SSBCI PROGRAM PROFILE:

LOAN PARTICIPATION PROGRAM 

May 4, 2011 

State Small Business Credit Initiative (SSBCI) 

U.S. Department of the Treasury 

SSBCI PROGRAM PROFILE:

LOAN PARTICIPATION PROGRAM 

May 17, 2011 

State Small Business Credit Initiative (SSBCI) 

U.S. Department of the Treasury 
US Department of Treasury

State Small Business Credit Initiative Program Profile 

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LOAN PARTICIPATION PROGRAM 

State Small Business Credit Initiative

What is a Loan Participation Program?

A Loan Participation Program enables small businesses to obtain medium to long-term financing, usually 

in the form of term loans, to help them grow and expand their businesses. States may structure a Loan 

Participation Program in two ways: purchase transactions, also known as purchase participation, in 

which the state purchases a portion of a loan originated by a lender; and companion loans, also known 

as co-lending participation or parallel loans, in which a lender originates a senior loan and the state 

originates a second (usually subordinate) loan to the same borrower. This program enables the state to 

act as a lender, in partnership with a financial institution lender, to provide small business loans at 

attractive terms. 

What are the Credit and Loan Characteristics? 

Like all credit programs, a Loan Participation Program can be tailored to meet a state’s objectives. The 

table below describes key credit and loan characteristics that should be considered when designing a 

Loan Participation Program. 

Characteristics Description 

What kinds of borrowers 

are eligible to 

participate? 

• Borrower eligibility may be broad or targeted at the state’s discretion. 

Eligibility is determined by each state and may target specific industries, 

regions, and types of businesses, depending on the state’s objectives. 

• Under SSBCI, should target an average borrower size of 500 employees 

or less; should not exceed a maximum borrower size of 750 employees. 

In practice, small businesses targeted by existing state programs are 

typically much smaller than 500 employees. 

• Corporations, partnerships, and sole proprietorships are eligible, as well 

as non-profits and cooperatives. 

• SSBCI Policy Guidelines provide specific guidance on certain borrowers 

who are prohibited from participating in this program. 

What sizes of loans are 

eligible? 

• Under SSBCI, must target an average principal amount of $5 million or 

less and cannot exceed $20 million on any individual loan. In practice, 

the average small business loan is typically much less than $5 million. 

What types of loans are 

eligible? 

• Term loans are the most common. 

• Small Business Administration (SBA) guaranteed loans may not be 

purchased in loan participation. A state may, however, purchase 

participations in loans that are subordinate to, or make its own direct 

loan subordinate to, an SBA guaranteed loan. 

How can loan proceeds 

be used? 

• For any business purpose, including, but not limited to start-up costs, 

working capital, business procurement, franchise fees, equipment, 

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. 

• Restrictions apply to refinancing and other uses; please refer to the 

SSBCI Policy Guidelines for additional details. 
US Department of Treasury

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LOAN PARTICIPATION PROGRAM 

State Small Business Credit Initiative

Characteristics Description 

Who negotiates the 

terms of the loan? 

• For purchase transactions, interest rates, maturity, collateral and other 

loan terms are negotiated between the borrower and the financial 

institution lender, though the state may seek to approve terms prior to 

closing. 

• For companion loans, the state and financial institution lender negotiate 

interest rates, maturity, collateral and loan terms with the borrower. 

What are the program’s 

strengths? 

• The state benefits from seeing the financial institution lender’s credit 

analysis, though the state should also conduct its own underwriting of 

each loan. 

• The financial institution lender diversifies its risk by sharing exposure 

with the state. 

• The state may decide to offer its participation at low interest rates, 

which reduces the blended rate paid by a small business. 

• In a purchased participation, the financial institution lender conducts all 

of the customer interaction, including monthly invoicing, collections, 

and loan workouts. 

How Does a Loan Participation Program Work? 

Loan Participation Programs typically work in one of two ways: 1) purchase transaction loans, whereby a 

state purchases a participation in a loan that is issued by a financial institution lender; or 2) co-lending 

participation, companion loans, or parallel loans, whereby a state makes a loan alongside a financial 

institution lender loan. Typically the state’s loan is subordinate to the lender’s loan in terms of collateral 

priority. 
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LOAN PARTICIPATION PROGRAM 

State Small Business Credit Initiative

Operating Mechanics Description 

What kinds of lenders are 

eligible to participate? 

• Under SSBCI, any insured depository institution, insured credit union, 

or community development financial institution, as defined in section 

103 of the Riegle Community Development and Regulatory 

Improvement Act of 1994. 

• SSBCI recommends that states confirm that financial institution lenders 

have sufficient commercial lending experience and financial and 

managerial capacity to participate. 

Who originates loans in 

this program? 

• For purchase transaction loans, the financial institution lender 

originates the loan, and the state purchases a portion of the loan from 

the financial institution lender. 

