The United States Department of Agriculture – Intermediary Relending Program (USDA IRP) was created to alleviate poverty and increase economic activity and employment in rural communities by supplying capital to establish a revolving loan program for small businesses. These funds are loaned to intermediaries such as local economic development agencies, local government or community not-for-profits for community development projects, the establishment of new businesses, expansion of existing businesses, creation of employment opportunities, or saving existing jobs.
This program is limited to areas with a population of less than 25,000 and the business must be unable to finance the proposed project from its own resources or through commercial credit or other Federal, State, or local programs at reasonable rates and terms.
Funding can be used for:
- Business acquisition
- Business construction
- Leasehold improvements
- Working capital
- Furniture and fixtures
- Machinery & equipment
The maximum a business may borrow is tied to the number of FTE’s (full-time equivalents) which can be a combination of part-time positions to create a full-time to a maximum loan amount of $150,000. Most funds are $15,000 per FTE while others go higher. Keep in mind that the owner(s) can also qualify as the full-time position. The positions to be hired are required within a certain time frame, usually within one year from obtaining the funding. While I don’t recommend borrowing more than what you can hire, if you aren’t able to create that job within the time frame, it’s typically a benign process to extend your timeline out further. I’ve never seen a loan called due to not upholding the job creation/retention requirement but it could happen.
The USDA IRP program will not lend the entire amount needed. Depending on the intermediary, they will provide between 40% and 75% of the total project or up to $150,000, but many are at the 75% level. Some intermediaries will require an equity injection (up to 10%), while others are ok with other sources such as a bank funding the remainder. This program is intended to be a gap financing tool and not to finance the entire 40% and 75% of the project. While many businesses will only need $150,000 or less to finance their project, most, but not all intermediaries are willing to make a loan unless a bank or other financial source is participating.
The intermediary is allowed to set the interest rate and I have seen them vary between 0% and 12%, but many will be around five percent and others will base it off of prime + 1 or 2%.
The terms of the USDA IRP loan are also at the discretion of the intermediary but at most up to 15 years per USDA requirements. Terms are typically tied to the average life expectancy of what is being purchased. For example, a loan secured by real estate will qualify for the maximum, equipment typically up to 5 years and working capital up to two years.
Collateral requirements will vary between intermediary but very are going to make a loan without some sort of security and are going to require 100% or more collateralization. While these loans are meant for economic development/job growth for rural areas and don’t have the same profit requirements that a bank has, the intermediaries don’t have the same financial resources as a bank to cover loan losses and the intermediary still has to pay back USDA for the money they borrowed to create the fund. Bottom line is even though this is public funding, this funding tends to be more conservative than some other programs that are available. If you go in expecting to put up 100% collateral (either what you are purchasing or other assets you already have) you are going to have a much better chance of getting this funding.
How it works
The intermediary will have an application form to fill out along with several USDA required forms that they may have you fill out at the time of application, but many will wait until they review the project. Expect to also include a business plan with three years of financial projections, personal financials and credit history.
A loan administrator will do an initial review and let you know if there is any additional information needed. Once you have a complete application a loan review committee will review and meet to discuss whether to fund, decline or if additional supporting information will be required. Sometimes the loan review committee has to meet with the full board to get approval to make the loan.
Once approved by the board, the USDA will then review the application to ensure that the loan is properly documented and meets all of the guidelines. The USDA does a very thorough review and even after the local intermediary approves, the USDA will have final input whether the loan should go through or not. The USDA won’t typically tell the intermediary whether to not make the loan or not, they will strongly recommend not funding if they don’t feel the project is in the best interest of the intermediary. The intermediary can still make the loan but in many cases won’t as they want to keep USDA happy to receive further funding.
Once through this process and a loan is approved a lien will be required on the assets being purchased or a purchase money security interest (PMSI) which gives the intermediary title of the equipment until the loan is paid off as it gives them a more secure way to retrieve the collateral in the case of default. Some intermediaries will require receipts that the loan was spent on the items you requested in the application and some don’t. In addition a personal guarantee for the repayment of the loan is pretty standard.
The timeframe from application to money disbursement averages between two and six months. Many of the intermediaries are volunteer driven and only meet at most once a month. In addition there is the USDA review to go through as well. Most of the deals I have worked with take about four months which can be an eternity when you need the money but that’s the common price for a governmental program that is typically low interest and after other more typical sources of funding aren’t available.
One client we worked with was restarting a restaurant that had previously been in the family and was a signature name in the community, sold twice and the new owner wanted out. A downtown retail building had become available. The original owner did not want to see any more damage to the family name and purchased the assets back.
The owner’s had already purchased the equipment and had working capital for the building down payment, starting inventory and some renovations ($140,000) through personal funds and a home equity loan. A local bank was on board to finance the building through a SBA 7a loan and some renovations ($280,000) but additional equipment and the remaining renovations were still needed ($60,000). The two owners were going to hire four people and the city’s USDA IRP fund would loan was $15,000 per FTE so they had an additional $30,000 of borrowing capacity which could be important later down the road because if they needed extra money to grow the business asking for the additional money is typically a quick and easy process as USDA approval isn’t needed.
The city took a second position against the building and a first on the equipment as the building appraised for $350,000. The city wasn’t really interested in the collateral from the equipment as restaurant equipment is not highly regarded in the lending world but was enough to warrant making the loan in conjunction with the additional equity in the building.
Total funding of this project was close to six months.
Why get a USDA IRP loan?
A loan such as this isn’t typically at the top of my list for many reasons but primarily due to the length of time to get funding and the additional hoops to jump through. Where it comes in handy through is if you are turned down by the local banks due to a lack of collateral or when your debt-to-income ratio is too high. Especially in the case of the debt-to-income ratio this comes in handy because the bank then doesn’t include the loan (since you don’t have it yet) but there will be instances that the intermediary won’t or can’t lend because of a lack of collateral and that will vary depending on your local sources. The other time the USDA IRP loan is helpful is when interest rates are high. Many programs cap their interest between three and seven percent which can be a real cost savings when bank rates are back at historical amounts of eight to ten percent.
Where to find a USDA IRP loan
Check with USDA Rural Development – http://www.rurdev.usda.gov/recd_map.html.