BEST PRACTICES FROM 

PARTICIPATING STATES:

LOAN 

GUARANTEE 

PROGRAMS

SEPTEMBER 2015
i

Acknowledgements

This SSBCI Best Practices document, first released in July 2013 and later updated in 2015, resulted from 

many constructive discussions and editing sessions of the 2013 and 2015 LGP Working Groups. SSBCI 

thanks the following members of the working groups for their time and thought leadership in support of this 

project:

2013 LGP Working Group

• Howard Wills, SSBCI Coordinator, Alabama Department of Economic and Community Affairs

• John Saris, Business Services Manager, Oregon Business Development Department

• Dan Apodaca, Director of the Small Business Loan Guarantee Program, California Business, 

Transportation, Housing Agency

• Barbara Vohryzek, Deputy Director and Small Business Advocate, Governor's Office of Business 

and Economic Development (California)

• Brenda Guess, Economic Development Manager, Louisiana Department of Economic Development

• Greg Cole, Program Director, Finance Programs, Choose Maryland

• Sara Watson, Bureau Manager, Mississippi Development Authority 

• Percival Clouden, CEO, Virgin Islands Economic Development Authority

2015 LGP Working Group

• Howard Wills, SSBCI Coordinator, Alabama Department of Economic and Community Affairs, CoChair

• John Saris, Business Services Manager, Oregon Business Development Department, Co-Chair 

• Teveia Barnes, Executive Director, California Infrastructure and Economic Development Bank 

(IBank)

• Percival Clouden, CEO, Virgin Islands Economic Development Authority

• Greg Cole, Program Director, Finance Programs, Choose Maryland

• Brenda Guess, Economic Development Manager, Louisiana Department of Economic Development

• David Rodriguez, Manager, Capital Programs, Enterprise Florida

• Nancee Trombley, Chief Compliance Officer, California Infrastructure and Economic Development 

Bank (IBank)

• Sara Watson, Bureau Manager, Mississippi Development Authority

SSBCI also thanks George Surgeon from the Center of Regional Economic Competitiveness and Diane 

Casey-Landry from DCL Banking Advisors for facilitating the working group sessions and collecting 

perspectives. We also wish to thank David Rixter at the Department of the Treasury for his assistance in 

producing this document.

Jeffrey Stout

Director 

State Small Business Credit Initiative 
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State Small Business Credit Initiative

Loan Guarantee Program Best Practices

Under the U.S. Treasury’s State Small Business Credit Initiative (SSBCI), 19 states1 received funding 

for Loan Guarantee Programs (LGPs). To strengthen the states’ performance in these programs and to 

assist states considering the creation of a LGP, working groups of state officials met to discuss their best 

practices. This document distills the most important and practical advice LGP state managers would 

offer their peers.

In an SSBCI LGP, the state guarantees a portion of the principal balance of a loan originated by a 

financial institution. The state provides a guarantee to cover a deficiency in the event a loan originated 

by a lender does not fully repay. 

The LGP Working Groups’ discussions elicited comments on practices that were successful and can be 

readily implemented by other states. The working groups agreed that four key principles apply to all 

LGPs: 

1) Ultimate responsibility for program success rests with the state, and lenders must always 

have “skin in the game.”

2) Program focus should remain on assisting small businesses’ efforts to retain and/or expand 

jobs. Every state has its own strategies and tactics to support job creation and retention 

including the provision of assistance generally to small businesses, expanding access to 

capital among minority-, women-, veteran- and disabled-owned businesses, and increasing 

economic activity in the state, among others.

3) Allow lenders to underwrite the loans while the state underwrites the lender.

4) Keep the LGP simple and flexible.

The working groups developed best practices in the categories of program design, marketing, operations, 

monitoring and evaluation, sustainability, and loss mitigation.

1. Program Design

• Consult with the local financial institutions most active in small business lending and 

guaranteed lending when starting an LGP: Consultations with state banking associations are 

a valuable way to disseminate information and obtain feedback. Typically, the state proposes a 

program design that targets a specific market segment or industry. One example that has been 

successful is using the program to guarantee the unsecured lines of credit that typically 

accompany an SBA-guaranteed term loan. Consultations with lenders and state banking 

associations should be on-going to identify the evolving needs of lenders to support continued 

program utilization.