• For companion or parallel loans, the financial institution lender 

originates the primary loan, and the state or agent originates the 

secondary loan. 

Who has underwriting 

responsibility? 

• For purchase transaction loans, the financial institution lender 

underwrites the initial loan. The state typically underwrites its 

purchase participation but may gain further information from the 

lender’s credit decision. 

• For companion loans, the financial institution lender and state each 

evaluate the application based on their own credit criteria, though the 

state may request the financial institution lender’s credit analysis. 

How are these loans 

monitored? 

• States should establish a program to monitor both the repayment 

progress of borrowers and the servicing performance of participating 

lenders. 

• Servicing capabilities are particularly important for states with parallel 

or companion loans. 

• Many states periodically reevaluate the value of collateral in issued 

loans and make sure that the collateral is properly insured. 

What kinds of fees may 

be charged? 

• Application and origination fees may be charged, as determined by 

each state, to defray the cost of program operations and ensure 

sustainability. Typically, fees range from 0% to 3% of the loan amount. 

What is the loan 

participation term? 

• Varies from state to state and from loan to loan. Typically, the state’s 

participation is no shorter than the term of the lender’s loan. 

In what percentage of the 

loan can the state 

participate? 

• The state may purchase or issue a loan participation up to 80% of the 

total loan amount; a private lender must have at least 20% of its own 

capital at risk. 

What happens in the case 

of a default? 

• An agreement between participating lenders and the state should 

define each party’s responsibilities in situations involving default, 

charge-off, and liquidation. Typically, if the state has a subordinate 

position, the lender has the first claim to all recoveries until its losses 

are covered. 
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Operating Mechanics Description 

What leverage 

requirements exist? 

• Under SSBCI, each OCSP must individually demonstrate a minimum 

private financing ratio of 1:1 over the lifespan of the SSBCI program. 

• States must demonstrate a plan that creates a reasonable expectation 

that the approved programs, when considered in sum, will result in 

10:1 leverage over the lifespan of the SSBCI Allocation Agreement or 

Allocation Time Period. 

What is the state’s 

liability? 

• The state bears losses up to the amount of its participation. The state 

may also need to participate in costs of workout as negotiated with the 

lender. 

• The lender has no recourse against the state in case losses exceed 

recoveries. 

Who are the Key Stakeholders and What are Their Roles? 

The stakeholders in a Loan Participation Program include the state, financial institution lenders, and an 

implementing agency/entity, if assigned by the state to manage the program. Implementing entities 

may include a specific department, agency, or political subdivision of the state, or an authorized agent 

of, or entity supervised by, the state.

Stakeholder Role

What is the role of the 

state? 

• Conducts outreach to inform lenders, small businesses, and trade 

associations of the program. 

• Verifies the eligibility of individual loans, which includes confirming 

borrower eligibility requirements and certifying that proceeds will be 

used for acceptable business purposes. 

• Has direct lending responsibilities, including underwriting loan 

participation purchases and companion loans and ongoing loan 

monitoring and reporting. 

• Establishes an agreement with the lender specifying who is responsible 

for servicing, modifying, reporting, and collecting loans. 

• Some states select an agent to perform their responsibilities on their 

behalf. 

What is the role of a 

lender? 

• For companion loans, the senior financial institution lender generally 

has few or no responsibilities to the subordinate state loan unless 

spelled out in an inter-creditor agreement. 

• In purchased participations, the financial institution lender’s role is 

written into the participation agreement. 

• In each case, the financial institution identifies potential opportunities 

for state participation. 

What is the potential role 

of an implementing 

agency/entity? 

• May act on behalf of the state, as a lender, to administer the loan 

participation program, to include underwriting, monitoring, reporting, 

and possibly servicing. 

• May assist in marketing the program in their region or community. 
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What Kind of Operating Model is Needed to Manage a Loan Participation Program?

Loan Participation Programs’ operating costs include underwriting, ongoing loan servicing, and portfolio 

monitoring. These costs differ based on the state’s involvement in the program, as purchase 

transactions generally require fewer resources to manage because states may rely to a greater degree 

on the originating financial institution lender’s infrastructure. Essential state knowledge and experience 

should include: credit analysis and underwriting with subordinate lending, loan servicing, portfolio 

monitoring and reporting, and loan participation purchase process management. States may acquire 

these skills in-house or through agents such as Economic Development Corporations or other states. 

How Does a Loan Participation Program Help to Achieve a 10:1 Private Financing Ratio? 

To be eligible for federal funding, a state is expected to reasonably demonstrate that, when considered 

with all other SSBCI programs of the state, such programs together have the ability to generate private 

lending of at least 10 times the new federal contribution amount, also known as the private financing 

ratio by December 31, 2016. Eligible private financing includes all loans or investments from a private 

source to an eligible borrower or eligible portfolio company, whether occurring at or subsequent to 

loan/investment closing, and whether funded or unfunded as well as any new infusions of cash by the 

borrower. 

