What is a USDA Loan?

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 banks or credit unions to businesses in rural areas; and 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.

USDA loans can be used for:

  • Commercial real estate purchase, development, or improvement
  • Machinery, equipment, supplies, or inventory purchases
  • Working capital
  • Business modernization, development, or repair
  • Debt refinancing when it improves cash flow and creates or saves jobs
  • Integrated agriculture production or processing facilities
  • Business Acquisition when the loan will create or save jobs

While not all businesses are eligible to apply, USDA loans can be an excellent source of financing for businesses in more rural areas.

USDA loans come with a wide range of loan amounts, flexible use of funds, competitive interest rates and long terms.

PHD Financial has successfully placed many clients into USDA loans.

Will You Qualify for a USDA Business Loan?

Both new and existing businesses are eligible to apply for a USDA loan. The USDA identifies a specific set of minimum requirements for businesses to qualify for a USDA loan, but your lender may require that you meet additional criteria. The minimum criteria are below-

  • 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.”
  • 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
  • Specific types of insurance may be required like hazard, life, key person, worker’s compensation, flood, and other
  • Personal and corporate guarantees are required
  • Collateral is required

To find out if you’re eligible for a USDA loan, contact PHD Financial today at 561.508.7558.

USDA Loan Personal Guarantees and Collateral

To qualify for a USDA Loan, all business owners, partners (except limited partners), and anyone with a 20% or more share in the business is required to personally guarantee the loan.

Borrowers are also required to put up collateral for the loan. The collateral is usually equal to the loan amount, not the value of the assets you are financing.

Normally, the value of the collateral will be discounted to match the (LTV) loan-to-value ratio of the loan, and the discounted collateral will be equal to at least the actual dollar amount of the loan.

For example, the maximum LTV allowed on a USDA loan for purchasing real estate is 80%. If you plan on purchasing a property for $5 million, the maximum loan you can apply for is $4 million; and $4 million is likely how much the lender will ask for in collateral.

USDA Loan Parameters can differ based on the type of business looking for funding. USDA loans cannot be used by certain types of borrowers or for some purposes. This includes:

Ineligible uses of USDA loans

  • Line of credit
  • Agricultural production (exceptions apply)
  • Lease payments
  • Guarantee of loans made by other federal agencies
  • Payment to an owner, close relative or beneficiary when the owner will remain an owner
  • Federal tax-exempt obligations

Ineligible borrowers

  • Charitable institutions
  • Churches or church-controlled organizations
  • Fraternal organizations
  • Lending and investment institutions
  • Insurance companies
  • Golf courses
  • Racetracks or gambling facilities

USDA Loan Application Process

PHD financial works with lenders that participate in the USDA Loan program. We will help determine your eligibility for USDA funding.

If you are eligible, we will then need to prove the viability of your project, typically with a feasibility study and other documentation. Once deemed acceptable, we will submit a full application to the USDA. The USDA will approve or deny the application within 30 to 60 days, so total time from application to funding may take one to three months.

The USDA requires financial statements, credit reports and other documents to complete your application, including:

  • A business plan
  • Personal credit reports of all owners
  • Business credit reports
  • Resumes of business owners
  • Current balance sheet
  • Profit and loss statement not more than 90 days old
  • Pro forma balance sheet projected for loan closing
  • Balance sheet and cash flow projections for next two years
  • Number of jobs created or saved and average wages
  • Current personal or corporate financial statements for guarantors
  • Real estate and/or environmental appraisal or review
  • Feasibility study by independent consultant (new businesses only)

If your business is new or a startup, some of the financial statements and business credit documents are not required to secure a USDA Loan.

To find out more about USDA loans and your eligibility, contact PHD Financial today at 561.508.7558.