handle USDA business loans, those lenders decided on many of the approval factors. But the USDA determines some costs. Interest rates can be fixed or variable, and although the lender will set the rate, it can’t exceed what they typically charge borrowers in similar situations.
The USDA charges fees for its Business & Industry Loan Guarantee Program, and the lender often tacks on fees. The USDA charges a one-time, 3 percent guarantee fee and an annual, 0.50 percent renewal fee to maintain the guarantee. The USDA also allows lenders to charge a prepayment penalty — a fee required if you pay off the loan early.
Similar to SBA loans, the application process can be lengthy and require a lot of paperwork, but that depends on the type and complexity of the loan. For example, some loan guarantee projects through the Business & Industry Loan Guarantee Program can be approved and funded in as few as 10 days, but for more complicated, larger loans — like those under the Biorefinery Assistance Program — it could take six months to a year to complete.
The Biorefinery Assistance Program supports the development, construction and retrofitting of new and developing technology for advanced biofuels — biofuels that come from sources like crops residue and animal fat — renewable chemicals (such as succinic acid, sorbitol and acetone) and biobased products (commercial or industrial products other than food or feed) by providing loan guarantees up to $250 million.
USDA vs. SBA
If you’re not located in a rural area, you might want to consider an SBA loan instead. Like the USDA loan program, the SBA also guarantees a portion of its loans. The SBA doesn’t require businesses to be located in a certain geographical area, but they must be for-profit.
The USDA and SBA loan terms are fairly similar. For a look at the details of the SBA’s loan offerings, visit here. In general, though, you can expect:
- Loan amounts between $5 million and $20 million
- Repayment term lengths from five to 25 years
- Down payments ranging from 10 percent to 15 percent for some loans
Just like for USDA business loans, you must find an SBA-approved lender to apply for the loan.
How to apply for a USDA loan
The first step in applying is to make sure you’re eligible. Next, contact your local state office to get the process started. The USDA has a list of state offices on its website. If your project seems like a good fit for a USDA business loan, an agency representative will meet with you and the lender to determine if you should move forward. If the answer is yes, you’ll need to fill out the full application.
To get a USDA-guaranteed loan, the USDA and the lender must approve you. These loans require a fair amount of paperwork and documentation, and require typical documents such as:
- Application for loan guarantee
- Personal and corporate guarantees
- Certification of Non-Relocation & Market & Capacity Information Report (only for loans greater than or equal to $1 million that create 50 or more jobs)
- Profit and loss statements
- A balance sheet
- Cash flow statements
- Bank statements (usually from the last three months)
- Loan and lease statements
- Personal and business tax returns
- Business license
- Proof of collateral
- Articles of incorporation
The bottom line
Although getting a USDA business loan can be hard work, the results could well be worth it. The USDA’s business programs have high, long-term success rates. Three out of four small businesses that receive funding under the Business & Industry Loan Program are still up and running five years after receiving a loan.