To demonstrate the private financing ratio for Loan Participation Programs, total estimated federal 

contributions to support loans should be compared to total estimated private loan amounts over the 

lifespan of the SSBCI program. States that have Loan Participation Programs in place may rely on 

historical data. States that plan to enact new programs may rely on data from other states. SSBCI 

considers the total private financing for the loans and any borrower cash infusions to constitute “total 

private financing.” In the context of Loan Participation Programs, Treasury considers the aggregate 

federal portion of the loans to constitute the “SSBCI funds used.” The following is an example of a 

private leverage calculation for a Loan Participation Program calculated within one calendar year: 

a. SSBCI Funds Used (aggregate federal participation) $20,000,000 

b. Private Financing $60,000,000 

Private Leverage Ratio (b to a) 3:1 

Treasury recognizes that Loan Participation Programs will rarely achieve 10:1 leverage based only on the 

original loan participation unless the participation is 10% or less of the entire transaction amount. For 

this reason, states may also include: subsequent private financing to the borrower closed or committed 

before December 31, 2016, that is the cause and result of the initial SSBCI-funded transaction; and 

additional transactions to other borrowers closed or committed before December 31, 2016, that are 

funded with recycled SSBCI funds. 

Where Has the Loan Participation Program Worked Well? 

Several states have Loan Participation Programs, including Maryland, Michigan, Missouri, and Vermont. 

Vermont has operated its Loan Participation Program since the mid-1990s, and it is a popular, selffinancing program that does not receive appropriations from the state. Key features of the Vermont 

program were discussed in an SSBCI conference call on Loan Participation, and in a follow-up discussion 
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between representatives from Vermont and Treasury. Highlights from these discussions are summarized 

below. This information is not drawn from Vermont’s SSBCI application. 

Highlights from Vermont’s Loan Participation Program 

• Overview: The Vermont Economic Development Authority (VEDA) supports two types of Loan 

Participation Programs to assist borrowers in purchasing fixed assets: purchase participation (i.e., 

state purchases interest in originating lenders’ loan) and companion loans (i.e., state makes a 

second loan parallel to the originating lenders’ loan). Lenders tend to prefer companion loans 

because VEDA’s interest rates are fixed, rather than tied to an index. 

• Loan Amount: VEDA is authorized to fund up to 40% of a loan, not to exceed $1.3 million. The 

maximum size of its small business loans is $250,000. 

• Rates and Terms: VEDA offers subsidized and unsubsidized rates, currently ranging between 2% 

and 3.75% above its cost of funds. Projects perceived as having a high development impact are 

eligible for the most attractive rates. Terms vary by asset type: 10 years for real estate, and 5 to 7 

years for machinery and equipment. 

• Underwriting: The lender underwrites its loan, and VEDA underwrites the state’s loan, which is 

subordinate. VEDA relies on lender appraisals and other lender documentation to streamline the 

approval process. VEDA loan officers are experienced commercial lenders, and loans up to $250,000 

may be approved internally. Loans greater than $250,000 are reviewed by VEDA’s board. 

• Losses and Recoveries: Historically, VEDA has experienced high delinquency rates (around 8% to 

12%) but low loss rates (below 1%). VEDA typically allows lenders to take the lead in loan workouts 

with the agreement that lenders will pass along excess recoveries to VEDA. Because of its 

subordinate position, VEDA often requires personal guarantees and subordinate agreements as 

additional protection, and is persistent in pursuing loan workouts, sometimes for several years. 

• Leverage: The estimated private financing ratio is 15:1 and the estimated private capital ratio, 

including borrower equity, is 19:1. VEDA achieves this high leverage ratio because it has access to 

other sources of loan capital and uses SSBCI funds not as loan capital, but as a subsidy to buy down 

the interest rate charged to borrowers. 

• Marketing: VEDA actively markets its program in three ways: 1) The CEO meets with lender 

presidents to discuss VEDA’s programs; 2) Loan officers market the programs through their 

individual relationships with financial institution lender loan officers; 3) VEDA meets with 

committees of lender loan officers to explain programs; and 4) VEDA does promotional advertising 

in trade journals and at trade shows. 

• Staffing: VEDA has a staff of 28 full-time employees to administer all of its credit products, which 

includes 10 loan officers, 5 staff to manage loan closings, and a 4-person team to handle 

disbursements, loan systems, payables and receivables. VEDA also employs a full-time consultant to 

do workouts. 

Who Can You Contact With Questions on Loan Participation Programs?

Treasury has posted policy guidelines and application materials on its website, available here: 

http://www.treasury.gov/ssbci. Questions may be asked via phone (202-622-0713) or via email at 

SSBCIquestions@treasury.gov.