USDA Business Loans: The Complete Review

The USDA has several programs designed to revitalize and provide financial assistance to rural communities. Three of these resources specifically target small business owners in rural areas. Let’s take a look at the three USDA business loan programs to understand your options:

Through the Business and Industry Loan Guarantee Program, the USDA provides a partial guarantee to lenders that loan money to businesses within rural areas. You can use Business and Industry loans in a variety of ways, including:

• Business expansion or modernization
• Buying equipment
• Buying land or buildings
• Acquiring a business
• Refinancing existing debt

You cannot use Business and Industry loans for:

• Lines of credit
• Owner-occupied housing
• Golf courses
• Gambling facilities
• Churches or charitable organizations
• Fraternal organizations
• Agriculture productions (with certain exceptions)

Lenders with the legal authority and sufficient experience and financial strength to operate a successful lending program can apply for this program. This includes federal or state-chartered banks, savings and loans, farm credit banks, and credit unions.

A multitude of businesses can qualify for loan guarantees, including for-profit entities, nonprofits, cooperatives, federally recognized tribes, and public bodies, given they are located in a city or town with a population under 50,000.

Although USDA Business and Industry Loans can go up to $25 million, the typical loan is between $200,000 and $5 million. The loan terms range between seven to 30 years, depending on the loan use, so these are long-term loans.

The USDA guarantees anywhere from 60% to 80% of the loan, depending on the size of the loan. Loans are fully amortizing and can have fixed or variable interest rates (this is negotiated between the borrower and lender, and subject to USDA review).

The USDA charges an initial guarantee fee and an annual renewal fee on Business and Industry loans. During the underwriting process, borrowers may be required to obtain a feasibility study and put up collateral sufficient to protect the interest of the lender and the USDA.

For more information on the USDA Business and Industry loan program, check out this fact sheet. To begin your application, visit the USDA office in your state.

Through the Intermediary Relending Program, the USDA provides 1% low-interest loans to intermediaries—also known as local lenders—in rural areas that then lend the funds to local businesses. Nonprofits, cooperatives, federally recognized tribes, and public agencies can apply to be intermediary lenders.

Small business owners in rural areas can access these loans with a maximum amount of $250,000 or 75% of project cost, whichever ends up being less. Other than those loan caps, the intermediary lender will determine the loan’s repayment structure and cost. The only constraint is that the intermediary has to keep the costs to whatever’s necessary to sustain the loan fund.

To apply for a loan from an intermediary lender, a borrower must meet the following eligibility requirements:

• The applicant is a U.S. citizen or permanent resident.
• The applicant owes no delinquent debt to the U.S. government.
• The applicant is unable to obtain affordable commercial financing for the project elsewhere.
• The applicant has no legal or financial interest or influence in the work of the intermediary lender.

The small business owner can use the funds for any qualified business purpose, such as working capital, purchasing commercial real estate, upgrading equipment, and renovating a business. The eligible types of businesses are very broad, including education centers, transportation companies, and hotels.

For more information on the USDA Intermediary Relending Program, check out their website or reach out to your local office.

Through the Rural Microentrepreneur Assistance Program, the USDA provides funding to nonprofit community-based lenders, which then make microloans to small business owners in rural areas, as well as training and technical assistance.

The loans are limited to 75% of your project costs, up to a maximum of $50,000. For example, say you need funding to pay for a marketing strategy that will cost you $20,000. The maximum amount of your microloan would be $15,000.

Small business owners can use the loans for any eligible business activity, such as purchasing equipment, purchasing commercial real estate, working capital, or refinancing existing debt.

Nonprofits, federally recognized tribes, and institutions of higher education may apply to be microenterprise development organizations (MDOs). Any business with 10 or fewer full-time employees located in an eligible area can apply for a loan from an MDO.

For more, check out the USDA fact sheet on the Rural Microentrepreneur Assistance Program.

If any of the USDA small business loan programs sounds like the right fit for you, you’ll want to next confirm whether you’re eligible for this type of funding. The USDA has one specific motive for guaranteeing loans—to revitalize rural economies around the nation—so they have pretty specific requirements of their borrowers.

These are the minimum eligibility requirements for USDA business loans. You can expect lenders to have additional qualification requirements.

The USDA defines rural communities as any city or town with a population of less than 50,000 people. If your business is headquartered in a larger area, you can still be eligible as long as the project is located in an area that has a population of less than 50,000.

To help understand if your business is located in an eligible area, visit the USDA business services property eligibility page.

In addition to your business being located in a rural area, you need to have good credit to qualify for USDA business loans. Remember, the USDA itself isn’t making loans—banks are the ones actually issuing the loans, and they have a high bar for borrowers (even with the USDA guarantee, you’ll need to have strong credit to qualify). Most banks won’t lend to borrowers who have a personal credit score under 650, and the bar is even higher for startups.

