USDA-guarantee program supports commercial lending in rural areas

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Ask a Lender
September 21, 2017


Key Points

USDA Business and Industry Guaranteed Loan Program

  • Provides guarantees for commercial mortgages and loans for other business activities
  • Activities funded must create jobs and be located in rural areas
  • Average loan size of $3 million
  • Private lenders make the loans, with USDA guaranteeing up to 80 percent
  • Borrowers must provide collateral and personal repayment guarantees

The U.S. Department of Agriculture (USDA) sponsors a loan program that will help you obtain a commercial mortgage, and you don’t have to be a farmer to be eligible.

The USDA’s Business and Industry (B&I) Guaranteed Loan Program guarantees commercial mortgage loans, as well as loans for most other business endeavors. The primary requirement is that the activity funded must create jobs and be carried out in a rural area, defined as locality with a population of less than 50,000 that is not part of an "adjacent urbanized area." Those who aren't sure whether their location meets the standard can enter the address into a USDA website search tool to find out if it is within a qualifying area.

For-profit and nonprofit enterprises are eligible for the loan guarantees, as are public agencies, Indian tribes, cooperatives and individuals. Churches and casinos are ineligible, as are some other specific businesses listed on the program's website.

Lender incentives

The B&I program is similar to U.S. Small Business Administration loan guarantees. Borrowers work out the terms of a loan — including interest charges — with private lenders, which then send the loan package to the USDA. Department staff members then consult with the lender and prospective borrower and, if the project earns USDA’s approval, the agency will guarantee the bulk of the loan. The guarantee eliminates much of the lender’s risk and provides credit to borrowers who might otherwise be turned away or forced to seek a more costly loan.

The USDA will guarantee loans of up to $25 million under the program, but loans typically range from $200,000 to $5 million, and the average size is $3 million. The maximum portion of the loan the department will guarantee varies according to the size of the loan: 80 percent for loans of $5 million or less; 70 percent for loans between $5 and $10 million, and 60 percent for loans of more than $10 million.

Borrowers and lenders negotiate the interest rates of the loan, subject to USDA approval. Fixed and adjusted-rate loans are allowed, and interest rates cannot be adjusted more often than quarterly.

Commercial real estate loans are amortized for up to 30 years, longer than any other type of B&I loan; reduced payments are allowed in the early years of the loan; and balloon payments are prohibited. The program allows lenders to charge prepayment penalties, however. The amount of the guarantee varies, according to the size of the loan: The USDA will guarantee a maximum of 80 percent for loans of $5 million or less; 70 percent for loans between $5 million and $10 million, and 60 percent of loans exceeding $10 million.

Collateral, equity required

To obtain those relatively generous terms, borrowers must make significant guarantees. The program requires collateral equal to the value of the loan, as well as personal repayment guarantees for anyone with a 20 percent or larger stake in the project being funded. In addition, owners of the project must be able to show equity of at least 10 percent for existing businesses and 20 percent for new businesses.

The program also requires environmental inspections for every piece of real estate that’s funded at a level that varies according to the type of work being done on the building and its history.

Any lending institution under the supervision of federal or state authorities is eligible to submit loan-guarantee requests under the B&I program, as are lenders that are part of the Farm Credit System, Savings and Loan Associations and insurance companies. Some unsupervised institutions, such as community development corporations and commercial mortgage companies, also offer the program — although they must apply to the USDA for permission to participate.

The USDA says the program is particularly attractive to small community banks that serve rural areas because it generates future nonlending banking business with loan recipients, and the portion of the loans that are guaranteed by the government do not count against the institutions’ regulatory lending limits.

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