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The U.S. Department of Agriculture guarantees business loans for small businesses, companies, nonprofits and other organizations located in rural communities. This program is known as the USDA Business and Industry program, and it’s a great source of affordable, long-term financing. In this guide, we cover what these loans can be used for, how you can qualify, what the terms and fees are and what the application process is like.
What are USDA Business Loans?
USDA Business Loans, formally referred to as USDA Business and Industry loans, are business loans guaranteed by the U.S. Department of Agriculture (USDA). These loans are made by lenders, such as banks or credit unions, to businesses in rural areas. A portion of the loan is guaranteed by the USDA. These loans are very similar to Small Business Administration (SBA) loans, but with a focus on promoting small businesses and creating jobs in rural communities.
These loans can be used for:
- Business modernization, development or repair
- Commercial real estate purchase, development or improvement
- Machinery, equipment, supplies or inventory purchases
- Working capital
- Integrated agriculture production or processing facilities
- Debt refinancing when it improves cash flow and creates or saves jobs
- Business acquisition when the loan will create or save jobs
While not all businesses are eligible to apply, we think these loans are an excellent source of financing for businesses and nonprofits in rural areas. These loans come with a wide range of loan amounts, flexible use of funds, competitive interest rates and long terms.
How Do I Qualify for a USDA Business Loan?
Both new and existing businesses are eligible to apply for a USDA B&I loan. The USDA sets forth a specific set of minimum requirements for businesses to qualify for a business and industry loan, but your lender may require you to meet additional criteria. The minimum criteria are below:
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- Must be located in a rural area: The USDA defines this as any area other than a city with a population over 50,000 or the urbanized area of that city. You can check your business’s eligibility here.
- Must have U.S. citizenship or permanent residency status: This applies to individual borrowers as well as businesses (at least 51% of the business must be owned by U.S. citizens or permanent residents).
- Must be an eligible type of borrower: This includes for-profit businesses, nonprofits, federally recognized tribes, public bodies and individuals.
- Must have sufficient cash flow to support loan repayment
- Business and its owners must have good credit history: For individuals, this means at least several years of history with a credit score of 680 or above. For businesses, this means a history of on-time payments, low credit utilization and no derogatory marks (judgments, liens, charge-offs, bankruptcies, etc).
- Must have a tangible balance sheet equity position of:
- 10% for existing businesses
- 20% for new businesses
- 25% to 40% for energy projects
- Completed feasibility study by an independent consultant for new businesses
- Hazard, life, key person, worker’s compensation, flood and other types of insurance may be required
- Personal and corporate guarantees are required
- Collateral is required
You may be unfamiliar with the concept of tangible balance sheet equity position. It is a way to arrive at the equity position of your business using only tangible assets, or in other words, it is the balance sheet equity of your business minus the value of any intangible assets. Intangible assets include amortized loan costs, licenses, goodwill, customer lists, patents, copyrights, proprietary rights and trademarks.
What is Ineligible for a USDA Business Loan?
USDA B&I loans cannot be used by certain types of borrowers or for some purposes.