Many businesses and individuals may be surprised to learn that capital for their existing businesses or start-up ideas are available through the United States Department of Agriculture (USDA). The USDA offers government-backed business loans to borrowers who need funding in areas of “rural” and/or “low populations”. The USDA does not lend directly, but only through approved lenders like North Avenue Capital (NAC), the nation’s #1 provider of USDA Business & Industry (B&I) Loans and only lender focused exclusively on USDA lending.
The Rural Development Loan program is designed to help individuals start, sustain or grow their business, while creating jobs and economic opportunity for underserved areas of the United States. While still surprisingly under-the-radar of many seeking business funding, USDA loans offer a number of unique, highly appealing benefits for borrowers. These include high loan amounts; favorable credit & collateral requirements; appealing interest rates & repayment terms; the availability of the loans in locations with moderately sized populations; and fact that they are not restricted to agricultural businesses. Here’s a closer look at five unique benefits of USDA rural development loans for prospective and current business owners.
One of the major benefits of USDA Rural Development Loans is the fact they can be as low as $1 million and as high as $25 million. The average USDA B&I loan for North Avenue Capital is $5 million. This makes it a great option for borrowers who need a large cash infusion to start their business or expand a current one, who may be having a hard time finding a lender to work with them.
As with all loans, borrowers must be credit worthy, but the requirements for USDA Rural Development Loans, including collateral and equity guidelines, are generally quite favorable. Borrowers should have a credit score above 680, and the higher the credit score, the more favorable the interest rate. Collateral requirements are traditionally set at a 1:1 ratio of discounted collateral to the amount of the loan. For example, a rural business seeking to borrow $1 million should maintain collateral in an equivalent amount (i.e., land, buildings, cash or other tangible assets).
NAC’s average Loan to Value (LTV) is about 57%, but can be maxed out to 80% in certain situations. Equity of borrowers must be 10% for established business, 20% for start-up business and 25% for construction. Importantly, this is GAAP balance sheet equity. It is not necessarily what the assets are worth, but what is eligible to be posted as an asset on the GAAP balance sheet.
Another benefit of USDA Rural Development Loans are the competitive interest rates and flexible repayment terms. Rates are variable based off the movement of Wall Street Journal Prime Rate. The USDA ensures that interest rates are competitive, pegged to the Market Prime Rate and in line with similar loans offered by other lenders. The loans use a fully amortizing loan schedule that keeps payments stable throughout the loan term. There are no balloon payments that can catch a borrower off guard later in the life of the loan. The length of the loan depends on what the funds are used for. Real estate has a 30-year maximum, machinery and equipment is 15 years, and working capital is seven years.
Surprisingly, USDA rural development loans for businesses are not limited to agricultural development. In fact, agricultural production is eligible only if the project is vertically integrated, such as a production or manufacturing facility on the agricultural land. This is because the USDA has separate Farm Service Agency (FSA) farm loan programs for agricultural production needs. Rural development loans are intended to stimulate rural economies by providing financial backing for a broader, more diverse range of businesses and uses.
Qualifying businesses for USDA Rural Development Loans include:
Funds can be used for:
One more surprising benefit of USDA rural development loans is that they’re available in over 97% of the United States. That’s the geographic percentage of the USA considered “rural”. The USDA defines “rural” as communities of no more than 50,000 residents. However, many areas immediately outside of an ineligible area are often considered eligible. That means a borrower who lives just outside a suburban area may be eligible to apply for a USDA B&I loan, even though they’re in or near an area with a large population. In addition, businesses headquartered in larger cities may also still be eligible if the project being funded is in a qualifying community.
Contact North Avenue Capital today to talk to one of our lending experts about USDA Rural Development Loans. We can help you learn more about USDA B&I Loans and how these programs help you get the capital you need to get your business off the ground or continue growing. North Avenue Capital has offices in Northeast Florida, Nevada, Arkansas, Georgia, Tennessee and Texas, but we partner in all 50 states and US territories for USDA loans.