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USDA REAP Loans for Geothermal Projects: All The Benefits You Need to Know

USDA (United States Department of Agriculture) provides the required aid to farms and rural small businesses through the Rural Energy for America Program (REAP). This program helps to cover some of the costs of purchasing and setting up renewable energy systems, including geothermal ones, as well as energy efficiency upgrades.

We will now look at the advantages of REAP loans for geothermal projects and how they can help lower energy costs, minimize dependence on fossil fuels, and make renewable energy profitable.

by | Jun 6, 2024

The REAP Loan Nuts And Bolts

Understanding Loan-to-Value Ratio in ABL

The key objective of REAP loans is to provide agricultural producers and small entrepreneurs with a solution that minimizes their energy use and costs. The program was also created to give loans and grants for building renewable energy systems and energy efficiency improvements. At the end of 2009, REAP had more than 8,250 projects made in the USA with massive financial incentives.

Financial Assistance and Eligibility

Eligible renewable energy systems or energy efficiency improvement projects can receive between 50 % and 75 % of the grant costs from REAP.  This financial instrument attracts other private financings making renewable energy projects more profitable and easy to develop.

For example a $100,000 geothermal unit could receive $75,000 from a REAP grant. This would help eliminate the economic burden and lead to investment in renewable energy. 

In addition, the rest of this $75,000 can be financed through private loans, which are supported by USDA loan guarantees and help decrease lenders’ risk.

Benefits of Geothermal Projects

Geothermal projects offer many advantages. Geothermal power plants rely on the earth’s natural heat, which is renewable and efficient. Installing a geothermal heating and cooling system can cut energy costs by about 70%. This can be considered a significant conservation for any farmer or rural based enterprise.

Impact on Rural Economy

PhotoReal Geothermal Energy Financing with USDA REAP Loans 1

The REAP program does not only assist individual businesses but also actively participates in the development of a bigger rural economy. Through investments in renewable energy projects, USDA is generating new income opportunities and helping us battle climate change. In 2024, the USDA approved the funding of 424 projects across the country, totaling more than $14 million in grants and loan guarantees.

For example, if a geothermal system costs $50,000. A REAP grant covering 25% places the grant amount at $12,500. The last $37,500 can be financed via loan guarantee. This dramatically brings down the initial cost for the business.

Geothermal systems can achieve substantial energy savings. A well-known geothermal heat pump can reduce the cost of heating and cooling by 50%. 

For example, if a company invests $10,000 annually in energy, a geothermal system can bring the expenses down to $5,000 per year. In ten years, the savings are $50,000, more than the system’s initial cost.

Moreover, geothermal systems involve low maintenance costs and an extended lifetime. The initial investment can be recovered in a relatively short period of time, making it a financially viable move. In addition to these savings, they indirectly contribute to a smaller carbon footprint and thus, environmental sustainability.

Financing of Geothermal Energy Projects

Benefits of Opting for ABL Loans

USDA REAP loans provide different funding supports for renewable energy projects in rural areas. These alternatives involve loan guarantees, grants, and joint financing. Knowing the available sources of funding is important to getting funds for the projects.

Maximum Loan Guarantee Amount

A Federal Register notice states the annual maximum volume of loan guarantee. For the loans sanctioned in Fiscal Year 2024, the loan guarantee percentage is fixed at 80%. Thus, this high guarantee percentage gives lenders confidence and allows businesses to obtain financing for their renewable energy projects.

Impact on Rural Economy

PhotoReal USDA Hydrogen Project Financing with REAP Loans 1

The REAP program does not only assist individual businesses but also actively participates in the development of a bigger rural economy. Through investments in renewable energy projects, USDA is not only generating new income opportunities but also helping us battle climate change. In 2024, the USDA approved the funding of 424 projects across the country, totaling more than $14 million in grants and loan guarantees.

For example, if a geothermal system costs $50,000. A REAP grant covering 25% places the grant amount at $12,500. The last $37,500 can be financed via a loan guarantee.

This dramatically brings down the initial cost for the business.

Geothermal systems can achieve substantial energy savings. A well-known geothermal heat pump can reduce the cost of heating and cooling by 50%. For example, if a company invests $10,000 annually in energy, a geothermal system can bring the expenses down to $5,000 annually. In ten years, the savings are $50,000, which is more than the system’s initial cost.

