What does this program do?
This program bolsters the existing private credit structure through the guaranteeing of loans for rural businesses, allowing private lenders to extend more credit than they would typically be able to.
Who may apply for this program?
Lenders with legal authority, sufficient experience, and financial strength to operate a successful lending program like:
- Federal or State chartered banks
- Savings and loans
- Farm credit banks
- Credit unions
What kind of borrower may the lender request a guarantee for?
- For-profit businesses
- Nonprofits and cooperatives
- Federally-recognized Tribes
- Public bodies
Are there restrictions on the borrower?
- Government or military employees may not own more than 20%
- Majority ownership must be held by US citizens or permanent residents (1)
What is an eligible area?
- Any area other than a city or town with a population of greater than 50,000 inhabitants and the urbanized area of that city or town.
- The borrower’s headquarters may be based within a larger city as long as the project is located in an eligible rural area
- The lender may be located anywhere
- Projects may be funded in rural and urban areas under the Local and Regional Food System Initiative
How may funds be used?
Eligible uses include but are not limited to:
- Business conversion, enlargement, repair, modernization, or development
- Purchase and development of land, easements, rights-of-way, buildings, or facilities
- Purchase of equipment, leasehold improvements, machinery, supplies, or inventory
- Debt refinancing when new jobs will be created and other conditions are met
- Business and industrial acquisitions when the loan will keep the business from closing and/or save or create jobs
Guaranteed loan funds MAY NOT be used for:
- Lines of credit
- Owner-occupied housing
- Golf courses
- Racetracks or gambling facilities
- Churches, church-controlled organizations, or charitable organizations
- Fraternal organizations
- Lending, investment and insurance companies
- Projects involving more than $1 million and the relocation of 50 or more jobs
- Agricultural production, with certain exceptions (2)
- Distribution or payment to an individual owner, partner, stockholder, or beneficiary of the borrower or a close relative of such an individual when such individual will retain any portion of the ownership of the borrower
What Collateral Is Required?
Collateral must have documented value sufficient to protect the interest of the lender and the Agency. The discounted collateral value will normally be at least equal to the loan amount. Lenders will discount collateral consistent with sound loan-to-value policy. Hazard insurance is required on collateral (equal to the loan amount or depreciated replacement value, whichever is less).
Maximum Advance Rates
Real Estate: 80% of fair market value
Equipment: 70% of fair market value
Inventory: 60% of book value (raw inventory and finished goods only)
Accounts Receivable: 60% of book value (less than 90 days)
What is the maximum amount of a loan guarantee?
- 80% for loans of $5 million or less
- 70% for loans between $5 and $10 million
- 60% for loans exceeding $10 million, up to $25 million maximum
What are the loan terms?
- Maximum term on real estate is 30 years
- Maximum term on machinery and equipment is useful life or 15 years, whichever is less
- Maximum term on working capital not to exceed 7 years
- Loans must be fully amortized; balloon payments are not permitted
- Reduced payments may be scheduled in the first three years
What are the interest rates?
- Interest rates are negotiated between the lender and borrower, subject to Agency review
- Rates may be fixed or variable
- Variable interest rates may not be adjusted more often than quarterly
What are the applicable fees?
- There is an initial guarantee fee equal to 3% of the guaranteed amount
- There is an annual renewal fee, currently 0.5% of outstanding principal (3)
- Reasonable and customary fees are negotiated between the borrower and lender
What are the underwriting and security requirements?
- The proposed operation must have 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 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 do we get started?
Applications are accepted from lenders through our local offices year round
Interested borrowers should inquire about the program with their lender
Lenders interested in participating in this program should contact the USDA Rural Development Business Programs Director in the state where the project is located.
USDA Rural Development