Once Again, the SBA's ESOP Loan Program Becomes Dysfunctional

The first piece of legislation I wrote on ESOPs as a Congressional staffer was the Small Business Employee Ownership Act. It became law in 1980. The bill was designed to address the SBA's refusal to make loans to ESOP trusts. At the time, loans often went directly to the ESOP trust rather than first to the company, which would then reloan it to the ESOP. The new law clarified that the SBA could make a loan directly to the ESOP trust. Shortly after that, I started the NCEO. After a couple of years, the SBA still had not issued guidance on how the law would be implemented. I set up a meeting with SBA officials to discuss the issue. They told me the law did not mean what I thought. I explained that I actually wrote the law, but they were not persuaded. The law also directed them to run an outreach program, but they didn't want to do that either. 

In 2018, staff from Senator Gillibrand’s office approached us at the NCEO. The senator wanted to revive the SBA program and modernize it so that it would be effective for the way ESOPs are being used today. We had a number of conversations with their staff and staff on the House side, and a bill was drafted. It became the Main Street Employee Ownership Act of 2018. Once again, however, the SBA actively undermined the intent of Congress. It issued regulations that effectively made the program useless. A few years later, I was at an Aspen Institute conference. SBA officials were on a panel on employee ownership and talked about how the SBA was so supportive of the idea. I raised my hand and pointed out that that was far from true. After that panel, I had a conversation with the people involved. They said they were unaware of the extent of the problem. With the help of Congressman Dean Phillips’s office, the SBA eventually issued guidance that made the program fully effective.

In the last few years, a number of loans have been made under the program. History is unfortunately repeating itself, however. Recently, we reported on rules from the Trump administration that bar government agencies from making loans to individuals who are not citizens. While the SBA for other purposes regards only the trust in an ESOP as the legal owner, it has decided for these purposes to look through the trust when making a loan. That means that if even one ESOP participant is not a US citizen, the loan cannot be made. Bankers who have worked with the SBA on ESOP loans tell us this has effectively killed the program. The SBA was never a significant funder of ESOPs when it was making loans, but the program could have been an important part of the ESOP financing landscape had it been fully implemented. The law also called for an education and outreach program, but only a couple of offices have made any efforts under that program.

Because the law will remain in effect with a new administration, we can only hope that the next administration will change the rules in a way that will reinvigorate the SBA program.