Loan vs. Grant

North Avenue Capital Explains the USDA Rural Energy for America Program

About the U.S. Department of Agriculture (USDA) Rural Development Program

When it comes to fi­nancing renewable energy projects and making energy-efficient improvements, the U.S. Department of Agriculture (USDA) Rural Development Program offers two potential paths under its Rural Energy for America Program (REAP): government-guaranteed loan and grant. These initiatives aim to support rural businesses and agricultural producers in their pursuit of clean and sustainable energy solutions. Both options are part of the USDA’s Rural Development REAP program, so what’s the difference between the two? Let’s find out.

At a Glance

The USDA REAP program provides government-guaranteed loan and grant options to agricultural producers and rural small businesses to upgrade, replace, or construct renewable energy systems and make energy-efficient improvements.

USDA REAP Loans

Agricultural producers and small businesses operating in rural areas

AMOUNTS

$2 Million* - $25 Million

*NAC minimum; USDA’s minimum loan amount is $5,000.

STRUCTURE

Up to 30-Year Loan

USDA REAP Grants

Agricultural producers and small businesses operating in rural areas

AMOUNTS

$1,500 – $1 Million

STRUCTURE

Up to 50% of Project Cost

Eligibility for

USDA REAP Loans vs. Grants

Agricultural farmers and small business owners can qualify for a REAP loan and grant. Farmers that make at least 50% of their gross income from agricultural production are considered “agricultural producers” and are an eligible borrower for REAP funding. Small business projects must be in “rural” areas, but agricultural producers may be in either rural or non-rural areas. The USDA defines rural as communities with populations of 50,000 or fewer residents. To find out if a project location qualifies as “rural,” use North Avenue Capital’s handy map tool.

ELIGIBILITY FOR USDA REAP LOAN PROGRAM

Applicants must be agricultural producers or small businesses, as defined by Small Business Administration (SBA) standards, located in rural areas to be eligible for the REAP Loan Program. The loan program primarily targets projects that demonstrate a clear potential for reducing energy consumption and generating renewable energy. Additionally, applicants should have the ability to repay the loan amount and meet the lender’s creditworthiness criteria.

ELIGIBILITY FOR USDA REAP GRANT PROGRAM

As with the loan program, the REAP Grant Program is open to agricultural producers and small businesses operating in rural areas.

Funding Structure of

USDA REAP Loans vs. Grants

A significant distinction between the USDA REAP Loan Program and the REAP Grant Program lies in their funding structures.

ELIGIBILITY FOR USDA REAP GRANT PROGRAM

Under the REAP Loan Program, eligible applicants can apply for renewable energy loans provided by USDA-approved lenders, like North Avenue Capital (NAC). NAC is a specialized nationwide commercial lender certified by the USDA and founded in 2015. NAC exclusively focuses on USDA business loans, which allows for more room, time, and energy for excellence and expertise in the space. The USDA REAP loan is specifically designed to support the development, construction, and implementation of energy efficiency improvements and renewable energy systems. The loans are typically long-term, with repayment terms of up to 30 years, allowing borrowers to distribute their repayments over an extended period.

ELIGIBILITY FOR USDA REAP GRANT PROGRAM

In contrast, the REAP Grant Program provides funding through a competitive grant process. These grants do not require repayment, making them a desirable option for businesses and agricultural producers seeking financial assistance without incurring debt. The grant is up to 50% of the total eligible project cost with a maximum of $1,000,000. The Grant is reimbursable to the applicant after the project is complete, commissioned, and all project-related costs have been paid. Eligible project costs include project related costs incurred after the official receipt of the application by the USDA, and are not for reimbursement on prior project expenses.

Funding Limits & Project Costs of USDA REAP Loans vs. Grants

Understanding the funding limits and allowable project costs is crucial for applicants looking to benefit from both the REAP loan and grant programs.

FUNDING LIMITS/PROJECT COSTS FOR USDA REAP LOAN PROGRAM

Under the REAP Loan Program, loan guarantees are available for up to 75% of the total eligible project costs. While the minimum loan program amount is $5,000, NAC’s loan minimum is set at $2 million. The maximum program amount for a REAP Loan is $25 million. However, it’s important to note that while the USDA guarantees the loan, the actual loan amount is determined by the participating lender. The borrower is responsible for financing the remaining project costs not covered by the loan. Loan terms will not exceed 30 years.

USDA REAP Loans: $5,000 – $25 million*

*USDA REAP Loans start at $5,000, but North Avenue Capital participates in the program starting at $2 million.

 

 

FUNDING LIMITS/PROJECT COSTS FOR USDA REAP GRANT PROGRAM

In contrast, the REAP Grant Program offers varying levels of funding, depending on the size and nature of the project. Grants can cover up to 50% of total eligible project costs; the passage of the Inflation Reduction Act in April 2023 increased this from 25%. However, there are minimum and maximum grant amounts set by the USDA and vary based on usage. Grants can be used for renewable energy systems or energy efficiency improvements.

Grant Minimums and Maximums*:
Renewable Energy System Grants: $2,500 – $1 million
Energy Efficiency Grants: $1,500 – $500,000
*Amounts based on total eligible project costs.
Applicants can apply and receive both a USDA REAP Loan and a USDA REAP Grant. Combined grant and loan guarantee funding can cover up to 75% of total eligible project costs.

Choosing between the USDA REAP loan and grant programs ultimately depends on the unique needs and circumstances of your rural business or agricultural operation. The USDA REAP Loan Program provides flexible financing options, allowing borrowers to repay the funds over an extended period, while the USDA REAP Grant Program offers non-repayable funds. For help selecting the most suitable option to support your renewable energy initiatives, contact a USDA loan specialist at North Avenue Capital today.

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