What is a USDA Loan?

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If you’re wondering, “what is a USDA loan?”, there are a few different categories, including commercial loans, farm/ranch loans, and home mortgages. This article will provide an overview of USDA commercial loans, including how they work, who qualifies for them, and what benefits they bring. 

How Does a USDA Commercial Loan Work?

USDA commercial loans work just like any other bank loan. The loan is funded by the bank, and will be serviced by your banker after closing. The difference between a USDA loan and a traditional bank loan is the USDA guarantee, which is extended to the bank at closing to reduce the risk of the loan, allowing the bank to offer special terms. When considering a USDA loan, it is vital to recognize that you must first formally qualify for one; it is not something you can simply apply for. You must first qualify your project with a bank familiar with the USDA programs. Often borrowers achieve better outcomes engaging with an experienced USDA lender and/or consultant upfront. 

What is the Difference Between USDA Commercial Loan Programs?

The Business and Industry program is the most common type of USDA commercial loan. These loans of up to $25 million are available to eligible businesses located in rural areas, and can be used to acquire and/or refinance real estate or equipment purchases. All loans must be collateral secured. Borrowers are attracted to these loans due to their long terms, no balloon maturity risk, and minimal down payments. 

The Community Facilities program is available to rural-located non-profit entities, public bodies, and Native American tribes to finance real estate and equipment that has a tangible community benefit. Some examples of these sorts of financing are medical facilities, educational facilities, public buildings (fire, police, city halls, etc), and public infrastructure like ports, airports, etc. These loans can be larger (up to $100 million) and can feature even longer terms than the Business and Industry program. 

Food Supply Chain guaranteed loans are available to Borrowers in the “middle of the food supply chain” meaning everything other than retail (supermarkets, restaurants) and farms or ranches. These loans can range in size up to $40 million and are eligible for businesses located in both rural and urban areas, a unique feature given the USDA’s primarily rural orientation. 

Lastly, the Rural Energy for America program offers loans to rural-located small businesses and agricultural producers to develop renewable energy systems such as wind, solar, hydropower, etc. Funds may also be used to buy, build, and install energy efficiency improvements such as HVAC systems, insulation, lighting, refrigeration units, doors/windows, and energy-inefficient equipment replacement. In certain cases, grants are available through this program for up to 40% of eligible project costs, not to exceed $500,000. 

Geographic Eligibility Requirements for USDA Commercial Loans

All USDA loans, other than the Food Supply Chain program, must be located in a rural area. The definition of “rural” can be confusing, but fortunately there is a convenient mapping tool to determine geographic eligibility here. The vast majority of Americans qualify as rural so no matter where you are located, be sure to check your project eligibility! There are no income restrictions under the USDA commercial lending programs, and Borrowers can be organized as for-profit or not-for-profit entities, including public bodies and/or Native American tribes. 

What Type of Businesses are Eligible for USDA Commercial Loans? 

Generally, any business located in a rural area is eligible for a USDA commercial loan other than housing, farming/ranching, and “sin businesses” such as marijuana growing/processing, gambling, golf courses, etc. Some examples of eligible businesses include (but are not limited to) manufacturing plants, distribution facilities, hotels/motels, restaurants, warehouses, marinas, cold storage facilities, refineries, mines, equipment dealers, convention centers, assisted living centers, veterinary clinics, medical facilities, airports, office buildings, wine operations, student housing, chemical processing, cold storage facilities, trucking terminals, lumber mills, rock quarries, shopping centers, etc. Schedule a call with us for any questions on eligible businesses! 

USDA Commercial Loan Fees

An origination fee is required for all USDA loans. These fees vary by program, but generally they range between 1-2.4% of the loan amount, and are paid to the USDA at closing in exchange for the guarantee. These fees are used to keep the guarantee programs solvent, and the percentage of the guarantee can be thought of as the percentage of USDA program loans that default in any given year. The guarantee fee is often added to the amount borrowed and paid at closing. In addition, there is sometimes an annual fee depending on the program, although the annual fee is often paid by the lender. 

How To Get a USDA Commercial Loan

When considering a USDA loan, it is important to recognize that you must first formally qualify with a bank familiar with the USDA program. First National Bank of Oklahoma is an approved USDA lender that focuses on this special financing niche across the United States, and our team of experts is available to answer your questions at any time. To determine if your project is located in an eligible area, please visit our simple mapping tool here and search by project address. For any other questions, please schedule a call with our USDA specialist. We look forward to working with you!