The United States Department of Agriculture (USDA) introduced its business loan program primarily to boost economic activity and improve business climate among rural areas in the country. By providing loan guarantees, rural entrepreneurs can access funding to grow their ventures and contribute to their local economy.
If you are a business owner from the countryside who is looking for financing to level up your venture, you may have heard of USDA commercial loans and the many misconceptions surrounding them. To help you with the facts, here are some of these myths and the truth behind each one:
Myth 1: USDA Lends Money Directly to Entrepreneurs
USDA helps rural borrowers secure enough funding for a variety of business purposes by providing guarantees to reduce the risk of lending parties. The agency doesn’t lend money directly to business owners, but rather, partners with lenders and financing entities to provide loans to entrepreneurs. Given the agency’s guarantee, it will be easier for rural ventures to obtain loan approval.
Myth 2: USDA Business Loans are for Agribusiness Only
While the agriculture department manages this financing program, USDA business loans are not strictly for the agricultural industry alone. This program is open to various business entities such as individuals, partnerships, cooperatives, non-profit/for-profit corporations, public organizations or tribal groups from a wide variety of ventures, such as:
- Manufacturing companies
- Sales industries (wholesale or retail)
- Service businesses
Myth 3: The Credit Limit for USDA Business Loans is small
USDA commercial loans offer loan guarantees of up to $25 million, which is significantly much higher than conventional loans. Note that the most loan limit provided by the U.S. Small Business Administration (SBA) is $5.5 million only. Given its high loan limit, USDA loan guarantees are more suitable for projects that require a sizeable amount of money.
Myth 4: The Loan Purpose for USDA Loan Guarantees is Highly Restrictive
Contrary to this misconception, you can use USDA loan proceeds for almost all businesses like the following:
- Business construction, expansion, conversion, repair, or development
- Improvement of commercial property
- Procurement of business equipment, machinery, fixtures, or supplies
- Business capital for startup or expansion
- Loan refinancing
Myth 5: USDA Business Loans are for Small Businesses Only
USDA loan guarantees have no business size standard. It can get utilized for both small and large ventures provided that their facilities are situated in rural areas and meet other loan requirements.
Myth 6: USDA Commercial Loans Do Not Require Collateral
While other government financing programs do not require collateral, USDA business loans require rural borrowers to put up one. The value of the collateral should be at least equal to the amount of the loan applied for.
Myth 7: Businesses outside Rural Areas Can Seek USDA Loans with the Right Connection
As a general rule, USDA loan guarantees are for business owners in rural areas. Note, however, that there are two exemptions to this rule. Cooperative facilities outside rural locations may avail of the USDA loan program under specific conditions. For instance, the funds should provide jobs for people in rural areas. Business projects in urban locations can also secure USDA funding if the business has a role in the processing, storing, or marketing of agricultural food products that support the development of rural communities, among others.
Before you make the same mistake and readily dismiss this government financing initiative as an option, make sure to learn more about it from credible sources and not through rumors.