5Non-State Financing Tools for the State Practitioner

A state employee ownership program’s most valuable function is its stewardship of a comprehensive statewide strategy that connects various capital sources. When an owner engages with a state’s Director of Employee Ownership to begin the process of understanding whether a sale to employees is feasible, the owner needs a reading of the whole capital stack available for that transaction: the senior lender, the loan guarantee that might sit behind it, the state’s revolving loan fund, a possible private layer of mezzanine debt, and the residual subordinated seller note, together with the tax provisions that shape the deal’s economics. Much of that stack is federal or otherwise non-state, and a practitioner must be able to speak fluently about those layers.

This chapter is organized around the role that each non-state tool plays in the employee ownership transaction. The Small Business Administration’s (SBA) 7(a) product is a transaction-specific tool, essentially a federal guarantee on the business’s own bank loan. SSBCI and EDA are federal authorities that capitalize the state’s own programs.

SBA 7(a) and the Main Street Employee Ownership Act

The Small Business Administration's (SBA) 7(a) program is the federal government’s flagship small business lending product. A participating lender makes the loan, and the SBA guarantees a large share of it (85 percent on loans up to $150,000, 75 percent above that to a $5 million maximum), which lets a lender extend credit it would not offer on conventional terms.⁷⁴ For a sub-$5 million ESOP or worker cooperative conversion that a lender will not finance on its own balance sheet, that guarantee can make a previously unbankable deal bankable.

In 2018, Congress tried to make the 7(a) program work for employee ownership with the Main Street Employee Ownership Act, which introduced ESOPs and worker cooperatives as allowable ownership transition financing structures in 7(a). Though well-intentioned, early implementation has been lackluster, with ESOP loans accounting for just 17 of the nearly 32,000 change-of-ownership loans the SBA guaranteed from fiscal year 2018 through fiscal year 2021.⁷⁵ This was largely a consequence of federal regulations that were misaligned with Congressional intent. Between 2023 and 2025, the SBA addressed most of the ESOP barriers. Its revised operating procedures made ESOP loans processable under delegated lender authority, waived the equity-injection requirement for loans financing a controlling interest of at least fifty-one percent, confirmed that neither the plan nor its members need guarantee the loan, and accepted the trustee’s ERISA-compliant appraisal in place of a duplicative SBA valuation.⁷⁶ An ESOP transition today can be financed through 7(a) on delegated terms, without an incompatible equity injection or a redundant valuation.

Some limitations remain, including a personal guarantee requirement that is structurally incompatible with worker cooperatives, but 7(a) remains a real tool for ESOP transactions below the $5 million ceiling, especially given that ESOPs are exempt from a personal guarantee due to superseding ERISA prohibitions.

The State Small Business Credit Initiative

The State Small Business Credit Initiative (SSBCI) is best understood as the modern incarnation of the federal-state development finance architecture that opened this playbook. It is money the U.S. Treasury Department lends to the states, which the states then lend and invest through credit programs of their own design (within the parameters of Treasury rulemaking). When small businesses receive financing that involves collateral support or a loan participation, the capital behind it is frequently SSBCI capital.

Congress created SSBCI in the Small Business Jobs Act of 2010, seeding state small business credit programs with $1.5 billion after the financial crisis. The Biden-era American Rescue Plan Act of 2021 reauthorized and expanded it to roughly $10 billion, a reauthorization often called SSBCI 2.0. This round of funding is being deployed by states with a horizon that ends in March 2028.⁷⁷ While SSBCI funds generally cannot be used to buy out an owner’s equity, Treasury’s guidelines carve out an explicit exception for transactions that produce broad-based, majority employee ownership, provided the employee entity holds a majority interest, on a fully diluted basis, at close.⁷⁸ There are several program structures through which states can leverage SSBCI 2.0 to finance employee ownership, all of which were covered in the previous section:

• Collateral support: a state cash deposit that covers the borrower’s collateral shortfall.
• Loan participation: the state buys a share of, or lends alongside, the lender’s acquisition loan, either pari passu with the lender (expanding the lender’s capacity) or, as in most companion loan designs, subordinate to it.
• Loan guarantee: the state guarantees a defined share of the private lender’s loan so the lender will lend where it otherwise would not.
• Capital access program (loan loss reserve): lender and borrower contribute to a loan loss reserve fund, matched by SSBCI, to build a pooled reserve that absorbs first losses across a portfolio of enrolled loans.
• Equity or venture capital program: the state invests in, or alongside, private funds that finance employee ownership.

Each transaction in an SSBCI-funded program must be matched on at least a 1:1 basis by private capital.

Over the life of the program, Treasury expects roughly $10 in private lending or investment for every $1 of federal funding. Importantly, SSBCI funds must move through a Treasury-approved structure; they cannot be used to capitalize a freestanding state revolving loan fund, for example. The appendix maps each SSBCI program type to the toolkit instrument it funds.⁷⁹ None of the above use cases requires new statutory authority. Each can be stood up via administrative action by the state agency administering their state’s SSBCI 2.0 tranches. The task of that agency, then, is to learn which of their programs run on SSBCI capital, confirm that those carry the employee ownership carve-out (or else request a program modification from the U.S. Treasury Department), and route eligible conversions to them.

