Dangers of Rural Development Business and Industrial Loan

A rural development business and industrial loan is a federal loans issued by the United States Department of Agriculture.  They are designed to facilitate economic development in rural communities. Under it's terms, individuals and organizations can use the money to either start or maintain local businesses, provided they fit certain criteria. Because different communities have different needs, no two loans are quite alike. But while they do have certain benefits, they contain a number of drawbacks and dangers that potential applicants should be aware of.

Who Qualifies for Rural Development Business and Industrial Loans

The USDA doesn't just give out loans to anyone. With private rural development loans, the requirements are usually financial, but those who want to take out  rural development business and industrial loans must meet the following criteria:

  • Eligible types of applicants - the loans are available to individuals, for-profit and non-profit organizations, public bodies and federally recognized Native American tribal groups.
  • Citizenship requirements - if the applicant is an individual, he or she must be either a US citizen or a permanent resident. if the applicant is an organization, at least 51% of it's owners must fit the above requirement.
  • Residency requirements - applicants must reside outside an urban area with a population of 50,000 or more. They also can't reside near any areas where the population is more then 100 people per square mile.

What Rural Development Business and Industrial Loans Can Be Used For

With private rural development loans, borrowers can, in theory, get a loan for any plan--so long as they can show the plan is financially sound. But USDA rural development business and industrial loans can only be used for specific purposes. The borrowers must use the loan to either establish a business or support existing business that either provides employment, improves local economic or environmental climate, promotes the conservation of natural resources, constructs and develops renewable sources or achieves any combination of the four. Furthermore, they have to prove to USDA that they have a sound plan that would achieve those results.

Other Disadvantages of Rural Development Business and Industrial Loans

Rural development business and industrial loans are partially guaranteed by federal government. This means that if the borrower defaults, he or she wouldn't have to pay the guaranteed portion of the debt. However, the guarantee comes with a price--the annual renewal fee. As the name implies, it's a fee that must be paid at the end of every year. If the borrower fails to pay by the end of the year, the guarantee is revoked.  The borrower will also have to pay a late fee that will accumulate interest for every year.

Another noteworthy disadvantage of the rural development business and industrial loans is the loan amount limits. No matter what they may be planning to do with the money, borrowers can't take out more then $10 million. A borrower might be able to convince the loan administrator to raise that limit provided he or she makes a compelling enough case, but even than, no one would be able to borrow more then $25 million. Many private loans would be able to give borrowers more then that.