Loan Participation FAQ’s
The USBGI’s Loan Participation Program enables small businesses to obtain short to medium-term financing, usually in the form of construction or bridge loans, to help them grow and expand their businesses.
The loan Participation Program is structure in two ways: purchase transactions, also known as purchase participation, in which USBGI purchases a portion of a loan originated by a lender; and companion loans, also known as co-lending participation or parallel loans, in which a lender originates a senior loan and USBGI originates a second (usually subordinate) loan to the same borrower. This program enables USBGI to act as a lender, in partnership with a financial institution lender, to provide small business loans at attractive terms.
USBGI bears losses up to the amount of its participation. USBGI may also participate in costs of workout as negotiated with the lender. The lender has no recourse against USBGI in case losses exceed recoveries.
What percentage of the loan can USBGI Participate?
USBGI will target purchases or issue loan participations from 10% to 30% of the total loan amount; a private lender must have at least 50% of its own capital at risk.
How does the loan participation program work?
USBGI’s Loan Participation Program works in one of two ways: 1) purchase transaction loans, whereby USBGI purchases a participation in a loan that is issued by a financial institution lender; or 2) co-lending participation, companion loans, or parallel loans, whereby USBGI makes a loan alongside a financial institution lender loan. Typically USBGI’s loan is subordinate to the lender’s loan in terms of collateral priority.
What happens in the case of default?
An agreement between participating lenders and USBGI will define each party’s responsibilities in situations involving default, charge-off, and liquidation. If USBGI has a subordinate position, the lender has the first claim to all recoveries until its losses are covered.
What is the role of the USBGI?
- Establishes an agreement with the lender specifying who is responsible for servicing, modifying, reporting, and collecting loans.
- Conducts outreach to inform lenders, small businesses, and trade associations of the program.
- Verifies the eligibility of individual loans, which includes confirming borrower eligibility requirements and certifying that proceeds will be used for acceptable business purposes.
- Has direct lending responsibilities, including underwriting loan participation purchases and companion loans and ongoing loan monitoring and reporting.
What is the role of the Lender?
- Submits participation applications and underwriting to USBGI for review/approval, and obtains assurances of eligibility from each borrower.
- For participation loans, the senior financial institution lender generally has few or no responsibilities to the subordinate USBGI loan once the loan has closed unless spelled out in an inter-creditor agreement.
- In purchased participations, the financial institution lender’s role is written into the participation agreement.
- In each case, the financial institution identifies potential opportunities for USBGI’s participation.