SB3165

SECTION 1. The legislature finds that access to affordable, right-sized credit is essential for small business formation, survival, and expansion in the State's geographically isolated and high-cost economy. Small businesses, particularly startups, sole proprietors, and very small employers, depend on smaller-dollar loans to finance working capital, equipment, inventory, leasehold improvements, and early operating expenses.

The legislature further finds that publicly available data from the United States Small Business Administration (SBA) indicate that a substantial share of SBA-backed loans made to Hawaii businesses are originated by lenders headquartered outside the State, rather than by Hawaii-based banks and community lenders. This pattern reflects limited local capacity for smaller-dollar lending and constrained lender risk tolerance in the absence of credit enhancement tools.

The legislature further finds that when small business credit is primarily originated by out-of-state lenders, interest payments, fees, and servicing revenues are more likely to leave the State, reducing the local economic multiplier effect that would otherwise occur if those dollars were retained and reinvested through local financial institutions. Over time, this dynamic contributes to capital leakage from the State and weakens the State's locally rooted small business financing ecosystem.

The legislature further finds that limited availability of locally delivered micro-loans increases financial risk for Hawaii entrepreneurs. In the absence of sufficient micro‑lending capacity among local lenders, small businesses may be forced to rely on higher-cost or riskier credit products, accept less favorable loan terms, or delay business formation, expansion, and hiring altogether. These constraints disproportionately affect early-stage businesses, rural communities, and neighbor islands.

The legislature recognizes that other states have successfully addressed similar capital access challenges through state-supported loan loss reserve and credit enhancement programs that share risk with lenders while leveraging private capital. In particular:

(1) California operates a long-standing small business capital access program that establishes loan loss reserve accounts funded by borrower and lender contributions matched by the state, enabling lenders to extend credit to small businesses that would not otherwise qualify on comparable terms;

(2) Colorado administers a credit reserve program that uses borrower fees and state matching contributions to capitalize lender-held reserve accounts that absorb first losses on enrolled loans, expanding access to smaller-dollar loans while preserving prudent underwriting standards and voluntary participation; and

(3) Florida operates a state capital access program that similarly establishes loan loss reserve accounts through borrower and lender contributions matched by the state; demonstrating that credit enhancement models can be successfully deployed in tourism-driven, small-business-dominated economies with significant seasonal cash-flow variability—conditions that closely mirror Hawaii's economic structure.

The legislature further finds that these programs are effective because they are market-based, voluntary, and fiscally disciplined, leveraging private lending rather than replacing it and expanding access to credit without imposing mandates on lenders.

Accordingly, the purpose of this Act is to strengthen the State's small business financing ecosystem by establishing a state-supported micro-lending credit enhancement program that expands local lending capacity, retains more financial activity within the State, reduces reliance on higher-risk borrowing options, and improves access to affordable, appropriately sized capital for entrepreneurs in the State.

SECTION 2. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

hawaii Micro-Lending credit enhancement program

§ -1 Definitions. As used in this chapter:

"Credit enhancement" means a loan loss reserve, first-loss reserve, partial guarantee, or other risk-sharing mechanism approved by the department to encourage lending that would not otherwise occur on comparable terms.

"Department" means the department of business, economic development, and tourism.

"Eligible lender" means a state- or federally-chartered bank, savings bank, credit union, certified community development financial institution, or other financing entity approved by the department that originates and services business loans in the State.

"Micro-loan" means a business loan with an original principal amount not to exceed $ , as determined by the department by rule.

"Qualified borrower" means a for-profit small business that:

(1) Is authorized to do business in the State;

(2) Maintains its primary operations in the State; and

(3) Meets size standards as determined by the department by rule.

§ -2 Hawaii micro-lending credit enhancement program; established. (a) There is established within the department the Hawaii micro-lending credit enhancement program to encourage eligible lenders to increase the availability of micro-loans to qualified borrowers through state-supported credit enhancement.

(b) Participation by lenders and borrowers shall be voluntary. Nothing in this chapter shall be construed to require an eligible lender to make any loan or alter prudent underwriting standards.

§ -3 Credit enhancement mechanisms; loan loss reserves. (a) The department may provide credit enhancement through one or more of the following mechanisms:

(1) Loan loss reserve accounts established with participating eligible lenders;

(2) First-loss reserve arrangements that absorb a portion of initial losses on qualified micro-loans; or

(3) Other risk-sharing mechanisms approved by the department that are consistent with recognized state small business credit enhancement practices.

(b) The department may require, as a condition of participation, that:

(1) A borrower pay a fee of up to one per cent of the micro-loan principal, which shall be deposited into a lender-held loan loss reserve account; and

(2) The program provide a matching contribution, in an amount determined by the department, deposited into the same reserve account.

(c) Funds in a loan loss reserve account shall be used solely to cover losses on qualified micro-loans in accordance with program guidelines established by the department.

§ -4 Eligible uses; exclusions. (a) Qualified micro‑loans may be used for standard business purposes, including working capital, equipment, inventory, leasehold improvements, and other uses approved by the department.

(b) The department shall establish by rule any exclusions necessary to protect the integrity of the program.

§ -5 Administration; rules; contracts. (a) The department shall administer the program and may adopt rules pursuant to chapter 91 to implement this chapter.

(b) The department may contract with a qualified third‑party program administrator to support lender enrollment, reserve administration, compliance monitoring, and reporting.

§ -6 Hawaii micro-lending credit enhancement special fund. (a) There is established in the state treasury the Hawaii micro-lending credit enhancement special fund.

(b) The following shall be deposited into the special fund:

(1) Legislative appropriations;

(2) Moneys received from the federal government;

(3) Grants, awards, donations, gifts, transfers, or money derived from private sources;

(4) Moneys received pursuant to the program; and

(5) Interest earned or accrued on moneys in the special fund.

§ -7 Reporting. No later than twenty days prior to the convening of each regular session, the department shall submit a report to the legislature detailing:

(1) The number and dollar amount of micro-loans supported;

(2) Participating lenders;

(3) Geographic distribution of loans;

(4) Reserve contributions, claims, and recoveries; and

(5) Estimated private capital leveraged per state dollar."

SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2026-2027 to be deposited into the Hawaii micro-lending credit enhancement special fund.

SECTION 4. There is appropriated out of the Hawaii micro‑lending credit enhancement special fund the sum of $ or so much thereof as may be necessary for fiscal year 2026-2027 for the Hawaii micro-lending credit enhancement program.

The sum appropriated shall be expended by the department of business, economic development, and tourism for the purposes of this Act.

SECTION 5. This Act shall take effect on July 1, 2026.

INTRODUCED BY:	_____________________________

THE SENATE	S.B. NO.	3165
THIRTY-THIRD LEGISLATURE, 2026
STATE OF HAWAII