What are USDA loans?

In June 30, 2017

Header image: What is a USDA loan?

Thriving businesses are important-and not just in big cities. Farmers, cooperatives and rural businesses are the lifeblood of our small towns and play a key role in Arizona.

Towns like Parker, Yuma, Quartzsite and Goodyear keep the State’s economic health humming along.

Did you know Yuma is the winter lettuce capital of the world, according to Arizona Farm Bureau? In addition, our apple growers provide almost 20 million pounds of apples and our pecan harvest is worth $52 million annually. 

We rank third in the nation for production of fresh market vegetables, and have a robust $12.4 billion (and growing) agricultural industry that includes farming, dairy and ranching.

Here’s an interesting but slightly weird factoid from Tucson’s Edible Baja Arizona magazine: Arizona’s Department of Agriculture is the second largest consumer of Spam (canned meat) in Arizona. It’s used to attract fire ants so they can be eliminated. 

Much like the Small Business Administration (SBA) guarantees small business loans through participating lenders like Horizon Community Bank, the government also supports rural areas through United States Department of Agriculture (USDA) Rural Development programs.

It doesn’t fund the loan, it ensures repayment to the bank.

Who is eligible for a USDA loan and how can it be used?

Communities up to 50,000 people have opportunities to borrow money with lower equity requirements, larger credit limits and longer repayment terms than conventional funding typically requires. The guarantee lessens bank risk, encouraging them to approve the loan request, but the lender determines what terms it will offer to the borrower. Collateral that covers the amount of the loan is required and may be a combination of business and personal assets.

So what’s the catch? Loan amounts tend to be larger for USDA loans, compared to SDA loans, but they also tend to run out of budget before year’s end. Paperwork and processing times can be extensive.

The lender can be located anywhere, but the funded business or project must be located in an eligible rural area.

Borrowers must be U.S. citizens or permanent residents and funds must remain in the U.S. while providing jobs for its rural community. For-profit and nonprofit businesses, cooperatives, federally-recognized tribes, public bodies and individuals may qualify, but churches, gambling organizations, lending or insurance businesses, and some other exclusions apply.

To qualify for the USDA loan program, approved use for the funds typically includes:

  • Business development, construction, expansion, repair or modernization costs
  • Purchase and development of land, easements, rights-of-way or buildings/facilities
  • Debt refinancing or acquisitions related to creating or saving jobs and improving cash flow
  • Installation or construction of renewable energy systems
  • Purchase of equipment, machinery, supplies or inventory
  • Working capital (not lines of credit)
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It’s also important to know that the borrower must have tangible equity of 10 percent (or 20 percent for startups) at the time of the loan closing.

A full list of requirements, exclusions and other details are available at USDA.gov. A banker can also discuss the program, along with comparable SBA loan programs and funding ideas customized to the individual borrower’s needs.

Contact us today if you’d like to learn more or schedule an appointment!

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