USDA Food Supply Chain Loans offer numerous advantages for borrowers. The Food Supply Chain Guaranteed Loan Program was established by the U.S. Department of Agriculture to encourage private investment in America’s food processing and infrastructure to strengthen the food supply chain, which was disrupted by the COVID-19 pandemic. Made through the American Rescue Plan, the program recently received a $100 million infusion for the purpose of upholding nearly $100 billion in loan guarantees to finance start-ups or expansion of businesses involved in supply chain activities. This includes food manufacturing, aggregating, processing, transporting, storing, distributing and wholesaling. Here are eight key advantages of USDA Food Supply Chain Loans (USDA FSC).
One of the biggest advantages of USDA FSC Loans is that, unlike other USDA Rural Development (OneRD) Guaranteed Loan Programs, which are restricted to areas identified as “rural” by the USDA, USDA FSC Loans come with no geographical constraints. Eligible businesses can be located within sparsely populated rural areas or larger metropolitan areas, regardless of the size of the business.
Another great advantage of USDA FSC Loans is the broad range of qualifying uses for the funding. Food supply chain businesses ranging from meat, poultry and fish processors to storage facility operators, to packagers, distributors and transporters – whether start-ups or existing businesses, individuals, partnerships, or co-ops – may all apply. Funding can be used for everything from helping launch a new business to financing business expansion, repair, modernization, conversion, to pay for land, building, infrastructure, or equipment, or to use as working capital.
USDA FSC Loans offer high funding amounts ranging up to $40 million. By contrast, SBA 7(a) loans only offer up to $5 million and SBA 504 loans (for owner-occupied commercial real estate financing), only up to $20 million. That’s just half of the funding that an FSC loan could potentially provide in an apples-to-apples scenario.
USDA FSC Loans hold a similarly distinct advantage over SBA 7(a) and 504 commercial financing when it comes to repayment terms. SBA 7(a) and 504 loan repayment terms only can extend to a maximum of 25 years, whereas FSC loans can extend to 40 years.
USDA FSC Loans offer highly competitive interest rates, in line with similar SBA 7(a) and 504 loan rates, which generally are lower than conventional business loans. USDA FSC Loan interest rates are tied to the Wall Street Journal Prime Rate.
Another big advantage of USDA FSC Loans is that there are no guarantee or annual renewal fees. Because SBA 7(a) loans are backed by the federal government – in exchange for a fee to the lender, which gets passed on to the borrower – the SBA guarantees a certain portion of each loan, so if a borrower defaults, the lender is guaranteed to recoup most of their funds. These fees can rise to 3.5% and much higher, depending on the type of loan and amount.
While SBA 504 loans are a little different, for fiscal year 2022, the guarantee fee (paid upfront) is 0.50%, and the yearly service fee is 2.475% of the outstanding balance. In either case, by not requiring guarantee or annual renewal fees, USDA FSC Loans can save borrowers many thousands of dollars over the life of the loan, a huge advantage over the competition.
Another great benefit of USDA FSC Loans is that they offer full amortization. Fully amortized loans have repayment schedules such that the amount of your payment that goes toward both principal and interest changes over time, so your balance is fully paid off by the end of the loan term. This means you don’t have the payment shock of a balloon payment at the back of an interest-only loan to pay off the balance and/or a situation where you are forced to refinance to do so. There also are no pre-payment penalties, providing USDA FSC Loans advantages across the board.
Finally, credit requirements for USDA FSC Loans are very reasonable. As collateral-backed loans, borrowers must provide sufficient collateral (cash, real estate, fixed assets, equipment, etc., discounted consistent with established LTV practices) to back the loans on a 1:1 basis. Borrowers must possess a minimum credit score of 680 and a good credit history with good payment history, and low credit utilization. Like most business loans, the better the credit history, the lower the interest rates that may be offered.
The USDA Food Supply Chain Guaranteed Loan Program truly offers incredible advantages for borrowers operating in America’s food supply chain system over other types of commercial loans, including SBA loans. The federal government hopes supporting these kinds of highly appealing commercial business loans will create new market opportunities, making the U.S. food supply chain stronger, more resilient and secure than ever.
North Avenue Capital is a deeply experienced USDA-approved lender. We can help walk you through the application process for a USDA FSC Loan, so you can benefit from all the advantages of this incredible new lending initiative. We have offices in Northeast Florida, Arkansas, Georgia, Tennessee and Texas and partners for USDA loans in all 50 states. Contact us today.