If a creditworthy small business in Eastern Kentucky is struggling to access capital, there’s a government-backed program that may be able to help. 

One such program is the Kentucky Small Business Credit Initiative (KSBCI). The KSBCI aims to increase lending opportunities and improve terms for small businesses by reducing the risks incurred by private lenders. 

The KSBCI operates through partnerships with private lenders, backs loans with credit enhancements, and invests program funds as a share of the loan. 

Since 2019, participating lenders closed $178.2 million in total loan volume, of which $22 million was KSBCI-supported. The program reported $55 million in closed loan volume in the second quarter of 2022, of which $8.6 million was KSBCI-funded. 

The Jobs Act of 2010 initially allocated $15.5 million to Kentucky as part of the US Treasury State Small Business Credit Initiative (SSBCI). The American Rescue Plan Act (ARPA) reauthorized the SSBCI in 2021 with $82 million in funding. 

Today, KSBCI counts on a larger pool of funds than ever before. As a result, the program will be able to support hundreds more small businesses seeking funding throughout the Commonwealth. 

How the KSBCI works

We’re highlighting 2 credit enhancement programs powered by the KSBCI that EKY entrepreneurs should become familiar with:

• Collateral Support Program (KYCSP)
• Loan Participation Program (KYLPP)

KY Collateral Support Program

When a lender determines that a small business is creditworthy — but doesn’t have enough collateral to secure the loan — KYCSP can step in. 

KYCSP furnishes up to 20% of the collateral requirements, typically from a cash position. 

It’s up to the lender to decide whether to approve or reject borrowers. The Kentucky Cabinet for Economic Development (CED) and the Kentucky Economic Development Finance Authority (KEDFA) won’t get involved with the credit decision, underwriting, or terms — unless the state’s participation exceeds $250,000. 

KYCSP is available for fixed assets financing only. Borrowers can’t use it for working capital or line of credit loans. The applicant business must occupy at least 51% of the commercial real estate they’re financing. Any other building tenants must be commercial. 

Loan terms tend to align closely with existing SBA lending programs. 

Borrowers must be able to demonstrate existing equity investments in the project.

KSBCI Loan Participation Program 

KYLPP increases opportunities for borrowers who may not have enough cash flow to qualify for the loan amount they’re seeking. 

The program purchases up to 20% of the loan amount issued by the private lender. Then, it provides an interest-free grace period to the borrower for up to 24 months. 

Note that the borrower immediately enters repayment for the remaining loan amount (80%+ of the loan principal). 

In an ideal scenario, the borrower will leverage the KYLPP investment during the grace period to increase their cash flow. Once the 24 months are up, they should be in a stronger position to start making monthly payments for the CED portion of the loan. 

As with other KSBCI programs, it’s up to the private lender to make the credit decision. Borrowers must demonstrate they’ve made equity investments in the business. The loan terms are negotiable, including collateral requirements. 

In some cases, the CED will share the first position with the original lender on collateral.

Finding a KSBCI lender

Lenders wishing to participate in the KSBCI must first enroll in the program. Accredited institutions, such as banks, credit unions, and CDFIs, are eligible.

Kentucky currently has 50 banks, one credit union, and 4 CDFIs participating in the KSBCI at this time. Every county has at least 3 participating lenders. Review the listings on the CED website to find one near you. 

How to seek KSBCI funding

Small business owners seeking funding should consider the KSBCI for their capital stack. Terms tend to be more favorable, and your chances of acceptance will typically be higher. 

Determining eligibility 

Finding out if your business is eligible for a loan is fairly standard no matter who your funder is. Traditional banks, CDFIs, and other KSBCI lenders will perform due diligence to understand your financial situation before making a credit decision. 

Preparing to work with a KSBCI lender 

Before reaching out, small business owners must ask: am I prepared to engage with a lender? 

When determining eligibility, lenders have specific requirements that borrowers must complete. These requirements take time to complete, so it’s helpful to start working on them well before your next funder meeting. 

Follow these 3 steps to impress lenders with your preparedness. 

Step 1: Write a business plan 

Every lender will ask to review your business plan. As a summary of your company’s objectives and how you plan to achieve them, it’ll answer many questions your lender will have about the feasibility of your business idea. 

Don’t have a business plan yet? Don’t worry! SOAR Innovation can help. It’s 1 of 6 complimentary direct services we offer to Eastern Kentucky entrepreneurs. 

Step 2: Prepare your budget and financial forecast 

If you don’t have hard data to back up your funding request, it will be difficult to make your case.

Budgeting and reporting are core activities for any small business. Letting these tasks fall off your to-do list can be easy, but measuring performance pays off when you have rich data to share with your potential funders. 

Step 3: Get ready for due diligence 

Due diligence is an investigation into your business. The process aims to rule out any liabilities to the investor, such as over exaggerations of company performance, debts, litigation, or patent violations. 

Be prepared to hand over documentation for the lender’s review, such as:

• Cash flow statements
• List of business assets
• Company debts
• Contracts with other businesses
• Patents or provisional patents 
• Conflicts of interest
• Information on any current or impending lawsuits

Reach out to SOAR Innovation for support 

The SOAR Innovation team is here to support your funding journey. 

If you’re trying to launch and improve your business, reach out to learn more about our free direct services.

SOAR Innovation is powered by KY Innovation.