Small communities still need to tackle big projects. From business development to public services to critical infrastructure, small and rural communities face the same key challenges as big metros – but a lack of funding and resources often proves to be a bigger barrier.
But, within these challenges is an opportunity for public-private partnerships to shine. Lenders that serve low-population areas can tap into important resources available through the U.S. Department of Agriculture (USDA) for their often-underserved rural customers. The USDA offers financial institutions loan guarantees to extend credit to meet important needs in rural America such as business growth, community facilities, water infrastructure, renewable energy and energy efficiency.
Even more, the USDA has recently made it easier to utilize its key programs. In 2020, the USDA streamlined four of its flagship rural development programs under the umbrella known as the OneRD Guarantee Loan Initiative.
The Four OneRD Programs
There are four key USDA loan guarantee programs that are now part of the OneRD initiative.
Business and Industry (B&I) Guaranteed Loan Program. The B&I program offers lenders a loan guarantee when they make a loan to businesses located in rural areas. In contrast to SBA loans, which are subject to business size requirements, any size business may apply for a B&I loan. There are no minimum loan amounts, and maximum loan amounts are up to $25 million.
Water and Waste Disposal Loan Guarantees Program. This program is designed to improve access to clean, reliable water and waste disposal systems in rural areas. Funds may be used to construct or improve facilities for drinking water systems, sanitary sewers, solid waste disposal and storm water disposal. Eligible borrowers are public bodies, federally recognized tribes and not-for-profits. Maximum loan amounts are $50 million.
Community Facilities Guaranteed Loan Program. This program helps to develop essential community facilities in rural areas. An essential community facility is defined as “a public improvement, operated on a non-profit basis, needed for the orderly development of a rural community.” A “facility” can refer to a physical structure or the resulting service. Examples of Community Facilities projects or services can include healthcare, public safety, education, transportation, water infrastructure, community parks and more. Maximum loan amounts are $100 million.
Rural Energy for America Guaranteed Loan Program. This program provides both guaranteed loans and grants to rural small businesses and agricultural producers for renewable energy systems or energy efficiency improvements. Examples of projects for which funds may be used include biomass, geothermal, hydropower, hydrogen, and wind, solar, or ocean generation, and the purchase, construction or installation of equipment that improves energy efficiency. Maximum loan amounts are $25 million.
Standardized Requirements, Processes and Forms
In an effort to remove unnecessary regulations and improve customer service, the USDA now has a standard set of requirements, processes and forms for the OneRD programs. The agency’s goal was to further increase private investment in rural businesses and economic development projects.
The following are some of the common criteria shared by the OneRD programs.
- Eligible “rural” areas are not in a city or town with a population of more than 50,000 inhabitants.
- The borrower must be located in a rural area, but the lender can be located anywhere.
- The loan guarantee percentage in FY 2021 and FY 2022 is an 80 percent guarantee.
- The USDA charges an initial guarantee fee and an annual guarantee retention fee.
- Maximum loan terms are 40 years, the useful life of the collateral, or state statute, whichever is less.
- There is a common OneRD loan application form for lenders.
- Lenders must a retain minimum of 7.5% of the total loan amount in their portfolio from the unguaranteed portion of the loan. The guaranteed portion of the loan can be sold on the secondary market to generate noninterest income.
Lenders that understand and are committed to supporting rural America have partners in the USDA and VITAL. Without funding, important rural projects will surely languish, but community bankers can be an instrumental force for instigating positive growth and change.
If you are a community lender interested in using USDA guaranteed loan programs to support rural customers, reach out to the experienced lending team at VITAL. We can discuss your rural lending goals and explain the lending processes we’ll follow to achieve them!