The American Rescue Plan Act of 2021 reauthorized and funded a new round of the State Small Business Credit Initiative (SSBCI 2.0), which provides a combined $10 billion to states, the District of Columbia, territories, and tribal governments to empower businesses to access capital needed to invest in job-creating opportunities as the country emerges from the COVID-19 pandemic. Each state is responsible for creating the SSBCI 2.0 programs they will use to deploy federal dollars received. As of February 9, forty states have been approved by the Treasury to implement their proposed SSBCI programs, and sixteen of those forty are accepting applications from lenders on behalf of businesses. This round of SSBCI money included employee ownership as one eligible purpose.
The intended end users of the SSBCI 2.0 programs are businesses with fewer than 500 employees, with an additional focus on businesses owned by socially and economically disadvantaged individuals. Authorized uses of the funds include startup costs, working capital, business procurement, franchise fees, equipment, and inventory, as well as the purchase, construction, renovation, or tenant improvements of an eligible place of business that is not for passive real estate investment purposes. The key aspect to know about SSBCI is that in almost all cases, the program requires a private loan between a financial institution and a business that is being supported by the state SSBCI dollars—that is, no dollars are being directly lent to business by the SSBCI program. To best illustrate this concept, let’s explore two specific state SSBCI programs: the Minnesota Loan Guarantee Program and the Michigan Collateral Support Program.
The Minnesota Loan Guarantee Program provides a guarantee of up to 80% of a private loan to a company with fewer than 750 employees, with a maximum guarantee of $800,000. This guarantee is meant to provide a lender with confidence that there will be a level of repayment in case of default on the loan. In contrast, the Michigan Collateral Support Program provides up to $5 million in cash collateral to enhance the collateral coverage of a borrower by depositing that cash into an account with the lender. As mentioned before, each state has created its own SSBCI programs, but many of them take the form of loan guarantees, loan participation, or collateral support like these examples.
So, with all this new information, you may wonder: how does SSBCI 2.0 help me grow my business and create new employee-owners?
After a mandate from Congress to the Treasury Department that employee ownership be included in SSBCI 2.0, many individuals from the employee ownership community were instrumental in providing the Treasury with the information and guidance needed to carry out this mandate. In the end, ESOPs, worker cooperatives, and employee ownership trusts were specifically identified in the SSBCI 2.0 regulations issued by the Treasury. With this in mind, there are two ways that employee ownership can be expanded using SSBCI 2.0 programs.
First, although SSBCI dollars cannot be invested in a loan used to purchase the ownership interest in a business, there is an exception for the purchase of a business that results in an employee stock ownership plan, worker cooperative, or other employee-owned entity holding a majority interest (on a fully diluted basis) in the business. The original intent of this exception was to expand employee ownership by providing state-backed loans for retiring business owners to use to sell their companies to ESOPs, worker cooperatives, or employee ownership trusts. In direct response to a question I posed to the Treasury Department’s SSBCI Support Team, they confirmed that a current employee-owned company (regardless of the ownership percentage) can use SSBCI programs to support loans they receive to purchase a majority interest in another business. Simply put, you can use SSBCI programs to help finance the acquisition of another company, thereby creating new employee-owners in your company.
Second, SSBCI programs should be viewed by employee-owned companies as a way to increase their access to capital for buying new equipment, creating new product lines, building or improving facilities, or any other step towards expanding their business. Have you been considering buying the land next to your facility to expand your manufacturing plant, but your banker has questioned the collateral you have available? Have you been looking at a new machine that would increase productivity, enabling you to hire more employees to support this growth, but the bank underwriters aren’t seeing it the same way as you? The loan guarantee, loan participation, and collateral support programs of SSBCI can be used to encourage a financial institution to give greater consideration to your opportunities for growth and ultimately to expand employee ownership.
Last, we would like to collect data on the use of SSBCI programs by employee-owned companies. If your company applies for an SSBCI program, please send me an email at sstorkan@eoxnetwork.org.
For more information on SSBCI, please visit the following resources: