USDA Loan as Alternative to 7a?

searcher profile

February 27, 2023

by a searcher from University of South Carolina in Indianapolis, IN, USA

Has anyone ever financed a purchase with a USDA loan? I had a lender mention it could be better than SBA for a deal I'm looking at since I'm above the 5m cap, but I've never heard about this option before.

Thanks,

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. I will try to summarize. With an SBA 7A loan you can typically finance 90% of the acquisition price of the business and in some cases can even finance as little as 5% if the seller takes back a note on full standby for the life of the loan of 5% or less. You do not have to be fully collateralized with hard collateral on the SBA 7A loan. The Bank can rely on the goodwill value of the business and still make the loan. You can also use an SBA 7A loan just about anywhere in the country and for just about any type of business. The biggest issue is you are limited to a loan amount of $5 million. You can get higher using a Pari-Passu / A & B note structure, where a lender makes a second conventional loan under the same terms as the SBA loan, but very few lenders will do the two loan structure and the cash flow and underwriting requirements are typically more stringent for those types of transactions.

USDA loans must be fully collateralized with an LTV of 80%. Because of this you cannot figure goodwill value into the transaction. So if you are buying a business for $1 million, you would need $800,000 in collateral after normal advance rates. So if it is real estate, you would have to have the real estate appraise for $1 million. If it is equipment securing the loan you would need the equipment to appraise for $1 million and after an 80% advance rate still cover the loan. Because of these requirements it is very hard to get a USDA done on a business acquisition where there is a high level of goodwill involved. There is also a requirement that there is 10% equity on the balance sheet post closing and 20% for new businesses. Unless you are in the food industry, to qualify for a USDA loan you must be in a market with a population of 50,000 or less that is deemed rural. You would be surprised at some of the markets that do qualify, but this is can be an issue if you are buying in a major metropolitan market. The approval process actually takes longer than the SBA process. This is because the USDA office in the specific State where you are getting the USDA loan must approve the loan. It is not consistent from State to state on the process. Also, you have an on-going guarantee fee of 1/2% of the guaranteed portion of the loan, versus just the up front fee with SBA 7A loans.

These are just some of the major differences. If you would like to talk in more detail about your subject request to see what it would qualify for, please let me know. You can ping me here or at redacted
commentor profile
Reply by a lender
from University of Southern Maine in Portland, ME, USA
USDA B&I has some unique characteristics. First and foremost, geographically located in an eligible rural area (https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp)

Second, USDA B&I will strictly ask min 1x collateral coverage (unlike SBA 7a). Loan amount is generally 80% of Real Property only (generally 80% or less LTV depending on appraisal value allocation among real property, personal property and intangible)

Third, there is no PLP (Preferred Lender Program). All approval is subject to additional USDA B&I agency approval on each state level. This translates to longer approval and closing period – it can be 120 to 180 days depending on state and deal complexity

Big benefit is if there is commercial real estate involved in the transaction you can hit larger dollar amounts and in some cases loan terms up to 30 years.
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