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CDFA Spotlight:
Rural Financing Programs

By CDFA Staff Writers

Rural Finance Overview

Rural communities require access to capital and financial resources for new infrastructure, investment, growth and sustainability. However, the challenges facing rural communities are often far removed from urban and suburban needs. Rural communities often require specialized financing options that provide resources relating to agribusiness, broadband development, energy assistance and value-added business assistance. Several federal, regional and state agencies exist to assist in financing rural development. The major programs and players are highlight in the following article.

USDA Rural Programs

The United States Department of Agriculture (USDA) has broad goals and areas that it deals with and aids. Like any successful organization, it has evolved with the times and now has a variety of programs that foster community and economic development in rural areas to compliment its traditional role helping agribusiness. The USDA dates to 1889, although earlier versions of a federal department to deal with agriculture existed in several forms going back to 1836. The USDA is the lead Federal agency for rural development through the Rural Development Policy Act of 1980, although there is a fair amount of overlap with other Federal agencies offering rural development programs.

Most of these programs are run through the Rural Development unit of the USDA. This entails many areas but several programs pertain to development finance through their Community Facilities programs.

Rural Development has three main mission areas in addition to community facilities development. They are rural business, rural housing, and rural utilities.

Part of the problem with development in rural areas is defining rural. Different programs have different definitions, but the general definition is any city with less than 20,000 people (some programs have a 50,000 population maximum) that is not a part of a larger metropolitan region and does not border a larger metro area. Unincorporated rural areas are also included in the programs.

USDA infrastructure programs deal with three specific areas. The first is “traditional” infrastructure in the form of utilities such as water, sewer, and electric. The second is critical access infrastructure that includes hospitals, schools, community centers, long-term care centers, police and fire stations, and other public-use facilities.

The USDA has three different programs to aid community critical access infrastructure. There are two loan programs and one grant program under the Community Facilities unit.

  • The Community Facilities Direct Loan program is available to applicants who can’t obtain commercial credit. Interest rates range from poverty level (4%) to market rate depending on the project and applicant. The Direct Loan program is aimed at building essential community facilities related to health care, public safety, and other public services. Besides government entities (municipalities, counties, special purpose districts), non-profit corporations and tribal governments may also apply.
  • The Community Facilities Loan Guarantee program provides guarantees in place of direct loans. Instead of directly loaning money to the applicant, the USDA will guarantee the loss of interest or capital on a loan up to 90%. Loans are made by private lenders at typical market rates for projects of similar size. Those eligible to use this program and projects that qualify are otherwise the same as the direct loan program.
  • The Community Facilities Grant Program has the same general requirements as the loan programs, first consideration is given to areas with especially low income and population. The grant program can be used to finance up to 75% of a project.

These programs have dramatically improved the quality of life in rural areas but still leaves rural residents and businesses at a disadvantage when it comes to access to technology.

The USDA’s third, and newest, mission area involving infrastructure is telecommunications. “The Digital Divide” is the much talked about gap between urban and rural areas in terms of access and use of broadband and internet services. Like other utilities, less dense rural areas require a larger investment per capita than urban areas.

The USDA has established two programs to address this need.
  • The Rural Development Broadband Loan and Loan Guarantee Program provide loans and helps secure loans for companies to expand broadband services in rural areas. While improvements to broadband services opens new IT and other business opportunities to rural communities.

With less than seven percent of the rural workforce employed in farm production, rural communities have looked elsewhere for job growth. One area of potential is IT-related services. Rural areas can offer significant cost improvements over major metropolitan areas. In this way, rural areas can offer lower cost domestic sourcing as an alternative to outsourcing IT services abroad. To fully capitalize on this opportunity, major investments must be made in terms of telecommunication education and infrastructure. Education is being addressed through several programs.
  • The Rural Business Enterprise Grant program provides grants for rural projects that finance and facilitate development of small and emerging rural businesses by funding distance learning networks and employment related adult education programs. To assist with business development, RBEGs may fund a broad array of activities although they are aimed at helping firms with less than 50 employees.
  • The Rural Community Development Initiative provides funding for adult education. Grants are also available to public and non-profit organizations for technical assistance and training (Rural Business Opportunity Grants). These grants may be used for feasibility and planning studies or other activities needed for economic development.

