States expand low-interest loan programs for farms, biz, new housing

>> 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 New York to Illinois to Montana, states have seen surging public interest in little-known programs that use state funds to spur private investment with bargain-priced loans. The programs have taken off after a series of key interest rate hikes by the Federal Reserve made virtually all loans more expensive, 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. Many states have built large surpluses from pandemic-era revenues, meaning they have more money available to deposit in banks.

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 lowrate deposits for agricultural loans.