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“State” includes states, territories, the District of Columbia, and municipalities approved to participate in SSBCI.
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• Maintain a flexible LGP program design adaptable to unanticipated demand: Flexibility in 

the program design stage is critical to meeting the needs of stakeholders. Program designers 

should keep in mind the private financial leverage goal and impact on job creation/retention. 

Financial institutions must manage their financial risk, and they are most comfortable with a 

partner they trust. 

• Determine the guarantee percentage that will maximize the program’s reach and 

distinguish SSBCI’s LGP program from the SBA and USDA guarantee programs: 

Guarantees can be applied to a portion of a loan ranging from 20 percent to 80 percent. Lower 

guarantee percentages encourage better underwriting by the lender. A guarantee percentage of 

50 percent has worked well for new LGPs to balance making sure that lenders have enough “skin 

in the game” and the level of loan re-underwriting by state program managers or their 

contractors. Experienced programs have enjoyed success with higher guarantee levels though 

this generally requires more re-underwriting by state program managers or their contractors. 

Guarantee percentages lower than 50 percent generally are not attractive to lenders.

• Determine risk-sharing strategy: States need to determine upfront how the loan guarantee will 

work in the event the loan fails to repay. Programs can be designed to share losses pro rata 

between the lender and the state, or losses may be borne first by the state up to the amount of the 

guarantee (also called “first loss”). Pro rata guarantees minimize the state’s financial exposure, 

but “first loss” guarantees encourage lenders to use the program to expand access to credit. The 

policy choice between pro-rata and first loss guarantees depends on understanding the local 

market conditions and the state’s ability to underwrite to varying levels of risk. Ultimately, 

lenders need to fully understand the program’s liquidation strategy. Some states vary the 

approach based on the loan; others decide on the approach for the entire program. 

• Understand the local market: States should consult with lenders and businesses to understand 

whether creditworthy borrowers are struggling to obtain loans. It is important that the state 

understands the markets the program will support.

• Encourage lenders to work with borrowers that encounter difficulties: States have found 

that lenders who work more closely with a borrower may avoid liquidation. This strategy also 

extends the life of the business and the jobs related to that business. 

• Staff the program adequately: Knowledgeable staff will gain the confidence of the lenders by 

demonstrating that they can “talk the talk” and facilitate deals that work for the borrower, the 

lender, and the state. Successful programs have a staff dedicated to the program rather than 

spreading responsibilities over a larger number of staff where no one owns the program. 

• Charge fees to cover program costs and discourage transactions that do not require credit 

support: Practices vary among the states, and fees can be assessed up front or annually. Fees 

are based on a percentage of the loan amount, ranging from 0.5 to 2 percent. Some states found 

that waiving fees for loans in distressed areas can benefit economic development. 
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• Focus outreach to underserved markets, but the LGP should not unduly subsidize a 

transaction: States should consider the parameters of other federal and state government 

lending programs to reduce overlap and expand outreach to underserved markets. 

• Raise LGP visibility through high-impact transactions: Guaranteeing loans for high impact 

and high visibility transactions can help gain more attention for the program.

• Focus on customer service to lending partners: The best LGP salesperson is a happy lending 

partner. Having visible lending partners who publicly advocate and provide testimonials for a 

state’s LGP can boost acceptance and participation by other lenders.

2. Operations

• Understand the capacity and capability of the state’s existing infrastructure: The agency 

that administers the program should be knowledgeable and familiar with small business lenders. 

Starting with a survey of capabilities, the state can determine if the program should be 

administered with an existing agency or outsourced to a capable contractor. Even if the LGP 

hires a contractor, the state remains responsible for compliance with program rules and for 

reviewing the contractor’s performance. 

