CCI’s mission as a Community Development Financial Institution or CDFI, challenges us to work with Southern Illinois small businesses that may not be ideal candidates for mainstream bank loans. In response to that challenge, CCI has developed growing working relationships with area banks that have made lending to sub-prime businesses more realistic.
Entering into loan participations with local commercial lenders including banks and credit unions is emerging as a dominant trend in CCI lending. These commercial bank relationships have been increasing in both the number of loans to area businesses as well as the number of banks CCI has been able to work with.
Currently, CCI enjoys constructive working relationships with over a half dozen Southern Illinois commercial lenders, with most of these lenders partnering with CCI on multiple deals. Most typically, those commercial lenders call CCI to determine if there might be interest in participating in a project that was presented to them by a local business.
To illustrate how these bank participation loans work, here’s an example:
The owners of a Mount Vernon business want to expand the size of their building and product line. They need $200,000 to accomplish those goals. Their local bank is willing to lend $150,000, which leaves a $50,000 gap in the financing needed. The commercial loan officer at the bank, seeking to reduce the bank’s risk on the deal, calls CCI to inquire about our interest in participating in the loan. With the prior consent of the applicant, CCI is able to use the bank’s application and underwriting. If there is sufficient room for CCI in the collateral provision, CCI may very well be able to lend the $50,000 in participation with the bank’s $150,000.
There are several benefits to loan participations for the banks and the customer, as follows:
- CCI’s interest rate charged to its customer is a straight 5 percent. We don’t risk-adjust our interest rates. As such, the interest rate charged by CCI is frequently lower than that charged by the bank. The lower interest rate can improve a customer’s ability to service the debt.
- If a loan participation proposal reaches CCI at the right time relative to our monthly board meetings, we have closed these loans in 10 to 14 days with bank assurances.
- CCI has several lending products from our capitalizing sources that can be tailored to the needs of the bank and the customer.
- Our capitalizing sources (primarily USDA) requires a 25 percent injection of other sources into a project. In other words, CCI can’t loan more than 75 percent of a total project’s value. Bank participation almost always exceeds that 25 percent requirement, allowing a prospective participation loan to clear that regulatory hurdle.
- Partnering with CCI as a CDFI on projects in distressed census tracts can gain CRA consideration for banks.
Bank participation loans with CCI are a rapidly growing component of CCI’s portfolio and a positive direction as CCI continues to help small Southern Illinois businesses gain access to the capital resources they need. CCI, as well as our funding colleagues at USDA’s Rural Development, encourage bank participation loans as an effective partnership tool that helps more small businesses throughout the region.