Understanding the Rates and Terms of USDA Business Loans

If you are looking for a loan to support your rural business or to start a new venture in your local rural community, this is what you need to know about USDA loans before moving towards any other option. USDA business loans or B&I loans are the way to go. These loans are provided through a federal program targeting small businesses in rural areas.

The government intends to improve the economic conditions of the respective area by developing local businesses. You can apply for a loan through a third-party lender offering the best interest rates and flexible terms.

What are the rates of USDA Commercial Loans?

Various borrowing options with different loan terms and interest rates make the USDA B&I loan a good choice for a growing business. Typically, the rates of interest fall in the range of 6-9%, and they can be fixed or variable.

However, the lender uses four critical factors to determine the rate of interest. They include the personal credit history of the borrower, annual income, amount of collateral, and the number of years in the respective business.

While a lender may determine the rate of interest, USDA ensures that it isn’t drastically high. For a variable-rate business loan, stay assured that the lender cannot alter the rates before a quarter.

What are the Terms for USDA B&I Loans?

Depending on the purpose of taking the loan, the lender may change the repayment terms for your B&I loan. For example, if you take the loan for working capital, you will get a repayment term of seven years. For the acquisition of machinery and equipment, the loan term may stretch up to 15 years, while real estate loans have a term of 30 years.

Whatever is the term of your loan, you have to amortize the loan completely during this term without any balloon payment remaining at the end. If you have a loan with a balloon payment, the amount of payment will reduce over the loan term.

As a result, you will have a lump sum payment called a balloon payment for the due end date of your term. This balloon payment can be burdening on you and your business, especially if you are in an expansion phase.

Can You Repay the Loan Ahead of Schedule?

The banks or lending institutions providing USDA business loans may charge appraisal fees, origination fees, and an annual fee for renewal. Now, if you want to pay your loan off entirely before the agreed term, the lender may also charge a prepayment penalty fee.

Similar to an SBA or any other business loan, the lender regains its costs irrespective of the loan term. So, closely scrutinize the quotes from each lender to compare apples with apples.

What is the typical fee structure of the Lender?

Since the lender charges various fees, you need to understand them before applying for a loan. Mainly, the lenders have an initial guarantee fee that may equal to 3% of the guaranteed money.

The annual guarantee fee or charge may be more than or equal to 0.5% of the remaining principal amount. There are additional lender fees that include any third-party costs, appraisal fees, and origination fees.

If you have any doubts about these terms and rates, don’t hesitate to ask your lender to clarify.