The Ohio Department of Development’s Collateral Enhancement Program (CEP) was created to facilitate increased lending by banks to small businesses and minority-owned businesses that need access to capital for growth or expansion. The CEP is designed to enable financing that might otherwise be unavailable because of a collateral shortfall. The program supplies pledged cash collateral deposit accounts (or allocations for credit unions and Community Development Financial Institutions) to lending institutions to enhance collateral coverage of individual small business loans. The program is designed to target certain situations in which there is insufficient collateral shortfall value to make the loan.
CEP Frequently Asked Questions
What types of businesses are eligible for the program?
- Corporations, partnerships, LLCs, and sole proprietorships (subject to restrictions as set forth below).
- Small businesses with fewer than 250 employees.
- Small businesses that are creating or retaining jobs ($50,000 CEP deposit per one full-time equivalent job).
- Small businesses with revenues equal to or less than $20 million.
- Ohio businesses (principal place of business and activity in Ohio).
- New or existing businesses (if owners of food services have a minimum of two years of recent food service management experience and franchise owners must have operated a franchise during the most recent two years).
What types of businesses are ineligible for the program?
- Firms involved in real estate investment, speculative activities, lending or leasing activities, pyramid sales, illegal activities, gambling activities, charitable institutions, religious institutions, consumer and marketing cooperatives, and other nonprofits.
- Small businesses whose principal of the business has been convicted of a sex offense against a minor.
What are the Cash Collateral Deposit limits?
- The maximum Cash Collateral Deposit amount for fixed-asset loans is $500,000.
- The maximum Cash Collateral Deposit amount for working capital loans is $500,000.
- The $500,000 maximum deposit limit is the total for a business, its owners active in the business, its guarantors, and the aforementioned parties’ related entities: "related entities" means 1) have significant common purposes and substantial common direction or control; 2) exhibit an ownership structure in which either entity owns (directly or through one or more entities) a 50% or greater interest in the capital or profits of the other; or 3) other determinations made by the Ohio Department of Development.
- There are no minimum deposit amounts.
What are the Cash Collateral Deposit percentages?
Up to 30% of the loan amount for real estate, equipment, and working capital loans up to the maximum cash collateral deposit limits, unless the business is a food service business or franchise, in which case the limit is up to 15% of the loan amount.
Are there increased Cash Collateral Deposit percentages for targeted businesses?
Yes, the deposit percentage is up to 50 percent of the loan amount if the loan is to a minority-owned business certified with the state of Ohio.
What are the loan limits?
- Maximum Lender loan amount is $5 million.
- Minimum loan amount for working capital lines of credit is $35,000.
What are the eligible uses of loan proceeds?
- Loans can be used for short-term or long-term owner-occupied commercial real estate purchases, expansions, or renovations.
- Equipment purchases (new or used).
- Leasehold improvements, working capital, inventory purchases or rolling stock.
- Refinancing of another Lender's debt, startup costs, franchise fees, or other business purposes.
- A lender's new extension of credit that repays the amount due on a matured loan or line of credit when all the following conditions are met: The new loan or line of credit includes the advancement of new funds to a small business borrower, excluding closing costs:
- The new credit supported with CEP funding is based on a new underwriting of the small business’ ability to repay and a new approval by the lender/investor.
- Proceeds from the new credit may be used only to satisfy the outstanding balance of a loan or line of credit that has already matured or otherwise termed and the prior debt was used for an eligible business purpose, as defined by the SSBCI Policy Guidelines.
- The new credit has not been extended for the sole purpose of refinancing existing debt owed to that same financial institution lender. (There must be a benefit to the business.)
- Real estate holding companies when all of the following conditions are met:
- Proof the operating company is a guarantor or co-borrower on the CEP-supported loan to the eligible real estate holding company.
- The real estate holding company and the operating company are eligible small businesses that meet all CEP criteria; 100% of the rentable property acquired or refinanced using proceeds from the CEP must be leased to the operating company. An operating company may sublease no more than 49% of the total rentable space (in the case of an existing building) to one or more unaffiliated tenants (no more than 40% in the case of new construction).
- Both the eligible real estate holding company and the operating company must complete the CEP Borrower Certification Form.
- Proof each natural person holding an ownership interest constituting at least 20% of either the eligible real estate holding company or the operating company provided a personal guarantee for the CEP supported loan.
