Common Myths and Misconceptions About USDA Guaranteed Loans

Common Myths and Misconceptions About USDA Guaranteed Loans

Myth 1: USDA Loans Are Only for Farmers and Ranchers

One of the most common misunderstandings about USDA Guaranteed Loans is that they are solely intended for farmers and ranchers. This couldn’t be further from the truth, as the USDA Guaranteed loan programs that fall under the OneRD regulation (business + industry, community facilities, rural energy for America, and water + waste disposal) specifically do not allow loan guarantees to be used for farms or ranches! There are some exceptions to this rule where there is significant value-add production on a farm or ranch, such as a cow/calf operation that also has a meat processing plant and distribution facility on the same property, but generally speaking farms and ranches don’t work for OneRD USDA guaranteed loans. Other programs exist that are specifically intended to serve farmers and ranchers, such as the USDA FSA program, but that is not the focus of this article.

Myth 2: USDA Loans Are Difficult To Qualify For

The misconception that USDA guaranteed loans have stringent qualification requirements dissuades potential commercial applicants from exploring this option. While it’s true that USDA loans have specific criteria, they are not insurmountable hurdles and in many cases are easier to qualify for than SBA loans. USDA guaranteed loans may be made to for-profit or non-profit entities, federally recognized tribes, and individuals. Entities may be owned by US citizens or foreign nationals, provided that the guaranteed loan funds will remain in the United States. The loans must be personally guaranteed, but there are no income and net worth limitations that can occasionally trip up high net worth borrowers in the SBA program. The projects financed through USDA guaranteed loans must be located in a rural area, which can be determined by using our mapping tool: 

Myth 3: USDA Loans Are Only for Low-Income Borrowers

Another prevailing myth is that USDA guaranteed loans under OneRD exclusively cater to low-income borrowers. While the program aims to facilitate business opportunities in rural areas, there are absolutely no income or net worth restrictions inside of the OneRD regulations. In fact, many high net worth borrowers have realized that they can leverage USDA guaranteed loans to derive special financing terms that are better than what they can source using their traditional banking relationships. 

Myth 4: All Rural Banks Are Aware of the Program

Very few bankers have in-depth knowledge of USDA guaranteed loans under OneRD. Only a handful of bankers have the expertise to process a borrower’s USDA application, and understand the nuances of the program well enough to leverage the program’s special financing terms to bring value to their borrowers. At First National Bank of Oklahoma we have a team dedicated to USDA guaranteed lending. We originate loans for our bank as well as serve as a consultant for 3rd party banks across the country. We have great relationships with the USDA field offices, as well as the national office in Washington DC. Prospective borrowers keen on utilizing the benefits of the USDA loan program should proactively engage with their local banks to ascertain their expertise in processing USDA loan applications, and if they don’t seem like an expert you should consider working with a lender who is. 

Myth 5: USDA Loans Have Lengthy Approval Processes

The misconception that USDA loans entail lengthy approval processes concerns many potential commercial applicants. While certain aspects of USDA loans may require additional time, the overall approval timeline is comparable to other business loans, with loans generally closed within 60-90 days of the first meeting between lender/borrower. Timely collection of needed underwriting documents, financial statement accuracy, and proactive communication among borrowers, lenders, and relevant 3rd parties can expedite the process. Most of the horror stories we hear about loans taking months and months to close involve some combination of an unorganized borrower with incomplete financial statements, an inexperienced lender, or a capital structure that has lots of complexity (C-Pace, Tax Credits, TIF, etc) without experienced counterparties involved. At First National Bank of Oklahoma, our team is more than capable of “quarterbacking” the deal to keep all of these counterparties on the same page as we head towards closing. 

Myth 6: USDA Loans Are Not a Good Option for Refinancing

A prevalent misunderstanding is that USDA loans are exclusively suitable for purchasing real estate or equipment, and are unsuitable for refinancing. USDA guaranteed loans under OneRD can be used for debt refinancing provided that the bank being refinanced is not the same bank applying for the loan guarantee. In some cases (such as bridge loans needed for quick closings) even this requirement can be waived. Indeed, refinancings are one of the most common uses of funds for USDA guaranteed loans. 

Get Your First USDA Guaranteed Loan Now

The myths and misconceptions surrounding USDA Guaranteed Loans have hindered many from exploring this valuable path to rural business expansion. By debunking these myths, we hope to empower potential borrowers with accurate information and encourage them to consider the benefits of the USDA Guaranteed Loan Program. Whether you are a first-time commercial applicant, a current rural business owner seeking refinancing opportunities, or someone looking to initiate their venture, it’s crucial to approach the USDA loan program with a clear understanding of its potential. With accurate information and expert guidance, you can confidently embark on your journey toward entrepreneurship. For those interested in learning more about USDA Guaranteed Loans and assessing their eligibility, we encourage you to engage with one of our USDA experts at First National Bank of Oklahoma.