Prospecting for a Niche Commercial Borrower? An ESOP Loan Might Be Your Punch

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“ESOP” loans can be both an “exit” strategy for a company in distress (and its lenders), and an “entrance” opportunity for lenders targeting the right prospect.  Lending to an ESOP company can hit the mark coming (good times) and going (tough times): a one-two combination.

                                                                                   

The formula behind high-level statement, however, includes a deadly work: taxes.

So, I reached out to Lori Oliphant for some guidance.  (The residual value of my four tax courses in law school [yes, four] is summed up in the recognition of what I no longer know.)

Lori’s first words for me weren’t the knock-out combination of tax slang expected by me.  Instead, her first comment lulled me in, and then her follow up question got me to lean in further - yes, I fell for  the “rope-a-dope” -

  • As a lender, you are constantly scrutinizing whether loans to certain parties are economically feasible; right?
  • But, what lender can resist a borrower with increased debt capacity and a lower default rate; right?

Right on.

Here is Lori’s explaination:

An employee stock ownership plan, or ESOP, is, first and foremost, a tax-qualified retirement plan. However, it is often regarded as a vehicle of corporate finance.

This is due to the fact that the plan sponsor or other interested parties (such as selling shareholders) may lend money directly to the plan or may guarantee a loan made by a third party (such as a bank) to purchase shares of company stock.   In turn, this has at least these two attractive features:

  •  The contributions made by the plan sponsor to the ESOP are made on a tax-deductible basis and are used to repay the loan. 
  • In addition, if the shares being sold to the ESOP are shares of C corporation stock and other requirements are satisfied, then the selling shareholder may elect to defer his or her taxable gain on the sale. 

Both of these features will likely become more enticing to employers in the event of a future increase in income tax rates.

Lori makes it simple: ESOPs loans could be a good niche to target.

Next round with Lori: but how do loans to ESOP companies fare in the tough times?


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Winstead PC | Attorney Advertising

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