What are USDA Business & Industry Loan Guarantees and how can it be used to further a business’s entrepreneurial cause?
Food and agriculture is a vital industry in the United States. Not known to many, the country is a major player in the industry that meets some of the largest agricultural demands in the international market. Yet aside from taking care of the world’s agricultural needs, the federal government also sees to it that our domestic demands are met. To make sure this is taken care of, the government established the United States Department of Agriculture. This executive department sees to it that the agricultural foundation in the country stays solid by providing technical assistance through loans and grants to the country’s farmers and ranchers.
Of course, these services are not only limited to individuals but also to community groups such as cooperatives. And if you are an entrepreneur by nature, you can also look into the department’s Business and Loan Guarantees.
Get today’s rates.What are these Business & Industry Loan Guarantees?
The Rural Development Business and Industry (B&I) Guaranteed Loan Program guarantees loans made by eligible lenders to rural businesses. it bolsters the availability of private credit by insuring loans given to rural businesses.
Who can apply and qualify for this program?
The program is open to lenders who have the legal authority, substantial years of experience, and the financial capacity to operate a successful lending program. This includes federal or state-chartered banks, savings and loan lenders, farm and credit banks, and credit unions.
What kind of businesses can qualify for these loan guarantees?
For-profit entities, non-profit organizations, cooperatives, tribes recognized by the federal government, public institutions, as well as individuals can qualify for said loan guarantees.
Are there any restrictions on the borrower/s?
For individuals trying to qualify for the guarantee, you must be a US citizen or have resided in the country after being legally admitted for permanent residence.
For private entity borrowers, you must be able to demonstrate that the proceeds of the loan funds will be used within US soil and that the facility being financed will primarily create new or save existing jobs for rural residents of the country.
Find a USDA lender today!What is considered an eligible area?
Any region outside a city or town with a population size of 50,000 or more as well as the urbanized areas of that city or town. The borrower may be headquartered in a larger city as long as the project service area is within an eligible territory.
The lender, however, can be based anywhere.
Projects located in rural and urban areas can be funded via the Local and Regional Food System Initiative.
How can funds be used?
The proceeds of the loan can only be used for the:
- conversion, enlargement, repair, modernization, or development of a business
- purchase and development of land, easements, rights-of-way, as well as the establishment of buildings and facilities
- purchase of equipment, leasehold improvements, machinery, and inventory
- refinancing of debt if the refi can ease cash flow or create and save jobs
- acquisition of businesses and industry when the loan can create or save jobs
The proceeds of a Guaranteed Loan fund CANNOT be used for the:
- acquisition of lines of credit
- acquisition of owner-occupied housing
- establishment of golf-courses
- establishment of racetracks or gambling facilities
- building of churches or church-controlled organizations or charitable organizations
- establishment of fraternal organizations
- establishment of lending, investment, and insurance companies
- funding of projects that involves more than $1 million and the relocation of 50 or more jobs
- production of agriculture with certain exceptions
- distribution and payment to a beneficiary of the borrower or an individual or entity that will retain an ownership interest in the borrower
Is there a required collateral?
The collateral must have a demonstrated value that is enough 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. The collateral must carry a hazard insurance with an amount 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 terms of the loan?
The maximum term for real estate is 30 years. For machinery and equipment, lifetime or 15 years, whichever is less. For working capital, it should not exceed 7 years. The loans must be fully amortized and balloon payments will not be allowed. Interest-only payments can be scheduled in the first three years.
What are the interest rates?
The interest rates can be negotiated by the lender and borrower, subject to Agency review. It can be fixed or variable. Variable interest rates will not be adjusted more often than quarterly.
What fees are applicable?
An initial guarantee fee that costs around 3 percent of the guaranteed loan amount will be required. There is also a fee for annual renewals currently at 0.5 percent of the outstanding loan principal. Other customary fees can be negotiated between 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 to get started
The USDA accepts applications year-round. Borrowers can ask their lenders about the program. Lenders should visit their local USDA offices or contact the USDA Rural Development Business Programs Director in the state where the project is located.
Source: USDA website
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