Editorial · February 13, 2016
USDA Business and Industry Loan Guarantee: Rural Basics
A USDA business and industry loan guarantee backs a loan that a bank or other lender makes to a rural business. The lender applies for the guarantee. If the borrower cannot repay, USDA pays part of the lender's loss. USDA says this lets private lenders offer more credit than they typically could. The project has to be in a rural area, with some exceptions.
How the guarantee works with a lender
The lender makes, services and collects the loan, and USDA guarantees it. When USDA approves a request, it sends the lender a conditional commitment. This notice says the guarantee is approved if USDA's conditions are met. Later, USDA issues the loan note guarantee, which contains the terms of the guarantee.
The guarantee covers a share of the loan. The lender and USDA negotiate that share, up to a ceiling. The standard ceiling is 80 percent for loans of $5 million or less. It is 70 percent for loans between $5 million and $10 million, and 60 percent above that. In total, one borrower is limited to $10 million, with exceptions. For a high-priority project, USDA can allow an exception. The share can reach 90 percent on a loan of $10 million or less. A loan can reach $25 million at no more than 60 percent. The lender must show the loan and project would not happen without the exception.
USDA ranks eligible applications with points. Among other things, projects in cities under 25,000 people or outside city limits, in struggling communities, or with low-rate loans score higher.
The lender stays in charge of servicing the whole loan. It must act as a prudent lender would with its own loans that have no guarantee. The lender cannot enforce the guarantee for the part of a loss caused by errors such as negligent servicing or a missing required security interest. If a default cannot be fixed, the lender follows a plan that USDA approves, unless USDA sells the collateral itself. The plan covers, among other things, selling the collateral and collecting from any guarantors. Once the collateral is sold, USDA settles with the lender and pays no more than the guarantee allows. It can also recover what it pays from any party that may be liable.
Who can qualify
USDA's page names federal and state chartered banks, savings and loans, Farm Credit banks and credit unions as examples of lenders. Lenders outside the rule's full list can ask for approval if they meet USDA's tests for legal authority, lending record and capital.
A borrower can be a for-profit company, nonprofit, cooperative, federally recognized tribe, public body or individual. It must run a business or plan to start one. An individual generally must be a U.S. citizen or lawful permanent resident. A private organization must be at least 51 percent owned by such people.
USDA's page also requires realistic repayment ability, plus a good credit history for the business and its owners. At closing, an existing business normally needs tangible equity of at least 10 percent. A new one normally needs at least 20 percent. Owners with 20 percent or more usually sign personal or corporate guarantees, though USDA's page excepts limited partners.
Where the project has to be
The project must be in a rural area. That means any area except a city or town of more than 50,000 people and the urbanized area next to it. USDA's page says a borrower's headquarters can sit in a bigger city if the project is in an eligible rural area. The lender can be anywhere. The page links to an online address check.
The rural test has exceptions. One example: USDA's page says projects under its local and regional food initiative can be funded in rural and urban areas. A 2014 notice on the program's locally or regionally produced food provision says an urban project can be eligible for priority funding. It must clearly help an underserved community get affordable, healthy, local or regional food.
What the loan can pay for
Eligible uses include land, buildings, equipment, supplies, inventory, and the repair, upgrade or growth of a business. A loan can buy a business when that keeps it open or saves or creates jobs. Startup costs and working capital are allowed. So is refinancing debt, when it creates or saves jobs and meets other conditions.
Off-limits uses include lines of credit, golf courses, churches, lending and insurance companies, and payouts to owners who keep part of the business. Agricultural production is barred too, with certain exceptions.
Terms, rates and fees
Repayment can run up to 30 years for real estate. For equipment the limit is 15 years, or its useful life if that is shorter. For working capital the limit is 7 years. Balloon payments are not allowed. The lender and borrower negotiate the interest rate, and USDA reviews and approves it. The rate can be fixed or variable, but a variable rate cannot change more than once a quarter.
USDA charges an initial fee and a yearly renewal fee. The lender pays both and may pass them on to the borrower. For fiscal year 2016, the standard initial fee is 3 percent of the guaranteed amount. For example, an 80 percent guarantee on a $4 million loan covers $3.2 million. The fee is 3 percent of that, or $96,000. The yearly renewal fee for loans obligated in fiscal year 2016 is one-half of 1 percent. It is figured on the guaranteed part of the balance on December 31. The rule text says up to 2 percent for the initial fee. A December 2015 notice says appropriations laws allowed up to 3 percent from fiscal year 2012 through 2015. USDA expected the same for 2016.
How to start
Borrowers should ask their own lender about the program, USDA's page says. A lender that wants to take part should contact the USDA Rural Development business programs director in the state where the project sits. USDA accepts applications from lenders year round. To complete an application, the page says, you need a DUNS number and a registration in the System for Award Management. Neither costs money, but both can take time.