USDA business loans are loans guaranteed by the department of agriculture of the U.S. Formally, it was known as USDA business and industry loans. Banks or credit unions usually give the loan to businesses that are located in rural areas. USDA business loans are not very different from Small Business Administration loans. But the focus here is to create jobs in the rural sector and promote small businesses.
These loans can be used for a variety of purposes, some of which are
- Business development, modernization, and repair
- To upgrade machinery, supplies, equipment, and inventory
- Development through a commercial real estate purchase
- Debt financing to work upon cash flow
- Acquisition of business, when the loan saves or creates jobs
Though all businesses aren’t eligible for it, these loans are certainly an excellent source of financing for non-profit and other businesses in rural areas. This business loan gives you flexible funds, high-interest rates, a good amount, and long term agreements.
How to be eligible for a USDA business loan?
Both new and existing businesses can avail USDA loans. There is a set of minimum requirements to get the loan. The minimum requirements are given below:
- Have to be located in a rural area: Any area other than a city that has a population of over 50,000 is eligible.
- Must be a citizen: The applicant must be a citizen of the U.S. or have permanent residency status.
- Must be eligible as a borrower.
- Must have the minimum cash flow required for loan repayment.
- Good credit history: This means a constant 680 score over a long period has to be maintained. In business, it means on-time payments, no derogatory marks, and low credit utilization.
- Must have an equity position of 10% of an existing business, 20% for new business, and 25% to 40% for energy projects.
- An independent consultant must do the feasibility study
- Worker’s compensation, flood insurance, and other types of insurances may be required.
- Corporate, as well as personal guarantees, are required.
- Collateral is required.
One may be unfamiliar with the equity position of tangible balance sheets when it comes to commercial loans. If so, one can use tangible assets to arrive at the equity position. Therefore, this is the business’s balance sheet equity, excluding any intangible assets. Some of the intangible assets are licenses, goodwill, patents, copyrights, trademarks, etc.
Interest and fees
The interest rates for commercial loans are usually like those of on SBA loans i.e., 6-9%. The lender sets the interest rates, and it is ensured that the interest rate is reasonable when compared to similar loans.
USDA loans come with the following types of fees:
- Initial guarantee: The fee is 3% of the total loan amount
- Annual renewal fee: 0.5% of the principle(outstanding)
- Bank fees or lender fees: Origination fees, appraisal fees are charged by banks. A penalty that is to be made before the payment and miscellaneous fees are also included.
Completion of the loan application
The following are required to complete the loan application:
- A business plan
- Credit reports of business
- Credit report of all owners(personal)
- Resume of the business owners
- Updated balance sheet
- Profit and loss statements(maximum 90 days old)
- Pro forma balance sheet i.e., projected for loan closing
- Cash flow projection for the next two years and balance sheet
- Average wages, number of jobs created and saved
- Current statements for guarantors
- Real estate review
- A feasibility study by an independent consultant
Hope this brief guide to USDA business loans clarifies all your doubts and queries.