• Hire staff with commercial loan underwriting experience and personal familiarity with 

lenders in the small business market: The ability of the program staff to relate to the partner 

banks will make the program more appealing to the lender community. Knowledgeable LGP 

staff will also know if the program can be used to complement an existing government lending 

program. If possible, staff should be fully dedicated to the LGP. 

• Engage the banking and business community: Engaging bankers on an outside loan 

committee to evaluate borrower creditworthiness, while the state approves compliance with 

SSBCI rules can promote the LGP. Adding bankers to the loan committee can promote buy-in to 

the program, a better understanding of the state’s underwriting goals, and add to the outreach. 

States should set clear expectations about the procedures of a loan committee, i.e., who will 

maintain the records and who will be accountable for compliance on behalf of the state. States 

should adopt rules for conflicts of interest, including appearances of conflicts. Some states use 

loan committees to approve larger loans and allow program staff to approve smaller loans.

• Minimize administrative burden: Loan applications should be streamlined, readily available 

and easily downloadable from the website.

• Review the lender’s underwriting to confirm that loans meet program criteria: In most 

states, the lender underwrites the loans and sets the terms and conditions. The state must 

sufficiently underwrite the loan to understand and manage its risk. The higher the guarantee 

percentage and the longer the term of the guarantee, the greater the amount of re-underwriting 

required by the state or its contractor. The state must monitor and enforce compliance with the 

SSBCI program rules.
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• Consider using master participation agreements to reduce redundancy and paperwork: 

Using master participation agreements will lessen the burden on banks to certify eligibility of 

loans it enrolls in the program. Banks are familiar with these types of agreements. Allowing 

banks to use their own credit forms is a draw for the program. 

• Maintain a quick turnaround time: Some states reply to an application in 5-7 business days. 

It is most important to respond to the loan guarantee request in the timeline promised. Banks 

will accept a longer turnaround time if they know what to expect. Informing a lender quickly if 

the loan needs to go to the internal loan committee for approval builds trust in the program. 

• Require lenders to report regularly on nonperforming loans: Most states require lenders to 

inform them as soon as a borrower’s loan is classified as less than a ‘pass’ credit or is no longer 

compliant with the terms of the loan. States also may require an action plan from the lender 

focusing on working out the loan with the goal of avoiding liquidation where possible. In 

addition to requiring notifications from lenders when loans become delinquent and/or go into 

default, successful state LGPs require periodic reports from lenders on their entire portfolios.

States should request these reports at least quarterly.

• Encourage loan workouts: In lender participation agreements, some states have found it useful 

to remind lenders of the economic development goals of the program, encouraging the lender to

take steps to work with a troubled borrower. 

• Plan for staff succession: Always assume that the program’s existing staff may change.

Develop operation manuals and policies that address tasks and processes and keep them up-todate. Develop checklists for key operational activities, such as loan approvals and closings, 

collections, reporting, and compliance. Similarly, each staff member should identify his or her 

primary responsibilities and commit them to writing.

3. Marketing

• Market consistently and repeatedly: Assess what resources are available in your state and 

where it is possible to distribute/disseminate information about the program. Develop a 

marketing program before the program is implemented and then execute as designed. Promote 

key aspects of the program that make it easy to use, such as quick turnaround times on 

applications. 

• Promote the unique aspects of the LGP: SSBCI funds can be used for lines of credit, bridge 

financing, and loans to nonprofits for “business purposes.” Under LGPs, the bank retains the full 

amount of the loan on its balance sheet, which is different than companion or purchase loan 

participation programs. 

• Address the liquidation process: Whether a state opts for first loss or pro-rata loss sharing 

guarantees, the marketing materials should clearly set forth the liquidation process so the lenders 

understand it upfront. 
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• Meet one-on-one with the commercial lending team: For smaller banks, the initial meeting 

may be with the bank president. The introduction to the program should not be by email or with 

the branch staff. 

• Identify program champions: Bankers who successfully utilized the program become the most 

effective advocates for the program, both within the bank and with their industry colleagues. 

