Category: USDA Rural Development, Federal Incentives
What does this program do?
This program bolsters the availability of private credit by guaranteeing loans for rural businesses.
Who may apply for this program?
Lenders with the legal authority, sufficient experience and financial strength to operate a successful lending program. This includes:
- Federal or state-chartered banks
- Savings and loans
- Farm credit banks
- Credit unions
What kind of businesses qualify for loan guarantees?
- For-profit businesses
- Federally-recognized Tribes
- Public bodies
Are there restrictions on the borrower?
- Individual borrowers must be citizens of the United States or reside in the U.S. after being legally admitted for permanent residence.
- Private-entity borrowers must demonstrate that loan funds will remain in the U.S. and the facility being financed will primarily create new or save existing jobs for rural U.S. residents.
What is an eligible area?
- Any area other than a city or town with a population of greater than 50,000 inhabitants and the urbanized area of that city or town
- The borrower’s headquarters may be based within a larger city as long as the project is located in an eligible rural area
- The lender may be located anywhere
- Projects may be funded in rural and urban areas under the Local and Regional Food System Initiative
How may funds be used?
Eligible uses include but are not limited to:
- Business conversion, enlargement, repair, modernization or development
- Purchase and development of land, easements, rights-of-way, buildings or facilities
- Purchase of equipment, leasehold improvements, machinery, supplies or inventory
- Debt refinancing when refinancing improves cash flow and creates or saves jobs
- Business and industrial acquisitions when the loan will create or save jobs
Guaranteed loan funds MAY NOT be used for:
- Lines of credit
- Owner-occupied housing
- Golf courses
- Racetracks or gambling facilities
- Churches, church-controlled organizations or charitable organizations
- Fraternal organizations
- Lending, investment and insurance companies
- Projects involving more than $1 million and the relocation of 50 or more jobs
- Agricultural production, with certain exceptions (1)
- Distribution or payment to a beneficiary of the borrower or an individual or entity that will retain an ownership interest in the borrower
What Collateral Is Required?
Collateral must have documented value sufficient to protect the interest of the lender and the Agency. The discounted collateral value must be at least equal to the loan amount. Lenders will discount collateral consistent with sound loan-to-value policy. Hazard insurance is required on collateral (equal to the loan amount or depreciated replacement value, whichever is less).
Maximum Advance Rates
Real Estate: 80 percent of fair market value
Equipment: 70 percent of fair market value
Inventory: 60 percent of book value (raw inventory and finished goods only)
Accounts Receivable: 60 percent of book value (less than 90 days)
What is the maximum amount of a loan guarantee?
- 80 percent for loans of $5 million or less
- 70 percent for loans between $5 and $10 million
- 60 percent for loans exceeding $10 million, up to $25 million maximum
What are the loan terms?
- Maximum term on real estate is 30 years
- Maximum term on machinery and equipment is its useful life or 15 years, whichever is less
- Maximum term on working capital not to exceed 7 years
- Loans must be fully amortized; balloon payments are not permitted
- Interest-only payments may be scheduled in the first 3 years
What are the interest rates?
- Interest rates are negotiated between the lender and borrower, subject to Agency review
- Rates may be fixed or variable
- Variable interest rates may not be adjusted more often than quarterly
What are the applicable fees?
- There is an initial guarantee fee equal to 3 percent of the guaranteed amount
- There is an annual renewal fee, currently 0.5 percent of outstanding principal (2)
- Reasonable and customary fees are negotiated between the borrower and lender
What are the underwriting and security requirements?
- The proposed operation must have a realistic repayment ability
- New enterprises may be asked to obtain a feasibility study by a recognized independent consultant
- The business and its owners must have a good credit history
- At loan closing/project completion, the business must have a tangible balance sheet equity position of:
- 10 percent or more for existing businesses, or
- 20 percent or more for new businesses.
- Key person life insurance may be required and the amount negotiated. A decreasing term life insurance is acceptable
- Personal and corporate guarantees are normally required from all proprietors, partners (except limited partners) and major shareholders (i.e., all those with a 20 percent or greater interest)
How do we get started?
- Applications are accepted from lenders through USDA local offices year round
- Interested borrowers should inquire about the program with their lender
- Lenders interested in participating in this program should contact the USDA Rural Development Business Programs Director in the state where the project is located
Who can answer questions?
Contact the local office that serves your area.
What governs this program?
- Loan Processing – Code of Federal Regulations, 7 CFR 4279-A and B
- Loan Servicing – Code of Federal Regulations, 7 CFR 4287-B
- This program is authorized by the Consolidated Farm and Rural Development Act
Why does USDA Rural Development do this?
This program improves the economic health of rural communities by increasing access to business capital through loan guarantees that enable commercial lenders to provide affordable financing for businesses in eligible rural areas.