Loans For Businesses in Rural Communities
Farmers and ranchers exported $140 billion worth of food goods in 2015 alone to customers throughout the world. This is important because from 2010 through 2014, counties in rural areas actually lost more small businesses than they created. While most of the economy had been hit hard by the economic crisis, rural areas were hit especially hard. Making matter worse has been the slow recovery in rural and disperse areas. For instance, after the 1991-1992 recession, nearly one-third of all small businesses created were in rural areas. Now new business growth is much lower, thus: leading to less jobs being created in rural areas. In fact, during the recovery of 1992, nearly 1 in 4 jobs created came from companies based in rural areas. Since 2010, only 1 in 5 jobs come from these areas.
Between 2009 to 2014, exports by U.S. agriculture businesses directly and indirectly supported more than 1 million jobs. These jobs were located not only on U.S. farms and ranches, but many of these jobs were located off farms. With the reshoring of U.S. manufacturing, rural areas in the United States are gaining the most new projects. Studies show that 31% of companies plan on reshoring production to U.S. facilities over the next five years, while just 20% expect to expand production to China during the same period. Many of these jobs may end up in rural areas where companies can enjoy some clear advantages over businesses who locate production in more urban and metro areas: cheaper labor and capital costs. Major metro areas and big cities are expensive from both a business labor and capital perspective. Since business in rural America is much less expensive to operate, small businesses located in areas with between 5,000 – 50,000 inhabitants have special advantage over companies in metro areas. Where rural small businesses struggle is when it comes to infrastructure, transportation, technology and most importantly, access to capital.
Types of Rural Small Business Loans
|USDA Loans||5-8%||7-30 years||30-60 days|
|Bank||6-10%||3-25 years||30-60 days|
|SBA||6-10%||5-25 years||10-60 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Asset Based||8-30%||1-5 years||3-10 days|
|Equipment||5-15%||1-7 years||3-14 days|
|Invoice Finance||1-2% weekly||1 – 90 days||1-3 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
USDA Loans for Rural Businesses
USDA Business and Industrial Loans are a type of commercial financing offered to existing companies as well as startups located in any area with less than 50,000 inhabitants. USDA program financing is administered by the U.S Department of Agriculture, but the loan is provided by a private lender either in the rural community, or based in a larger metro area. The lender provides financing for the small business, and the USDA agrees to covers a large percentage of the lender’s losses (up to $25 million). Financing through the USDA program is solely structured as term loans as lines of credit are not offered. USDA financing is a program that focuses on cash-flow of the borrower, so in order for these lenders to lend to a rural company, they must have good credit, good cash-flow, and sufficient collateral to support the entire loan amount.
- Rates: negotiated between borrower and lender
- Term: 30 years on real estate, 15 on equipment, 7 on working capital
Bank Loans for Rural Companies
Banks in rural communities (particularly credit unions and community banks) offer the best rates and terms for rural small business of all commercial lenders. The reason these banks are able to offer great rates is because they don’t take much risk. Traditional bank business lenders are only able to keep their rates low if the loans they provide have a low default rate. Therefore traditional banks will conduct extensive due diligence of a company and its financials before providing financing. End result: banks have a low approval rate. But if you can get bank financing, you will be getting the best possible facility available.
- Rates: 5-10%
- Terms: 3-30 years
SBA Lending For Rural Areas
SBA loans are government guaranteed financing provided by big, small and community banks as well as credit unions in rural areas meant to help increase access to capital to all U.S. businesses. The loans are provided by the private lenders, and the SBA agrees to cover a large portion of the lenders losses if the small business fails to repay the loan. The SBA enhancement may be especially important for rural small businesses since lenders have been decreasing access to affordable capital in rural areas.
- Rates: 6-8%
- Terms: 5-25 years
Alternative Loans for Rural Companies
Alternative small business loans in rural areas is an option for companies who can’t quite access true bank-rate financing, but don’t want to pay the rates of high-interest merchant cash advances. While the rates aren’t as good as banks, the ease of the funding process is much easier than traditional bank funding. In fact, whereas a bank may take 30-60 days to fund, an alternative business lender can fund in as little as 3-10 days. And while the terms associated with an alternative business loan tends to be much shorter than traditional business loans, a non traditional business loan has longer terms than most other types of short term business financing.
- Rates: 8-25%
- Terms: 1-5 years
Asset Based Loans for Rural Business
Sometimes the availability of credit is non-existent because you or your business have poor credit or cash-flow. In these instances a company can use its assets (particularly real estate) as the basis to obtain financing for their company. An asset based lender will use commercial property, personal property or machinery as collateral for business financing. While the rates aren’t nearly as good as bank-rate financing, the rates for asset based business loans tend to be better than that of factoring or merchant cash advance financing.
- Rates: 8-30%
- Terms: 1-3 years
Rural Business Invoice Financing
If you are a rural business in need of immediate funding without having to take-out a small business loan, an option may be to use Invoice financing. Selling your unpaid invoices, (referred to as “invoice financing” or “invoice factoring”) is the sale of your unpaid 30-90 day invoices, in the return for upfront funding. A factoring company will provide you up to 90% of the invoice’s value, charge you a small fee, and then pay you the balance once your costumer pays off the invoice.
- Rates: 1-3%
- Funding time: 1 day
Equipment Leasing for Rural Businesses
For rural small businesses (especially those on farms or ranches) in need of machinery and equipment, an option to finance that equipment is through the process of leasing. Rather than paying the full purchase price of the commercial equipment, up front, a lender will purchase the equipment for you, and then lease the equipment to the rural company. At the end of the leasing term, the leasing company will then usually offer the small business with the option to purchase the equipment for a small fee, or to extend the length of the lease term.
- Rates: 5-15%
- Terms: 1-7 years (or useful life of equipment)
Cash Advances for Rural Companies
While its always preferable to get a true bank-rate business loan, or even a fairly affordable alternative business loan, its not always an option. Either because of lack of credit, poor credit, or maybe because the time frame needed for funds is much sooner than the application and funding process will take with a conventional commercial loan, an option may be to use a merchant cash advance. Business cash advance financing aren’t loans, but instead the sale of a rural company’s future bank and/or credit card deposits in exchange for upfront funding. The process is very easy and approval rates for cash advances are very high. At the same time the rates are also extremely high, with very short terms.
- Factor rates: 1.16-1.55
- Terms: 4-24 months