Besides community development and infrastructure funding, the USDA has running programs that directly benefit businesses.
  • The Business and Industry Guaranteed Loan (B&IGL) program allows for-profit and non-profit businesses and organizations borrow money to increase employment or generally improve the economic condition of the region. This program can also be used to fund development of renewable energy resources and water usage for aquaculture.
  • The Intermediary Relending Program establishes revolving loans. Intermediaries are given up to $2 million to distribute loans to businesses and projects. Payments made on the loan by the business should replenish the fund to allow other loans to be made.

The USDA has also utilized Rural Empowerment Zones as a means to aid economic development in depressed rural regions. EZs receive easier access to grant money and additional tax breaks. They also get primary consideration for many state and federal programs. The use of EZs and the application of community block grants in rural areas represent efforts to use traditional urban tools to help the rural community.

The USDA, along with federal-state commissions, play a vital role in promoting and fostering development in rural areas. The USDA provides a substantial amount of resources and program assistance online at the USDA Rural Development website.

Regional Commission Rural Programs

There are three region specific commissions that offer programs for rural development. These commissions usually function as a federal-state collaboration. The most prominent of these is the Appalachian Regional Commission (ARC) (http://www.arc.gov/index.jsp). Founded in the 1960s to deal with stagnant economic conditions and a standard of living far below the national average, ARC offers several programs to fund new initiatives and improve the economy.

One of ARCs’ most widely used tools are revolving loan funds. Like the USDA, ARC gives a grant to a local authority or organization to give loans to entrepreneurs and companies to create and retain jobs. These funds are said to be revolving as the money is repaid into the fund, it becomes available for another loan to another company. Besides grants and loans for business and economic development, ARC has similar programs as the USDA to improve infrastructure and improve community facilities.

The Denali Commission (http://www.denali.gov/), serving rural Alaska, has less in the way of loan and grant programs but still concentrates on infrastructure development and education. The challenges of rural development are magnified for the Denali Commission given the geographic size of Alaska and its climate. Their focus is creating a more business friendly environment to allow the private market to achieve sustainable economic growth.

HUD Rural Programs

The USDAs rural programs are also complimented by initiatives by the Department of Housing and Urban Development (HUD). HUD is able to issue community development block grants (CDBGs) to both rural and urban areas. These grants can be used to fund a variety of programs.
  • The Section 108 Loan Guarantee Program helps fund projects aimed at addressing economic development, housing rehabilitation, public facilities, and large-scale physical development projects. Section 108 can be used in conjunction with HUDs Brownfield Economic Development Initiative in areas where environmental concerns have prohibited development.
  • The Renewal Community Incentives (RCI) program offers tax incentives for businesses to open, grow, and hire local workers.
  • HUD created Empowerment Zones offer similar incentives as RCI except concentrated on a specific area.

It is important to note that the application process for HUD CDBG is different in rural areas than they are in urban areas. More information on CDBG can found online at http://www.hud.gov/offices/cpd/communitydevelopment/programs/.

HUD also runs a Rural Housing and Economic Development (RHED) program. It is designed to provide grants to meet the housing and economic development needs of rural communities. These grants provide funding for existing organizations to carry out new functions or perform more effectively by providing training and other technical assistance needs. They can also fund new initiatives in the planning stages to offset the cost of strategic planning, demolition, infrastructure improvements, and other costs associated with the startup of a new housing or economic development activity.

More information about these and other HUD programs can be found at the HUD Rural Housing and Development website.

State Rural Development Programs

There are also a variety of programs available in each state. While there is much variation from state to state regarding types of rural development aid available, the most commonly used form are “Aggie” bonds. These are bonds aimed at new and beginning farmers. Like many other private activity bonds, they are tax-exempt so that local lenders are able to offer farmers lower rates on the loan. The amount of the bond issue and who is eligible varies by state. There are also guarantee and direct loan programs available to farmers and ranchers in many states. These programs focus more on traditional agriculture and are aimed at aiding farmers or other industries dealing with farm production. More can be learned about state programs at the National Council of State Agriculture Programs website.

Additional resources on rural development finance include:

Center for Applied Rural Innovation -- http://cari.unl.edu/links.shtml
The Kansas City Federal Reserve Bank -- http://www.kc.frb.org/PUBLICAT/ECONREV/PDF/3q03drab.pdf
Center for Rural Studies (CRS) -- http://crs.uvm.edu/
Southern Rural Development Center -- http://ext.msstate.edu/srdc
Rural Policy Research Institute -- http://www.rupri.org
Economic Development Administration -- http://www.osec.doc.gov/eda/Default.htm
Rural Community Assistance Corporation -- http://www.rcac.org/

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.

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