Most lenders will also require your business to have strong revenue before extending a USDA-backed loan. The more revenue your business can show, the more likely you are to be able to pay back the loan and the more likely the lender is to approve the loan.

For a USDA Business and Industry loan, you’re required to have a tangible balance sheet equity position of 10% or more for existing businesses, and 20% or more for new businesses.

The exception here is startups, which might qualify for USDA business loans. The owner should submit a strong business plan with financial projections.

The USDA’s policy on collateral is that the borrower must provide collateral that’s at least equal to the amount of the loan. That could be business assets (equipment, real estate, machinery, etc.), personal assets, or a combination of both. If you’re planning to use the loan proceeds to buy equipment or real estate, those purchased assets might be able to serve as collateral.

As with most business loans, USDA small business loans require a personal guarantee from anyone who owns 20% or more of the business’s assets.

U.S. citizens or permanent residents must hold majority ownership in the business.

Lenders and borrowers are free to negotiate the terms on USDA business loans, but the lender cannot charge more than they charge similarly situated borrowers for similar business loan products. This typically brings the interest rate between 5% and 10%.

Your interest rate on USDA business loans will vary based on several factors, including:

• Your credit score
• The amount of time you’ve been in business
• Your business’s revenue
• The amount of collateral you can offer

The Business and Industry Loan Program and Intermediary Lending Program offer loans with fixed or variable interest rates. The Microentrepreneur Program offers fixed interest rates, which is great for businesses just getting off the ground or businesses with tighter budgets.

Only the Business and Industry Loan Guarantee Program comes with fees from the USDA. There’s a one-time 3% fee plus a 0.50% annual fee. The USDA charges these fees to the lender, but the lender generally passes them on to the borrower.

The other USDA loan programs don’t come with specific fees from the USDA, but the lender can charge customary fees, such as loan packaging fees, appraisal fees, and closing fees.

USDA business loans provide a low-cost source of funding for small businesses in rural communities. Researchers from the Rural Policy Research Institute found that rural businesses tend to grow at a slower rate than urban businesses and end up creating fewer jobs.

But, where credit is available, rural businesses tend to be more successful in getting loans than urban businesses. Therefore, when programs like the USDA’s are available, they can have a really positive impact on rural communities. That said, USDA business loans are not right for every rural business.

Here are the pros and cons of USDA business loans.

The application process for USDA business loans starts with contacting your state’s USDA office and speaking to their business division staff.

If your project seems like a good fit for one of their programs, the agency will meet with you and the lender to make a preliminary decision on project eligibility. If they provide preliminary approval, you’ll have to submit a complete application. Based on all the details you include, the agency will provide a conditional commitment to guarantee your loan within 30 to 60 days.

At that point, the lender, working with you and the USDA, will underwrite the loan and gather additional documentation as needed. Once the lender closes the loan, the USDA will issue the official loan note guarantee.

Be prepared to submit a lot of detail and paperwork as part of your business loan application, including a business plan, financial statements, credit reports, and more. But the reward is a low-cost loan that will help you start or grow your business.

Just like USDA business loans, SBA 7(a) loans are government-guaranteed business loans. Banks and other lenders issue SBA 7(a) loans and the SBA partially guarantees the loans.

SBA 7(a) loans mitigate lenders’ risk of loaning money to small businesses and startups. SBA 7(a) loans are the most versatile of all the types of SBA loans. They can go to a variety of purposes—working capital, equipment, and real estate loans, for instance. And SBA 7(a) loans are available to all qualifying for-profit businesses in eligible industries—no geographic limitations.

Even though SBA loans will be open to a wider range of business types than USDA business loans, they’re not exactly easy to get. In fact, the opposite is true—SBA loans are some of the most difficult types of small business loans to qualify for. Both the lender and the SBA have to approve you, so you and your business will need to be highly qualified.

If you decide to fund your business with an SBA loan, then you’ll gain access to the following terms:

• Loan amounts ranging from $500 to $20 million
• Repayment term lengths ranging from five to 25 years
• Low interest rates pegged to the market Prime Rate

The terms mirror USDA business loans pretty closely. However, the interest rates, fees, and other terms on SBA loans will vary depending on which of the SBA loan programs you apply to.

To apply for an SBA loan, you’ll need to find a lender who participates in the SBA program. Many large banks, such as Chase, Wells Fargo and Bank of America, offer SBA loans.

In addition, there are two SBA lenders in particular—SmartBiz and Celtic Bank—that offer online application processes that can speed up your funding turnaround.

USDA business loans fulfill a specific purpose to help businesses located in rural areas. They play an important role in revitalizing and growing the economies of rural communities.

That said, they’re not available to the majority of small business owners. If you’re not eligible for a USDA business loan, consider SBA loans as a great alternative for low-rate funding.