State Small Business Credit Initiative Program Now Allows Funding for Employee Ownership

The American Rescue Plan Act of 2021 (P.L. 117-2) included an appropriation of $10 billion for another round of funding for the State Small Business Credit Initiative (SSBCI), a program that has been in place since 2010. SSBCI funds might make it easier for lenders to ESOPs to provide larger and less collateralized ESOP loans or for mezzanine lenders to loan at lower rates.

The SSBCI program was created to increase access to capital for economic development through small business. Funding has not been historically available for business transactions, but in a floor dialogue on the bill, Congress directed the Treasury Department to include transitions to employee ownership in the program. The NCEO and a number of other employee ownership organizations participated in conversations with Treasury on how best to accomplish that, including both funding eligibility and technical assistance. Regulations issued on November 10 (U.S. Department of the Treasury State Small Business Credit Initiative Capital Program Policy Guidelines) include specific language allowing for this, stating that the funds cannot

Purchase any portion of the ownership interest of any owner of the business, except for the purchase of an interest in an employee stock ownership plan qualifying under section 401 of Internal Revenue Code, worker cooperative, or related vehicle, provided that the transaction results in the employee stock ownership plan or other employee-owned entity holding a majority interest (on a fully diluted basis) in the business.

Guidance on technical assistance grants will be issued in the coming weeks and may include funds for employee ownership as well.

The SSBCI program works through each state, which gets an allocation of the funds, some of which are earmarked for specific uses such as for tribes, or for companies owned by disadvantaged individuals. The goal of the program is to reduce the cost of capital for participating business. 

There are a number of SSBCI programs. State capital access programs (CAPs) are a kind of loan portfolio insurance initiative in which lenders and borrowers contribute a small percentage of the loan (between 2% and 7%) to a reserve fund that is matched by the state. The reserve fund is designed to encourage lenders to make more capital available for qualifying borrowers at lower rates by covering losses in the lender’s CAP portfolio. 

State participation loans involve the state either purchasing some of the SSBCI loans or participating as a co-lender. State loan guarantee programs can guarantee up to 80% of loan losses, but they also involve an origination fee from the borrower of from 0% to 3%. State collateral support programs provide pledged collateral accounts to lenders to enhance the collateral coverage of individual loans. Finally, state venture capital programs provide “investment capital to create and grow start-up and early-stage businesses.” They can include state-run funds or a fund of funds that the state invests in. 

For a good review of the SSBCI program, see the 2021 Congressional Research Service Report State Small Business Credit Initiative: Implementation and Funding Issues. The Council of Development Finance Agencies also have a very useful overview of the program and the nes rules.