Community Developments Investments (February 2013)

Case Study: Loan Participation Program Aids Georgia Veterinarian

In a loan participation program (LPP), a state and a lender share financing. The sharing can be structured in two ways:

• Purchase transactions, also known as purchase participation, in which the state purchases a portion of a loan originated by a lender.
• 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.¹

In Georgia, the state’s SSBCI operates an LPP, Georgia Funding for CDFIs, designed to provide small businesses in low- to moderate-income, minority, and underserved communities with access to capital. The Georgia Department of Community Affairs contracts with qualified, federally designated community development financial institutions (CDFI) to market the program and recruit banks to participate. Using State Small Business Credit Initiative (SSBCI) funds, a CDFI partners with a bank to make financing possible. The bank and the CDFI each take a portion of the identified transaction, each underwrites its loan, and they close at the same time. The CDFI companion loan has a slightly lower interest rate than the bank loan, and its collateral might be subordinate to bank collateral.

Team Effort Saves a Small Business

Key role	Key player
Borrower	Rural veterinary business
Lender	First Citizens Bank of Georgia
Participation loan lender	Access to Capital for Entrepreneurs (ACE)
SSBCI state implementing agency	Georgia Department of Community Affairs

A rural veterinary business that had been successfully operating in its community for 12 years had a loan coming up for renewal. The borrower had a strong credit history and the business had a strong cash flow, but economic declines had diminished the value of the borrower’s collateral. The borrower was informed that the loan would not be renewed.

Seeking alternatives, the veterinarian approached First Citizens Bank of Georgia. The community bank viewed the business as a community asset with a strong cash flow and history of service to the area. The loan request was over the bank’s lending limit, however, so the bank approached Access to Capital for Entrepreneurs (ACE), a certified CDFI in rural northern Georgia and a participant in the Georgia SSBCI. ACE made a $122,000 companion loan to the bank’s $525,000 loan. Both loans were secured by buildings and equipment. The ACE loan had a slightly lower interest rate than the bank’s and was in second position to the bank’s collateral.

Together, the two lenders helped keep the business operating in the community, preserving 13 jobs.