ESOP Lending: A Former Bankers Insight on the Huge Opportunity Bankers are Missing

By Scott Leach

The average banker’s lack of knowledge about employee stock ownership plan (ESOP) lending, especially regarding the productivity of the use of funds, is inhibiting business deals that could be lucrative for banks. During my former career in personal and commercial banking spanning more than10 years over three different banks, I never was approached with an inquiry or request regarding ESOP financing. It was not a part of our commercial lending training. As a result, I was not actively seeking these type of loans. It was not even a topic of conversation when my clients were discussing their business succession plans.

The shortfall of information about ESOPs in the banking industry is a whole discussion on its own, outside the scope of this short article. In researching this topic, I uncovered an even more precarious reality. Bankers and credit officers with only a scant awareness of ESOPs sometimes view ESOP financing as unproductive and high-risk debt. However, recent research by the NCEO clearly contradicts this thinking. This lack of knowledge is not only disappointing, but also it is a missed opportunity. Misinformation and preconceived notions threaten local communities, privately held companies, and in general the future growth of employee ownership.

In a traditional banking sense, the concept of taking on new debt in a leveraged ESOP transaction would appear to be “unproductive” because cash immediately leaves the business to purchase stock from an existing owner without a corresponding increase in company assets. Credit officers are always critical of the intended use of proceeds in lending, and rightfully so, because they expect a “productive” use (such as funding purchase orders, working capital, buying inventory, equipment, machinery, real estate, etc.), which drives business growth, solvency and continuity. When the funds are used in a “productive” manner, it conceptually makes the business less likely to default on the debt, which is of course a primary driver in business lending decisions. After all, the “productive” debt should not only increase company earnings, but serve as excellent collateral for the bank.

This traditional argument falls flat because of the assumption an investment in an ESOP-owned company is “unproductive.” If you ask the average business owner what he or she considers their greatest asset, the most likely answer is “our employees.” Financing an ESOP is an investment in human capital as well as the long-term success of the borrowing business.


ESOP companies:

  • The default rate on bank loans to ESOP companies during the period 2009-2013 was 0.2 percent annually, and by contrast, mid-market companies in the U.S. typically default on comparable loans at an annual rate of 2 to 3.75 percent. 1
  • Are 25 percent more likely to stay in business; 2
  • Increase sales by about 2.3-2.4 percent per year; 2
  • See average yearly post-ESOP improvement in return on assets of +2.7 percent; 2 and
  • Have comparatively high employee retention (1.3 percent of employees with employee stock ownership were laid off in 2014 compared to a 9.5 percent rate for employees without employee stock ownership. In 2010, during the Great Recession, the numbers were 2.6 percent and 12.3 percent, respectively). 3

The NCEO has collected plenty of data to support this argument, demonstrating why ESOP financing should be viewed as productive debt. This investment drives innovation, creates an ownership culture, instills loyalty while reducing turnover, increases productivity, redistributes wealth and creates a lasting legacy. For a bank, the lower default risk and increased growth are clear financial incentives to learn more before a blanket dismissal of ESOP financing should be made. Senior lenders should also take stock of the situation at the company. In many cases, the situation involves a large shareholder near retirement who is looking for liquidity. In most alternative transactions, the banking relationship and wealth creation leave the current bank and local community, resulting in lost lending opportunities, lost wealth management opportunities, and other lost sources of revenue.

Fortunately, many of the nation’s largest banks have seen the opportunities they had been missing and have set up dedicated teams within their commercial banking divisions to actively seek out ESOP loans. However, there are still numerous banks, both national and regional, who are unaware of or are unnecessarily biased against ESOP financing. Indeed, this is a very lucrative market for bankers, which is characterized by: 1) large loan amounts; 2) debt that is statistically less likely to default;3 3) allowance for personal guarantees and requirements for collateral coverage; 4) market rates; and 5) loans that serve the greater purpose of reinvestment in community well-being.

It is important to present fact-based information to the banking community regarding the productive nature of ESOP financing. With better information, more banks could benefit from selling ESOP loans. A number of banks attended the recent NCEO conference in Atlanta, both large and small; apparently, this movement is gaining traction.

ESOP financing is a fantastic opportunity for banks to make fiscally conscious decisions and take on statistically low-risk debt that support business succession, employee ownership and the redistribution of capital wealth in the communities in which they serve. The Beyster Institute intends to continue this education initiative by hosting seminars specifically for the banking community and by continuing our proactive outreach to commercial loan officers both local and nationwide.


  1. Employee-Owned S Corporations of America. July 8, 2014. Employee-Owned Companies Default One-Tenth as Often as Other Businesses. Retrieved on April 25, 2018, from:
  2. National Center for Employee Ownership. Research on Employee Ownership, Corporate Performance, and Employee Compensation.” Retrieved on April 24, 2018, from:
  3. National Center for Employee Ownership. The Economic Power of Employee Ownership. Retrieved on April 24, 2018, from:

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