Illinois among states expanding low-interest loans for farms, businesses and new housing
JEFFERSON CITY, Mo. — On the first business day of the new year, Missouri Treasurer Vivek Malek began accepting applications for about $120 million of state-subsidized, low-interest loans to small businesses, farmers and affordable housing developers.
Within six hours, Malek had so many requests for the money that he had to cut off applications.
“The demand is huge, and it is real,” Malek said.
Missouri’s situation, though extreme, is not entirely unique. From Illinois to New York to Montana, states have seen surging public interest in little-known programs that use state funds to spur private investment with bargainpriced loans. The programs have taken off after a series of key interest rate hikes by the Federal Reserve made virtually all loans more expansive, whether for farmers purchasing seed or businesses wanting to expand.
To combat inflation in consumer prices, the Fed raised its benchmark interest rate 11 times from March 2022 to last July, setting it at a two-decade high.
Under so-called linked-deposit programs, states deposit money in banks at below-market interest rates. Banks then leverage those funds to provide short-term, low-interest loans to particular borrowers, often in agriculture or small business. The programs can save thousands of dollars for borrowers by reducing their interest rates by an average 2-3 percentage points.
States typically cap the amount of money available for such discounted rates at either a flat dollar amount or a percentage of their total fund balances, because the programs result in less earnings for the state.
Though most states don’t currently offer such programs, some that shelved them when interest rates were low are now considering whether to revive them to aid financially-strapped businesses and residents.
“I can say in talks with other state treasurers that there is a definite increased interest in treasury money, whether that is through a linked-deposit program or a different vehicle,” said Illinois Treasurer Michael Frerichs, who is president of the National Association of State Treasurers.
Illinois has nearly $950 million of deposits linked to low-interest loans for farmers, businesses and individuals. That’s up substantially from past years. In 2015, Frerichs said, the state’s agricultural investment program had just two low-interest loans. By 2022, that had grown to $51 million of loans. Last year, Illinois made $667 million of low-rate deposits for agricultural loans.
With rising demand, Frerichs recently raised the program’s overall cap from $1 billion to $1.5 billion.
Though smaller in scope, New York’s program also has seen an explosion of applicants.
In 2022, New York had 42 applications for state deposits in financial institutions linked to $20 million in low-interest loans. Last year, that rose to 317 applications linked to more than $220 million of loans, said Rafael Salaberrios, a senior vice president who manages capital access programs at Empire State Development, New York’s economic development agency.
“As the banks see the benefit, they are inundating us with applications — and that’s a good thing,” Salaberrios said.
Texas Agriculture Commissioner Sid Miller said he hadn’t approved any linked deposits for low-interest loans since taking office in 2015 — until last year, when he approved his first two.
“There wasn’t much need because interest rates were cheap,” Miller said.
“But now that the rates are up,” Miller added, “it could be a viable program, and we could help some people.”