Moreover, geothermal systems involve low maintenance costs and an extended lifetime. The initial investment can be recovered in a relatively short period of time, making it a financially viable move. In addition to these savings, it indirectly contributes to a smaller carbon footprint and thus, environmental sustainability.

Financing Renewable Energy Projects With USDA

Factoring vs Tangible Assets

USDA REAP loans provide different funding supports for renewable energy projects in rural areas. These alternatives involve loan guarantees, grants, and joint financing. Knowing the available funding is important to getting funds for the projects.

Maximum Loan Guarantee Amount

The annual maximum volume of loan guarantee is stated in a Federal Register notice. For the loans sanctioned in Fiscal Year 2024, the loan guarantee percentage is fixed at 80%. Thus, this high guarantee percentage gives lenders confidence and allows businesses to obtain financing for their renewable energy projects.

Federal Grant Share Limitations

Qualifying projects blending the criteria of Renewable Energy Systems or Energy Efficiency Improvements would be granted a Federal share of up to 50%. On the other hand, all other projects are entitled to the federal share of grant only up to 25%. This demonstrates the equal allocation among various project categories.

Additional Requirements

Projects submitted by Tribal Corporations or other Tribal Business entities, as defined in 7 CFR part 4280, may have some specific restrictions and limitations. All projects must show the technical merit and have to employ the commercially available technology. Energy audits or assessments precede energy efficiency schemes, and all schemes require environmental review prior to grant or construction. 

This regulation guarantees that funded projects are not only technically achievable but also environmentally friendly.

Benefits that USDA REAP Loans Provide for Geothermal Projects

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Low Interest Rates: The benefit of USDA REAP loans for geothermal projects lies in the negotiation of low interest rates between the lender and borrower. These rates have an aggregate effect of decreasing borrowing costs in the long run, thereby ensuring the viability of geothermal projects. As interest rates remain competitive those who borrow can boost their returns on investment.

Flexible Loan Terms: The repayment terms of the USDA REAP loans are flexible and subject to individual project necessities. The term of the loan, which may extend up to 40 years, depends on factors such as the useful life of the assets as well as the repayment ability of the borrower. This flexibility results in structures of borrowers’ repayment of the loan in a way that suits the timeline and financial objectives of the project.

Promotion of Renewable Energy: Helping geothermal projects with USDA REAP loans allow USDA REAP loans support the increase of green energy sources and CO2 reduction. Geothermal energy is a clean and sustainable replacement of traditional fossil fuels by which society can enjoy long-term environmental benefits such as reduced air pollution and carbon emissions. Financing geothermal projects via USDA REAP loans accelerates the process of creating a greener energy system.

Job Creation and Economic Growth: The geothermal installations funded by USDA REAP loans promote employment and economic prosperity in rural areas. These projects need trained workers who do installation and operation work, creating jobs for the local people. On the other hand, the emergence of geothermal resources can result in investment, business expansion, and a widening of infrastructure, all of which strengthen the economy of the local community.

Energy Independence and Security: Geothermal energy gives a great impulse to energy independence and safety as it provides diversification of the energy mix and decreases dependence on imported fossil fuels. The fact that, unlike fossil fuels that are subject to price fluctuations and geopolitical tensions, geothermal energy is a domestically available resource with a stable long term supply and predictable costs cannot be underrated. USDA REAP loans for geothermal projects contribute to the fortification of national energy security and resilience.

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FAQ

Here are some answers to Frequently Asked Questions.

What are the main advantages of ABL loans?

ABL loans allow companies to use their existing assets as collateral for financing, providing greater flexibility than traditional lending methods.

Are there any risks associated with ABL loans?

Yes, if a business cannot repay its loan, the lender may seize the assets used as collateral. Businesses need to understand this risk before opting for an ABL loan.

How does accounts receivable factoring work for ABL loans?

In accounts receivable factoring within the context of ABL loans, a business sells its outstanding invoices (accounts receivable) at a discount to obtain immediate cash.

What is involved in the due diligence process for obtaining an ABL loan?

The due diligence process typically involves assessing a company’s financial health, including reviewing its balance sheet, income statement, and cash flow statement, among other things.

Can all types of companies apply for an ABL loan?

While any company can apply for an ABL loan, it is particularly beneficial for those with a high volume of accounts receivable or significant tangible assets.