• Recognize that websites are important to lenders, and make sure they are current, easy to 

find (remember the “3-click” rule), and have all the pertinent documents: State bankers’ 

association newsletters and websites are ideal places for stories and informational pieces about 

the program. Ask the association to email a letter or information about the program to their 

members. 

• Use media outlets to promote the program: States have promoted their programs in local 

newspapers and on local radio talk shows and through forums with civic and nonprofit groups 

and other state federal agencies. Promoting the program broadly allows the state to differentiate 

its LGP program from other credit enhancement vehicles. Getting the word out to the general 

community will generate interest among small businesses.

• Identify the small group of key small business lenders in the state and reach out to them:

Some successful outreach options include calling programs, regular email updates, lender 

roundtables and small business conferences. Marketing targets can include CEOs, chief credit 

officers, and small business loan officers. Only a few states market directly to small business 

borrowers. 

• Make use of testimonials from lenders who have successfully used the program: Regularly 

email news about the program to lenders; include information such as number of loans made, 

lender rankings, and dollars available. Press releases about success stories can generate interest 

from lenders. Make use of marketing by other states/ Treasury that can be customized to your 

state. Recognize strong performance by individual lenders by giving them awards such as

“lender of the year.”

• Reach out to state regulators as they can be helpful in addressing questions about 

regulatory treatment: Ask the bank commissioner for the opportunity to brief state examiners 

on the program. Examiners can help spread the word to the bankers. 

• Partner with state banking associations to promote the program: To increase exposure and 

control costs, states can work with the state banking association to promote the program in 

newsletters, websites, local meetings, and direct emails. States can also partner with the 

association to form informal advisory groups to discuss how to market the program.

• Acknowledge the limitations of the program: Not all loans or all lenders are good fits for an 

LGP. Lenders will appreciate the state’s honesty and frankness in quickly identifying loans that 

are not “right” for LGP and are better structured using other credit enhancement programs. 

Successful states differentiate their LGP from other credit enhancement programs. If a loan is 

better structured using an SBA guarantee, then the state should encourage the lender to use SBA.
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4. Monitoring and Evaluation

• Create a compliance checklist and confirm it is being used prior to closing each loan: A 

checklist informs the program administrators and the lenders of what is expected. 

• Review the state’s procedures against the SSBCI National Standards for Compliance and 

Oversight to adhere to the program requirements: It is critical to stay current with program 

rules. 

• Consider engaging external resources to help with compliance audits: States may wish to 

contract for compliance audits with a third party, but the state is always responsible for 

compliance.

• Keep lenders involved: Regular conversations with program participants reveal what is 

working and what may need to be adjusted in program design or operations. It is also an 

opportunity to emphasize the focus on job creation and retention, where possible. 

• Keep staff involved: Regular meetings with staff to discuss SSBCI program changes, 

compliance issues, and deal flow are important to update staff and to safeguard program 

integrity. 

• Establish performance metrics up front and track them: States have used a variety of 

metrics including number of loans, additional private capital received, job creation, job 

preservation and serving low income or underserved communities, any or all of which allow for 

measuring the program’s success. Some states ask for this information on the loan enrollment 

forms; others collect this information at loan closing. Some states follow up with borrowers at a 

future date to confirm final job creation and retention figures. The extent of the state’s future 

data collection and auditing activities should be clearly outlined in its guarantee agreement.

• Consider implementing a loan management reporting system: States have found that a loan 

monitoring system allows for better and easier reporting.

• Retain all records pertinent to the program: Whether or not a state program continues after 

the SSBCI program ends, states should maintain documentation regarding the program so it is

available for any compliance and audit inquiries. States should retain all financial records, 

supporting documents, statistical records, and all other records pertinent to its SSBCI allocation 

for a period of three years from the date of submission of the final quarterly report.

5. Sustainability

To enhance long-term stability and impact, states should consider various aspects of sustainability, 

including continuous product availability, preservation and expansion of loan fund capital, and the 

extent to which program income is needed to cover some or all operating expenses. To support

sustainability, states need to begin loan programs with the end in mind—knowing what they want to 

accomplish and how long they want the program to be operational. 
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• Cover most of the operating costs of an LGP through fee income and earnings on reserve 

funds: Many states have found that guarantee, documentation, and closing fees combined with 

interest earned on the investment of funds set aside for guarantee claims can cover all or a 

significant amount of the operating costs of an LGP. Loan losses, however, are generally 

covered from the corpus supporting the LGP, resulting in the reduction in funds available to 

underwrite future loan guarantees.

