What You Should Know About USDA Business Loans
The stated purpose of USDA’s loan program is to “bolster the availability of private credit” for rural businesses. Like any form of financing, though, USDA loans (formerly known as USDA Business and Industry Loans, or B&I Loans) are a great option for some but aren’t beneficial to others. To help you decide if a USDA business loan is right for you, we’ve assembled this list of pros and cons.
What Are the Benefits and Drawbacks of USDA Business Loans?
The Pros of USDA Business Loans
1. Relatively Easy Access to Capital for Rural Businesses
If you own a business that operates in a rural area, you may know how difficult it is to obtain a loan. Rural communities are often the hardest hit during economic downturns and banks are wary of this. However, if you can get a USDA guarantee, lenders are far more likely to extend a small business loan. Just keep in mind that, to qualify, your project or business must be in an area that is not a city or town with a population of 50,000 or more.
2. Many Types of Businesses Are Eligible for USDA Loan Guarantees
Although your business must be in a certain area to qualify, there are few restrictions on the type of business that’s eligible for a USDA loan. Cooperatives, non-profits, for-profit businesses, public bodies, individuals, and federally recognized tribes may all be eligible.
That said, if you’re an individual you’ll have to be an American citizen or currently live in the U.S. after having been admitted legally. Also, if the loan is for a private entity, you must show that the funds will stay in the U.S. and that they’ll be used to create or save jobs for U.S. residents.
3. Average Loan Amounts Are Large
USDA Business Loans vary in size from $200,000 to $5 million. However, the average size is about $3 million which means, if your business needs a large loan, a USDA loan can be a good option. In fact, loans of up to $10 million are eligible for a USDA guarantee. Loans over $10 million won’t be approved without an exception by the Administrator.
4. Competitive Interest Rates and Terms
When you receive a USDA business loan, the lender will select the interest rate. Typically, these rates are in-line with what the SBA offers on their 7(a)-loan product.
For the USDA loan terms, you can negotiate with your lender. However, there are maximum term lengths that depend on how you will spend the loan. For real estate, the maximum term is 30 years. If you’re spending the financing on machinery or equipment, the maximum is 15 years, and working capital terms can’t exceed a seven-year term.
The Cons of USDA Business Loans
1. USDA Business Loans Are Competitive
Each year, Congress allocates a certain amount of funds for the USDA. Often times, this money runs out before the year is over. At the beginning of the government’s next fiscal year, Congress will approve additional funding but, in the meantime, there won’t be any funds for new loans.
Sometimes, Congress will approve supplemental funds during the year, but that’s not guaranteed. This means that there’s a limited supply of USDA loans, which makes the application process relatively competitive.
2. Restrictions on Loan Fund Use
The USDA website lists the following as things that guaranteed loan funds may not be used for:
- Fraternal organizations
- Lending, investment, and insurance companies
- Projects involving more than $1 million and the relocation of 50 or more jobs
- Agricultural production, with certain exceptions
- Distribution or payment to a beneficiary of the borrower or an individual or entity that will retain an ownership interest in the borrower
- Lines of credit
- Owner-occupied housing
- Golf courses
- Racetracks or gambling facilities
- Churches, church-controlled organizations, or charitable organizations
If you plan on using the funds for any of the above types of projects or companies, you won’t be approved for this USDA program.
3. Collateral and Personal Guarantees Are Required
Some financial institutions will loan funds without requiring you to put up collateral or sign a personal guarantee. This isn’t the case with a USDA business loan. The value of your collateral must be at least equal to the loan amount for you to be eligible for a USDA loan.
Moreover, personal guarantees will be required from owners, partners, and any shareholder with 20 percent or more ownership interest. By signing a personal guarantee, you become personally liable for the loan.
How to Apply for USDA Business Loans:
Now that you understand the pros and cons of USDA financing, you should make sure you’re prepared to apply. To qualify for this business program, the USDA requires the following components:
- Balance sheet and cash flow projections.
- Business credit reports.
- Comprehensive business plan.
- A feasibility study conducted by an independent consultant.
- Profit and loss statements.
- A record of the number of jobs your business has created or saved, included the average wages of your employees.
- Personal credit reports and resumes from all owners.
- Real estate appraisal
Before submitting your application, you should meet with your lender to ensure that you have everything you need. They’ll submit a pre-application to the USDA to make sure you qualify, and then you can go from there!
How to Use a USDA Loan:
As previously mentioned, there are some usage restrictions for these loans. If you’re serious about applying, determine if this loan will meet your needs.
Below, you’ll find a list of the approved ways USDA loans can be used:
- Agriculture production or processing facilities
- Business acquisition
- Business development
- Commercial real estate
- Debt refinancing
Are USDA Business Loans Right for Your Company?
If you’re in the market for a larger loan and your business is located in a rural area, a USDA loan is worth considering. You won’t get the quick service and funding you might expect with online lenders, but if you have the time and can’t secure a large loan otherwise, applying may be worth a shot. If you choose to do so, examine the USDA’s detailed eligibility requirements.
Although we’ve reviewed many of these requirements, you should get very familiar with these loans before beginning the lengthy application process. That way, you can ensure that you aren’t wasting your time, and can pursue other business financing options instead if necessary.
Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.