USDA B&I loans are different from conventional small business loans in many ways, and their terms have unique requirements and parameters. As such, here’s an explanation of the terms of USDA B&I loans.
Loan Amount
USDA B&I loans are available in amounts up to $25 million, with administrator approval required for loans >$10 million.
Down Payment
The minimum (and typical) down payment of USDA B&I loans is 10%. However, a lender may require a higher down payment.
Interest Rate
USDA B&I interest rates can be either variable or fixed. Variable B&I rates are based on the prime rate, with B&I interest rates typically ranging from Prime + 1 and Prime + 3. Fixed B&I rates (usually fixed for 5 years, then variable thereafter) can vary more widely, and can be higher or lower than variable rates depending on the current and expected future rate environment.
Term
USDA B&I loans have a maximum term of 30 years for loans involving real estate, 15 years for loans not involving real estate (purchase of business and/or equipment), and 7 years for working capital. These are also the typical terms, as a longer loan term means lower loan payments.
Collateral
Most small business loans, are required by the lender to be “fully collateralized” (have a collateral value equal or greater than the value of the loan), and USDA B&I loans are no different.
This is easiest for loans involving real estate, as it provides most or all of the needed collateral value. If the loan doesn’t involve real estate – or if the value of the real estate isn’t enough – other common forms of B&I loan collateral may be used, such as a life insurance policy taken out on the borrower or a lien on the borrower’s home.
Personal Guarantee
A personal guarantee for a small business loan means the borrower(s) will be personally financially responsible for the loan should the business not be able to make the loan payments. Most small business loans require a personal guarantee from the borrower(s), and this includes USDA B&I loans.
For USDA B&I loans, all borrowers with a business ownership share above 20% are required to give personal guarantees. Additionally, anybody other than the owner (a manager, for example) with full control over the business is typically also required by the lender to give a personal guarantee.
Amortization
The amortization of a small business loan is the period over which the loan payments are spread. Most conventional loans are amortized over a period longer than the loan term, which makes loan payments lower, but necessitates a loan extension or balloon payment at the end of the loan term (as it’s still not fully paid off).
USDA B&I loans, on the other hand, are fully amortized, meaning their term and amortization period are the same. This means they’re fully paid off by regular, same-sized (other than the effects of interest rate changes) payments, with no balloon payment at the end. This is a notable advantage to B&I loans (and other government guaranteed loans, like SBA 7(a) and 504 loans), as it makes the loan more secure and consistent for the borrower.
Prepayment Penalty
A prepayment penalty, included in most commercial loans, is an added cost for prepaying a loan before a certain time. There are a few different structures lenders use, but the most common one penalizes the borrower a certain percentage of the loan amount for prepaying the loan. Prepayment penalty periods are almost always shorter than the loan term, instead lasting a certain number of years before ending and allowing penalty-free repayments.
Prepayment penalties are permitted for USDA B&I loans. There are no official guidelines for B&I loan prepayment penalties, so they are generally treated the same as those of conventional loans.