• Determine who effectively pays for guarantee, documentation, and closing fees and 

whether these fees can be financed in the loan amount: Lenders are required to pay all fees 

associated with LGP to the state. However, most states allow borrowers to reimburse lenders for 

those fees. Most states also allow those fees to be financed in the loan amount. Lenders may 

charge additional fees on LGP loans; most states do not limit those fees.

• Consider limiting the life of the LGP guarantee in order to revolve LGP funds more 

quickly: Other sustainability techniques to consider include shorter allowed maturities on lines 

of credit, charging higher fees for longer loan maturities, and charging new fees for loan 

renewals/extensions. Most states price their LGP guarantees very competitively compared to 

other small business credit enhancement programs. To enhance long-term sustainability of 

SSBCI-funded LGPs, most states will need to consider changing their fee structure after the 

operating subsidy provided by Treasury for SSBCI programs ends. There are alternatives for 

increasing overall LGP program income without having to increase the base guarantee fee for all 

loans.

• Consider other approaches to reasonably increase program capitalization: States should

explore other capitalization opportunities such as the creation of a secondary market for the 

guaranteed portion of LGP loans and reinsurance of state LGP guarantees by third parties.

6. Loss Mitigation

• Routinely monitor the LGP portfolio for risk: States can do this internally or by using a third 

party. A risk rating system can be useful. The goal is for the state to be ahead of any problems 

that might arise in its LGP portfolio. If the state does not set aside funds equal to the total 

amount of its outstanding loan guarantees, then the state can use a risk ratings system to adjust 

the amount reserved for each loan guarantee based on each loan’s risk rating.

• Communicate early with the lender in the event of a loan default to limit the amount the 

state may lose on the transaction: States with legacy programs generally require lenders to 

regularly inform them of delinquencies and defaults and to submit work-out plans when a loan 

goes into default. If a loan goes into liquidation, states generally require lenders to submit 

liquidation plans. The state should provide feedback to lenders on their work-out and liquidation 

plans and hold lenders accountable should a defaulted loan result in a claim on the state’s 

guarantee.

• Determine when the state will pay claims on its guarantees: Some states require lenders to 

liquidate collateral prior to processing claims on the state’s guarantee. Other states pay claims 

after an event of default and/or after a liquidation plan has been approved but before the
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collateral has been liquidated; the state then shares in the recovery with the lender. In all cases, 

lenders are responsible for managing loan work-outs and liquidations.

• Respond to claim requests in a timely manner: To maintain credibility in the marketplace, 

states have found that they must respond quickly to claim requests from lenders even if the 

response is to deny the claim, to request that the lender repair the claim, or to request additional 

information.

• Pay claims quickly if the claim is in order: States generally pay within 30 days of receipt of a 

completed, compliant claim. Small claims should generally be paid as quickly as possible.

• Adjust the amount of the claim if the lender’s claim is not in order: Lenders who do not 

follow approved or commercially reasonable work-out and liquidation plans generally should not 

be paid the full amount of their claims, especially if they fail to secure collateral to preserve it 

from theft and vandalism or if they fail to liquidate collateral with limited life quickly. Lenders 

should be required to support the diligence of their collection efforts.

• Require borrowers to provide personal guarantees and/or secondary sources of collateral 

to help mitigate loan losses: Personal guarantees generally should be required. Programs 

should be aware of various federal and state rules and regulations governing spousal guarantees. 

Most states follow the lead bank’s requirements with respect to second mortgages on a 

borrower’s home. While it is difficult and expensive to collect on a personal guarantee or a 

second mortgage, they can provide leverage when negotiating a loan workout. Loans can also be 

partially secured by cash collateral pledged by the small business or its owner(s).