States Witness Unprecedented Demand for Low-Interest Loan Programs

By Andi Anderson

The dawn of the new year saw Missouri Treasurer Vivek Malek launching a state-subsidized, low-interest loan program, earmarking approximately $120 million for small businesses, farmers, and affordable housing developers. The response was staggering, with Malek forced to halt applications within six hours due to an overwhelming $119 million in requests. 

This surge in demand is not exclusive to Missouri. Across the nation, states like New York, Illinois, and Montana witness a notable uptick in public interest for little-known programs utilizing state funds to catalyze private investment through budget-friendly loans. 

The catalyst for this surge stems from a series of Federal Reserve interest rate hikes, making virtually all loans more expensive. To counteract the impact, states adopt linked-deposit programs, depositing money in banks at below-market interest rates. Leveraging these funds, banks provide short-term, low-interest loans to specific borrowers, ranging from farmers to small businesses. 

The benefits are significant, with interest rates for borrowers reduced by an average of 2-3 percentage points, resulting in substantial savings. States, armed with pandemic-era surpluses, find themselves with ample funds to deposit in banks, further fueling the popularity of these programs. 

While some states are reviving programs shelved during periods of low interest rates, others are considering expansions. In Missouri, the linked-deposit loan program is nearing its statutory cap of $800 million, prompting calls for an increase to $1.2 billion to accommodate the high demand. This expansion, though potentially costing the state $12 million in earnings, aims to bolster economic activity generated from these loans. 

The trend extends to other states like Montana, Iowa, Kansas, and Ohio, signaling a broader shift in financial strategies as states explore innovative ways to support businesses, farmers, and affordable housing initiatives in a challenging economic landscape.

Photo Credit: gettyimages-d-keine