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If you own a business in rural America, you may be unaware of the range of loan options available. USDA loans, in particular, are an often overlooked source of financing for businesses in rural areas.
These government-backed loans offer distinct advantages, making them an excellent option for those looking to expand their operations or access working capital. Keep reading to closely examine key differentiators of USDA loans, their requirements, and the best lenders to seek for this type of financing.
What Are USDA Business Loans?
USDA Business loans are loan programs offered by the United States Department of Agriculture (USDA) to support businesses and development in rural communities. These government-backed loans can be used for various purposes, including purchasing land, constructing or upgrading buildings, purchasing equipment and supplies, refinancing existing debt, and more.
The Types of USDA Loans
There are various USDA loans businesses can take advantage of, including:
- USDA Business and Industry (B&I) Loans
- USDA Food Supply Chain Loans
- USDA Rural Energy for America Program (REAP) Loans
- USDA 9003 Loans
How to Qualify for a USDA Business Loan
To qualify for a USDA loan, your business must meet specific criteria related to your location, size, and purpose. To start, your business must be located in an eligible geographical area designated by the U.S. Department of Agriculture as “rural.” Typically, most communities with populations of less than 50,000 people qualify. However, you can email your business address to Madison One for eligibility confirmation.
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Your business must also meet certain equity requirements and demonstrate an ability to repay the loan using sound financial analysis techniques. After confirming eligibility, rural businesses can apply for a loan from a participating bank, credit union, non-bank lender, and, in some cases, directly from the USDA. Once the application is submitted, it typically takes between 30-60 days for the USDA to confirm eligibility standards and make a decision.
Whether your rural business is in food supply, manufacturing, healthcare, assisted living, or any other industry, a commercial USDA loan can help. Learn more below.
Key Differentiators Between USDA Loans and Other Types of Financing
Compared to traditional loan products, USDA loans offer several advantages to businesses in rural areas. These include more flexible credit qualifiers, varied funding purposes, competitive interest rates, etc. Some of the most significant differentiators include the following:
Longer Loan Terms
USDA loans offer significantly longer terms than any other type of loan. With a USDA business loan, the equipment can be financed for up to 10 years or the useful life of the asset, whichever is less. This extended repayment period allows borrowers to take advantage of lower monthly payments due to the length of time they have to repay the principal amount borrowed.
Fully Amortized Loans
Unlike other loans, USDA loans are fully amortized. This means the monthly payments are automatically calculated based on the loan amount and repayment period. The payment schedule is provided to borrowers before closing so they can see exactly how much they will owe each month. Since USDA loans have no balloon payments, borrowers don’t need to worry about being blindsided by a large lump sum owed at the end of their loan term.
Higher Collateral Value
USDA loans generally allow for a higher valuation of collateral, which can be especially beneficial for borrowers looking for financing for rural properties or businesses. USDA loans also allow for the purchase of rural land, even if that land does not have a traditional appraisal. This way, borrowers won’t be concerned about a lower valuation of their assets.
Wider Variety of Eligible Uses
USDA loans can be used for various purposes, including working capital and long-term investments. Businesses can use these funds to purchase equipment, build or improve infrastructure, or purchase real estate. This allows companies to make the most of their loan money while keeping loan payments low.
Increased Incentive for Rural Lenders
Due to these incentives, USDA B&I Lenders can often provide borrowers with more favorable terms and rates. The motivation also allows banks and credit unions that may not typically provide loan services in rural areas to partner with the USDA and offer loans to borrowers who otherwise would not have access to financing.
Assistance During Economic Recessions
When the economy takes a downturn, the USDA is there to help rural businesses get back on their feet. By offering loans with competitive interest rates and longer repayment periods, they can significantly reduce the financial burden of business owners in times of economic hardship.
Additionally, with its reduced risk and comprehensive insurance policies, the USDA loan program includes a guarantee from the federal government, which is up to 90% of the total loan amount. This guarantees that the lender will not face significant losses due to defaults.
Choosing the Best USDA Loan Lender
If you’ve determined that a USDA business loan is what your enterprise needs, you should find an accommodating lender. Regardless of your expenses, there are certain traits you should look out for when choosing one.
First and foremost, you should ensure the lender offers all the types of business loans you need, especially since not all offer every kind of loan the USDA provides. Are you thinking of taking advantage of the B&I loan program? Or, if you need to improve or build on your business, you should choose a USDA construction loan lender.
Additionally, businesses should consider what type of guidance and support is available. A suitable lender should be available to answer questions and provide advice on various topics, including loan terms and repayment options. Ensure you understand all of the details before signing a loan agreement. Don’t forget to verify that the lender has a long history of making USDA loans. If not, choosing the wrong lender could lead to months of loan processing only to find out the loan is not eligible for the program.
Once you’ve done enough research and narrowed down your options, compare loan offers side-by-side to evaluate which lender best fits your financing needs.
Take Control of Your Financial Future With Madison One CUSO
Choosing a reputable loan provider can be the deciding factor that guarantees your business’s success. Madison One CUSO is an excellent choice for helping your rural company secure the proper funding it needs. As a partial credit union-owned company, our team of loan experts with over a combined 50 years of USDA lending experience, stands above the rest and can help your business get the best deal so you can confidently move forward with your venture.
We’re here to help get your business off the ground. Get in touch with us today.
Discover which USDA Commercial Loan is best for you and speak with one of our business loan experts today.
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