The U.S. Department of Agriculture guarantees business loans for small businesses, companies, nonprofits and other organizations located in rural communities. This program is known as the USDA Business and Industry program, and it's a great source of affordable, long-term financing. In this guide, we cover what these loans can be used for, how you can qualify, what the terms and fees are and what the application process is like.
What are USDA Business Loans?
USDA Business Loans, formally referred to as USDA Business and Industry loans, are business loans guaranteed by the U.S. Department of Agriculture (USDA). These loans are made by lenders, such as banks or credit unions, to businesses in rural areas. A portion of the loan is guaranteed by the USDA. These loans are very similar to Small Business Administration (SBA) loans, but with a focus on promoting small businesses and creating jobs in rural communities.
These loans can be used for:
- Business modernization, development or repair
- Commercial real estate purchase, development or improvement
- Machinery, equipment, supplies or inventory purchases
- Working capital
- Integrated agriculture production or processing facilities
- Debt refinancing when it improves cash flow and creates or saves jobs
- Business acquisition when the loan will create or save jobs
While not all businesses are eligible to apply, we think these loans are an excellent source of financing for businesses and nonprofits in rural areas. These loans come with a wide range of loan amounts, flexible use of funds, competitive interest rates and long terms.
How Do I Qualify for a USDA Business Loan?
Both new and existing businesses are eligible to apply for a USDA B&I loan. The USDA sets forth a specific set of minimum requirements for businesses to qualify for a business and industry loan, but your lender may require you to meet additional criteria. The minimum criteria are below:
- Must be located in a rural area: The USDA defines this as any area other than a city with a population over 50,000 or the urbanized area of that city. You can check your business's eligibility here.
- Must have U.S. citizenship or permanent residency status: This applies to individual borrowers as well as businesses (at least 51% of the business must be owned by U.S. citizens or permanent residents).
- Must be an eligible type of borrower: This includes for-profit businesses, nonprofits, federally recognized tribes, public bodies and individuals.
- Must have sufficient cash flow to support loan repayment
- Business and its owners must have good credit history: For individuals, this means at least several years of history with a credit score of 680 or above. For businesses, this means a history of on-time payments, low credit utilization and no derogatory marks (judgments, liens, charge-offs, bankruptcies, etc).
- Must have a tangible balance sheet equity position of:
- 10% for existing businesses
- 20% for new businesses
- 25% to 40% for energy projects
- Completed feasibility study by an independent consultant for new businesses
- Hazard, life, key person, worker’s compensation, flood and other types of insurance may be required
- Personal and corporate guarantees are required
- Collateral is required
You may be unfamiliar with the concept of tangible balance sheet equity position. It is a way to arrive at the equity position of your business using only tangible assets, or in other words, it is the balance sheet equity of your business minus the value of any intangible assets. Intangible assets include amortized loan costs, licenses, goodwill, customer lists, patents, copyrights, proprietary rights and trademarks.
What is Ineligible for a USDA Business Loan?
USDA B&I loans cannot be used by certain types of borrowers or for some purposes. This includes:
- Line of credit
- Agricultural production (exceptions apply)
- Lease payments
- Guarantee of loans made by other federal agencies
- Payment to an owner, close relative or beneficiary when the owner will remain an owner
- Federal tax-exempt obligations
- Charitable institutions
- Churches or church-controlled organizations
- Fraternal organizations
- Lending and investment institutions
- Insurance companies
- Golf courses
- Racetracks or gambling facilities
USDA Business Loan Amounts, Terms, Rates and Fees
You and your lender will negotiate the terms of your USDA B&I loan. However, the USDA does set some specifications on amounts, terms and fees.
While there is no minimum loan amount, USDA B&I loans generally do not exceed $10 million (with some exceptions going up to $25 million or more). Most USDA business loans are between $200,000 and $5 million, with the average loan amount around $3 million. There are, however, requirements on the loan-to-value ratio, which are based on how you plan to use the funds. This also means that you'll need to make a down payment for the loan.
|Loan Use||Maximum Loan-to-Value Ratio||Down Payment|
|Equipment or machinery||70%||30%|
|Inventory, supplies or accounts receivable||60%||40%|
For example, if you plan to use the loan to purchase commercial property for $1 million, the maximum loan amount you could receive is $800,000, and you would have to put up $200,000 as a down payment.