- The eligible real estate holding company and the operating company have a written lease with a term at least equal to the term of the CEP supported loan, including options to renew exercisable solely by the operating company.
What are the ineligible uses of loan proceeds?
- Loans cannot be made in order to place under the protection of the CEP prior debt that is not protected under the CEP and is or was owed by the Borrower to the Lender or to an affiliate of the Lender.
- Loans cannot be used for refinancing a current Lender’s existing debt.
- Loans that have a Lender risk exposure of less than 20%.
- Goodwill and owner’s credit card debt.
- A change of business ownership; permitting the reimbursement of funds owed to any owner, including any equity injection or injection of capital for the business' continuance.
- Repaying delinquent state or federal withholding taxes or other funds that should be held in trust or escrow.
- Financing a non-business purpose.
- Guaranteeing the unguaranteed portion of an SBA or other federally guaranteed loan.
- Residential purchase, construction, or development.
- Passive real estate investment.
- Loans that cannot demonstrate a collateral value shortfall or loans that have no collateral (i.e. the CEP cannot be the only collateral with value for the loan).
What is the loan and CEP term?
- The maximum length of the CEP deposit/allocation is five years.
- The maximum term for a real estate loan is 15 years. (Balloon amortization schedules are acceptable.)
- The maximum term for equipment loans is seven years. (Balloon amortization schedules are acceptable.)
- The maximum term for short-term working capital loan is one year and can be renewed for no more than two additional years.
- There are no minimums.
- Only one CEP deposit/allocation per business within a 12-month period. (A business may receive a CEP deposit/allocation for a line of credit and a term loan if the lender provides the two loans simultaneously.)
What is the interest rate on the loan?
Loans may be made with such interest rate, fees, and other terms and conditions as Lender and Borrower agree.
What are the Borrower's costs?
- The Borrower pays a fee equal to 2% of the cash collateral deposit at closing. This fee is waived until Dec. 31, 2021. This fee can come from loan proceeds.
- The Borrower provides a minimum of 10% equity on real estate (purchases, renovations, and leasehold improvements) and equipment financing transactions.
- Borrower pays all other Lender application and closing costs.
Are there other Borrower requirements?
- Yes, the Borrower must create or retain jobs as a result of the CEP loan. The CEP's job to deposit ratio target is $50,000:1.
- The Borrower's historical or projected debt coverage ratio should be at minimum 1.2:1.
Who negotiates the terms of the loan?
Interest rates, maturity, and other loan terms are negotiated between the Borrower and the Lender.
Who originates loans in the program?
- Lenders are responsible for loan origination and reporting, as required by the Ohio Department of Development.
- Ohio Department of Development or its network partners may refer businesses to Lenders.
Who has underwriting responsibility?
Lenders have responsibility for loan underwriting.
What Lenders are eligible?
- Lenders whose principal has not been convicted of a sex offense against a minor.
- Banks that are not operating under any supervisory enforcement action.
Who applies for the CEP Cash Collateral Deposit?
- The Lender submits a CEP application to the Ohio Department of Development for the Cash Collateral Deposit and attaches the proposed loan write-up, risk rating justification, appraisals or other collateral valuations, CEP Borrowers Certification, purchase agreements, cost estimates, and proof of minority business certification, if applicable.
- Borrowers must complete a lending institution's standard loan application.
What reporting is required?
- Lenders must report the loan status (balance, delinquency, etc.) on an annual basis.
- The Ohio Department of Development will generate the annual report and send to Lender for completion.
- Borrowers may report on employment activity.
What happens if the Borrower defaults?
- In the event of default, a Lender must exhaust all allocation efforts (foreclosure, liquidation, etc.) prior to filing a claim on the CEP deposit account or allocation amount.
- The Lender has 120 days after the last collection effort to file a claim.
- The maximum claim amount is the deposit/allocation percentage of the outstanding principal balance after liquidation proceeds are applied.
1. The Collateral Enhancement Program was funded by the State Small Business Credit Initiative, a program of the U.S. Department of the Treasury and the Small Business Jobs Act of 2010.
2. "Principal" is defined as "If a sole proprietorship, the proprietor; if a partnership, each managing partner and each partner who is a natural person and holds a 20% or more ownership interest in the partnership; and if a corporation, limited liability company, association, or development company, each director, each of the five most highly compensated executives or officers of the entity, and each natural person who is a direct or indirect holder of 20% or more of the ownership stock or stock equivalent of the entity."