It can, depending on the loan. Under the Community Reinvestment Act (CRA), a business loan of $1 million or less generally counts as small business lending. A larger loan to a small business can count as community development if it keeps or creates jobs for low- or moderate-income people or areas.
The Community Reinvestment Act (CRA) asks banks to meet the credit needs of their whole community, including low- and moderate-income areas. Regulators rate each bank on its record. A loan that finances an employee buyout can count in two main ways.
As a small business loan
A business loan of $1 million or less at origination is generally a small business loan under the CRA. Examiners weigh these loans in the bank’s lending record.
As a community development loan
A loan can also count as community development if it passes two tests.
- Size. The business meets the size standards of certain US Small Business Administration programs, or has yearly revenue of $1 million or less.
- Purpose. The loan creates, keeps or improves permanent jobs for low- or moderate-income people. It can also qualify if the jobs are in low- or moderate-income areas, or in areas a government has targeted for redevelopment.
An employee buyout that keeps a business and its jobs in a community may meet the purpose test. Examiners judge the facts of each loan. A large bank usually can’t count the same loan as both a small business loan and a community development loan.
Lending through partners
Loans to and investments in community development financial institutions (CDFIs) that finance small businesses are presumed to promote economic development. Some CDFIs specialize in financing employee buyouts.
Who decides
Only a bank’s regulator decides what counts, at its CRA exam. CRA rules change over time, so a bank should confirm how its examiners will treat a specific loan.
Where to look
The Grid by Zolidar lists lenders, including CDFIs, and programs that finance moves to employee ownership.
This is general education, not legal, tax or investment advice.