Loan Terms and Maturities
Loan terms are negotiated by you and your lender, but the USDA does set maximum terms based on how you plan to use the loan proceeds. If the loan is for multiple purposes, your lender can make separate loans or one loan with a "blended" term.
|Loan Use||Maximum Term|
|Real estate||30 years|
|Machinery and equipment purchases||Lesser of useful life or 15 years|
|Working capital||7 years|
All USDA business loans are fully amortized, meaning that each monthly payment will be the same and there will be no balloon payments. However, borrowers can schedule interest-only payments for the first three years of the loan.
Interest Rates and Fees
Generally speaking, interest rates will be similar to those on SBA 7(a) loans, which are currently around 6% to 9%. Interest rates on USDA business loans are set by your lender, with the USDA ensuring the the interest rate is reasonable compared to similar loans. Interest rates can be fixed, variable or a combination of fixed and variable. If your loan has a variable or combination rate, the rate cannot be adjusted more than once per quarter, or four times per year.
USDA business loans come with several types of fees (these fees may change):
- Initial guarantee fee: 3% of the guaranteed amount of the loan
- Annual renewal fee: 0.5% of the outstanding principal
- Bank/lender fees: Banks may charge origination fees, appraisal fees, prepayment penalties and other fees for the loan
For example, let’s say you have a $1 million loan with an 80% guarantee. This means that $800,000 of the loan is guaranteed, and your guarantee fee will be 3% of this amount, or $24,000. After a few years, maybe you’ve paid off $300,000 of the principal, leaving $700,000 in remaining principal. Your annual renewal fee for that year would be 0.5% of that amount, or $3,500.
The guaranteed amount of the loan is based on the loan amount, with the USDA guaranteeing between 60% and 80% of each B&I loan.
|Loan Amount||Maximum Guarantee|
|$5 million or less||80%|
|$5 million to $10 million||70%|
|More than $10 million||60%|
Personal Guarantees and Collateral
All business owners, partners (except limited partners) and anyone with a 20% or more share in the business is required to personally guarantee the loan. Borrowers are also required to put up collateral for the loan. The collateral is usually equal to the loan amount, not the value of the assets you are financing.
Normally, the value of the collateral will be discounted to match the loan-to-value ratio of the loan, and the discounted collateral will be equal to at least the actual dollar amount of the loan. For example, the maximum loan-to-value ratio allowed on a USDA loan for purchasing real estate is 80%. If you plan on purchasing a property for $5 million, the maximum loan you can apply for is $4 million, and $4 million is likely how much the lender will ask for in collateral.
To apply for an USDA business loan, you will need to approach a bank, credit union or lender that participates in the program (the lender does not have to be located in your area). Your lender will submit a pre-application to the USDA to determine your eligibility. If you are eligible, a representative from the USDA will meet with you and your lender to determine if the project is acceptable. If it is, you and your lender will submit a full application to the USDA. The USDA will approve or deny the application within 30 to 60 days, so total time from application to funding may take one to three months.
The USDA requires financial statements, credit reports and other documents to complete your application, including:
- A business plan
- Personal credit reports of all owners
- Business credit reports
- Resumes of business owners
- Current balance sheet
- Profit and loss statement not more than 90 days old
- Pro forma balance sheet projected for loan closing
- Balance sheet and cash flow projections for next two years
- Number of jobs created or saved and average wages
- Current personal or corporate financial statements for guarantors
- Real estate and/or environmental appraisal or review
- Feasibility study by independent consultant (new businesses only)
If your business is new or a startup, some of the financial statements and business credit documents are not required.
To find lenders in your state that participate in the program, we recommend you contact your state USDA Rural Development office.