EDA Economic Adjustment Assistance

The Economic Development Administration’s Economic Adjustment Assistance (EAA) program is the federal route by which a state can capitalize a revolving loan fund that then lends into individual deals; it is the same path that financed the first transaction profiled in this playbook, the 1976 Okonite purchase, which ran on an EDA grant to New Jersey that was lent through the state’s Economic Development Authority. Under EAA, the EDA can grant funds to capitalize or recapitalize a state or local revolving loan fund on a rolling basis, with a federal cost share of up to 50 percent (or as much as 80 percent for particularly distressed regions) and under an approved fund plan aligned with a state or region’s Comprehensive Economic Development Strategy (CEDS).⁸⁰ A state development finance agency (or other relevant agency) is an eligible applicant, alongside political subdivisions, EDA-designated economic development districts, tribes, and qualifying nonprofits.

Applications run through the EDA regional office on a rolling basis, so there is no annual deadline to wait for. Eligibility is place-based and the region must meet EDA’s economic distress criteria (constituted by either an unemployment rate at least one percentage point above the national average over the most recent 24 month period or per capita income at or below 80 percent of the national average) or present a qualifying Special Need. A non-federal match can come from state appropriations, philanthropy, or another source, but, as a rule, cannot be matched by other federal funds. The non-federal match is combined with the federal grant to form the revolving loan fund’s capital base.⁸¹ EDA approves each fund under a written RLF plan that sets the fund’s financing strategy, lending policy, and portfolio standards, and the plan must be consistent with the region’s CEDS. The terms of the award require that the fund leverage two private dollars for each RLF dollar lent, that the agency report semiannually, and that the agency measure the cost per job.⁸² For an employee ownership-specific RLF funded in part by EDA, the state should write employee ownership acquisition/conversion lending into the plan’s financing strategy and into the CEDS itself.

The state/non-state capital stack in practice

For the state practitioner, the success of any of the above programs—state or non-state—rests on their ability to assemble them. Table 8 places the federal tools in the same $10 million ESOP transaction used in Chapter 4 and shows how a practitioner can leverage various capital sources to fill out an employee ownership transaction supported by the state.

In this example, federal and state tools elegantly complement and augment each other:

• The senior layer is a private loan made larger by a federal guarantee, whether through the SBA 7(a) program or SSBCI (via loan participation or guarantee).
• The subordinated layer is the state’s own fund, capitalized in part through a federal award by the Economic Development Administration.
• A private fund supplies an additional tranche where the deal can attract one; this is the layer of the transaction around which the fund-of-funds in Chapter 4 is designed to build a capital market.
• The seller note is significantly reduced, now a thin residual note on which the seller can defer federal taxes.
• After closing, the newly converted employee-owned firm is free of federal income tax, repaying its acquisition debt with pre-tax dollars.

No single actor or single state assembles this entire capital stack today. This gap is the one a state Director of Employee Ownership is designed to fill (see Chapter 7). The federal toolkit is substantial, but uneven and uncoordinated: generous tax incentives, a per-transaction guarantee for ESOPs, a durable source of state credit support funding, and a tested capitalization route for RLFs. Bringing these layers together for a business that has never contemplated selling to its employees is not something the federal government does, nor is it something that it could necessarily even do well. It is, however, something a state can (and should) decide to do by building the toolkit and a team to administer it.

Sources

Source numbering follows the full playbook.

74. U.S. Small Business Administration, Standard Operating Procedure 50 10 8 (eff. June 1, 2025) (a maximum 7(a) loan of $5 million; an 85 percent guaranty on loans up to $150,000 and 75 percent above); 13 C.F.R. §§ 120.151, 121.151.
75. U.S. Small Business Administration, Affiliation and Lending Criteria for the SBA Business Loan Programs (proposed rule), 87 Fed. Reg. 64724, 64729 (Oct. 26, 2022).
76. U.S. Small Business Administration, SOP 50 10 7 (eff. Aug. 1, 2023), SOP 50 10 7.1 (eff. Nov. 15, 2023), and SOP 50 10 8 (eff. June 1, 2025) (delegated processing of ESOP loans; waiver of the equity-injection requirement for a controlling ESOP interest of at least 51 percent; no guarantee required of the plan or its members; the trustee’s ERISA-compliant appraisal accepted); Procedural Notice 5000-858322 (June 24, 2024).
77. The State Small Business Credit Initiative was created by the Small Business Jobs Act of 2010, Pub. L. No. 111-240, tit. III (approximately $1.5 billion), and reauthorized and expanded to roughly $10 billion by the American Rescue Plan Act of 2021, § 3301; codified at 12 U.S.C. § 5701 et seq.
78. U.S. Department of the Treasury, State Small Business Credit Initiative Capital Program Policy Guidelines (rev. Oct. 7, 2022).
79. U.S. Department of the Treasury, State Small Business Credit Initiative Capital Program Policy Guidelines (rev. Oct. 7, 2022).
80. U.S. Economic Development Administration, Public Works and Economic Adjustment Assistance program; 13 C.F.R. Part 307, subpart B (capitalization or recapitalization of state and local revolving loan funds under an approved RLF plan consistent with the regional Comprehensive Economic Development Strategy).
81. U.S. Economic Development Administration, Public Works and Economic Adjustment Assistance program; 13 C.F.R. Part 307, subpart B (capitalization or recapitalization of state and local revolving loan funds under an approved RLF plan consistent with the regional Comprehensive Economic Development Strategy).
82. 13 C.F.R. § 307.9 (RLF plan requirements, including the financing strategy and consistency with the CEDS); § 307.15(c)(1) (portfolio leverage of at least two private dollars per dollar lent); § 307.14 (reporting, semiannual and adjustable to annual with EDA consent). Cost per job is an EDA performance measure set against the recipient’s own plan target.