What’s the Difference Between a USDA Guaranteed Loan and a Balance Sheet Loan?

What’s the Difference Between a USDA Guaranteed Loan and a Balance Sheet Loan?

When it comes to financing options for businesses, two common choices are USDA guaranteed loans and balance sheet loans. These loans play a crucial role in helping companies secure the necessary capital for growth, expansion, or operational needs.

However, they have distinct features and eligibility requirements that every business owner should understand before deciding which loan option is right for them. In this article, we will delve into the key differences between USDA guaranteed loans and balance sheet loans to help you make an informed decision. Balance sheet vs. USDA loan: which one is right for you?

Eligibility Requirements for USDA Guaranteed Loans

USDA guaranteed loans under OneRD are a government-backed financing option to promote rural economic development by providing loans to businesses in eligible rural areas, as stated on USDA’s official website. To qualify for a USDA commercial guaranteed loan, companies must meet specific criteria:

  • Rural Location: The business must be located in a designated rural area. These areas are typically outside the boundaries of urban cities and towns, and can be located using First National Bank of Oklahoma’s rural eligibility mapping tool: https://fnbok.bank/usda-eligibility-map/ 
  • Collateral: All USDA guaranteed loans must be collateral secured, typically with LTVs not greater than 80% for real estate and 70% for equipment. 
  • Legal Status: The company must operate as a legal entity and demonstrate good character and creditworthiness.
  • Ability to Repay: The business should show capabilities to repay the loan, which is evaluated based on its financial history and projections.
  • Business Plan: The USDA requires a detailed business plan outlining the loan’s purpose, the project’s intention to be funded, and a strategy for repaying the loan.

Eligibility Requirements for Conventional Loans

On the other hand, balance sheet loans, often called conventional or portfolio loans, are not government-backed and are typically offered by traditional financial institutions such as banks and credit unions, as Investopedia describes. The eligibility requirements for conventional loans may vary from lender to lender, but they generally include:

  • Credit Score: Lenders usually require a good credit score from the business owner and the business itself. A higher credit score improves the chances of loan approval and favorable terms.
  • Financial History: Lenders assess the business’s financial history, including its revenue, cash flow, and profitability. A robust financial track record enhances the likelihood of loan approval.
  • Collateral: All USDA guaranteed loans must be collateral secured, typically with LTV/LTCs (the lesser of) not greater than 80% for real estate and 70% for equipment. 
  • Ability to Repay: The business should show capabilities to repay the loan, which is evaluated based on its financial history and projections.

Government Backing for USDA Commercial Guaranteed Loans

One of the most significant advantages of USDA commercial guaranteed loans is the government backing they receive. This backing comes from the U.S. Department of Agriculture (USDA) and is a crucial factor that sets these loans apart from conventional options. The government guarantee is pivotal in influencing lenders’ decisions to finance businesses that might not otherwise qualify for loans due to certain limitations, or for the lender to offer special terms that may not be available with balance sheet loans. In essence, the government assures lenders that if the borrower defaults on the loan, the government will reimburse a portion of the outstanding balance. 

Here are some benefits of a government-backed loan program:

  • Increased Accessibility: The reduced risk for lenders translates to improved accessibility for borrowers. Businesses that might not have qualified for conventional loans have a better chance of securing financing through this program.
  • Favorable Terms: The lower risk for lenders often leads to more favorable terms for borrowers, including longer repayment periods, no balloon maturity, and lower down payment requirements.
  • Flexible Use: You can use the funds you obtain through USDA loans for various purposes, including business expansion, real estate investment, equipment purchase, acquisitions, working capital, and more. This versatility makes USDA loans suitable for a range of business needs.

Government Backing for Conventional Loans

In contrast to USDA commercial guaranteed loans, conventional loans do not benefit from government backing. These loans are offered by private financial institutions, such as banks and credit unions, and the lending decision is entirely based on the lender’s assessment of the borrower’s creditworthiness and financial stability. Because conventional loans lack government backing, lenders assume a higher level of risk. As a result, they tend to have stricter eligibility criteria and lending standards. Here’s what you need to keep in mind:

  • Reliable Background: Borrowers seeking conventional loans must demonstrate a strong credit history, stable revenue streams, and a solid financial track record.
  • Collaterals: To mitigate the increased risk, lenders often require collateral for conventional loans. Collateral serves as a form of security for the lender — if the borrower defaults, the lender can seize the collateral to recover the outstanding loan amount.
  • Conservative Underwriting: Lenders may be more conservative in their underwriting, considering the absence of government backing.

Loan Limits for USDA Commercial Guaranteed Loans and Balance Sheet Loans

Both USDA commercial guaranteed loans and balance sheet loans have specific loan limits that borrowers need to be aware of:

  • USDA Commercial Guaranteed Loans: According to the official USDA website, the loan guarantee limits for USDA loans vary based on the size of the underlying business, as well as an overall cap on the different program buckets under OneRD. Loans are limited to $25 million for the Business & Industry guaranteed loan program, $100 million for Community Facilities, $25 million for Rural Energy for America program, and $50 million for the Water and Waste Disposal program. 
  • Balance Sheet Loans: Conventional loans are not subject to government-imposed maximum limits. Instead, the lender’s assessment of the business’s financial health, creditworthiness, and ability to repay determine the loan amount for balance sheet loans, with each bank subject to their own legal lending limit based on the size of the bank’s balance sheet. 

USDA Loan Vs. Balance Sheet: Which One Should You Choose?

So, balance sheet loan vs. USDA, which one is the right option for you? The choice between USDA commercial guaranteed loans and balance sheet loans depends on various factors, including your business’s location, financial history, and creditworthiness.

USDA commercial guaranteed loans offer government backing and are designed to support rural businesses. In contrast, balance sheet loans are conventional loans that traditional financial institutions provide and can be located anywhere, not just in rural areas.

By understanding the eligibility requirements, government backing, and loan limits of each option, you can make an informed decision that aligns with your business’s financial goals. If you’re considering financing options for your business, it’s recommended to consult with financial advisors and lenders who can provide personalized guidance based on your specific situation.

Our team at First National Bank of Oklahoma is here to help you find the best loan option for your venture. Whether you’re looking to expand your operations, invest in new equipment, or manage your working capital, the right loan can be a valuable tool to help you achieve your business objectives, and we’re here to help.