# COMAR Title 24 — Department of Commerce

## Subtitle 05 — Economic Development

### Chapter 07 — Small Business Development Contract Financing Fund

**Authority:** Economic Development Article, §2-108 and Title 5, Subtitle 5, Annotated Code of Maryland

**Administrative History:** Effective date: April 3, 1989 (16:6 Md. R. 730)

**Administrative History:** Regulation .03B amended effective August 3, 1992 (19:15 Md. R. 1394)

**Administrative History:** Regulation .04 amended effective February 18, 2002 (29:3 Md. R. 223)

**Administrative History:** Regulation .06 amended effective April 16, 1990 (17:7 Md. R. 853)

**Administrative History:** Regulation .07A and H amended effective August 3, 1992 (19:15 Md. R. 1394)

**Administrative History:** Regulation .08A amended effective August 3, 1992 (19:15 Md. R. 1394)

**Administrative History:** Regulation .09 amended effective August 3, 1992 (19:15 Md. R. 1394)

**Administrative History:** Regulation .11 amended effective August 3, 1992 (19:15 Md. R. 1394)

**Administrative History:** Regulation .12E adopted effective April 16, 1990 (17:7 Md. R. 853)

**Administrative History:** Regulation .18 adopted effective April 15, 1991 (18:7 Md. R. 775)

#### Regulation .01 Purpose.

*COMAR 24.05.07.01*

These regulations prescribe the policies, procedures, and authorizations for assisting socially or economically disadvantaged persons to obtain the financing needed to perform government and public utility contracts.

#### Regulation .02 Objective.

*COMAR 24.05.07.02*

The basic objective of the Program is to guarantee loans or equity investments or to make loans to economically or socially disadvantaged business persons for working capital or equipment needed to perform federal, State, or local government or public utility contracts in order to encourage economically or socially disadvantaged persons to seek and perform these contracts.

#### Regulation .03 Definitions.

*COMAR 24.05.07.03*

A. In this chapter, the following terms have the meanings indicated.

B. Terms Defined.

  (1) “Act” means Economic Development Article, Title 5, Subtitle 5, Annotated Code of Maryland, as amended.

  (2) “Applicant” means a sole proprietor, a partnership, or a corporation applying for financial assistance under the Program.

  (3) "Authority" means the Maryland Small Business Development Financing Authority.

  (4) “Contract” means a contract for a project financed by the federal or State government, a local government, or a utility regulated by the Public Service Commission.

  (5) “Contract Financing Fund” means the Small Business Development Contract Financing Fund.

  (6) “Department” means the Department of Commerce,

  (7) “Direct loan” means a loan made by the Authority under the Program directly to the applicant.

  (8) “Director” means the Executive Director or Deputy Director of the Authority.

  (9) “Equity guaranty” means the Authority's guaranty of an equity investment in the applicant.

  (10) “Financial assistance” means a direct loan or guaranty made by the Authority.

  (11) “Financial institution” means any financial institution as that term is defined in Financial Institutions Article, §1-101(h), Annotated Code of Maryland, as well as any other lender approved by the Authority.

  (12) “Guarantied loan” means a loan made to the applicant by a lender and guarantied by the Authority under the Program.

  (13) “Guaranty” means a loan guaranty or an equity guaranty made under the Program.

  (14) “Guaranty agreement” means the agreement between the Authority and the lender providing for the terms of the Authority's guaranty of a loan or equity investment.

  (15) “Investor” means a person who invests funds in an applicant.

  (16) “Lender” means a financial institution or other lender approved by the Authority.

  (17) “Loan documents” means any instrument or agreement evidencing, securing, or guaranteeing the payment or the repayment of a loan, including by way of example any note, financing statement, mortgage, pledge, assignment, loan and security agreement, or guarantee.

  (18) “Program” means the Contract Financing Program, as authorized by the Act.

  (19) “Project” means the facility to be constructed, or task to be performed, under the contract.

  (20) “Secretary” means the Secretary of Commerce.

  (21) “Working capital” means funds used to pay for the current operations of a business, including, without limitation, supplies, materials, labor, equipment, accounts payable not more than 12 months old, or short-term credit used for working capital such as a bridge loan or revolving line of credit due within 12 months or less. “Working capital” does not include funds used to refinance existing long-term obligations.

#### Regulation .04 Eligible Applicants.

*COMAR 24.05.07.04*

A. The Authority shall be satisfied that the following requirements to qualify for financial assistance have been met by applicants who are sole proprietors and by the owners of at least 70 percent of business enterprises that are not sole proprietorships:

  (1) The applicant is of good moral character;

  (2) As determined from creditors, employers, and other individuals who have personal knowledge of the applicant, the applicant has a reputation for financial responsibility;

  (3) The applicant is a resident of Maryland or the applicant's principal place of business is in Maryland;

  (4) The applicant is unable to obtain adequate business financing on reasonable terms through normal lending channels because the applicant:

    (a) Belongs to a group that historically has been deprived of access to normal economic or financial resources because of race, color, creed, sex, religion, or national origin;

    (b) Has an identifiable physical handicap that severely limits the ability of the applicant to obtain financial assistance, but does not limit the ability of the applicant to perform the contract or other activity for which the applicant would be receiving financial assistance;

    (c) Has any other social or economic impediment that is beyond the personal control of the applicant, such as a lack of formal education or financial capacity or geographical or regional economic distress but that does not limit the ability of the applicant to perform the contract or other activity for which the applicant would be receiving financial assistance; or

    (d) Does not meet the established credit criteria of at least one financial institution; and

  (5) The applicant or owners of the applicant who qualify as socially or economically disadvantaged under §A(4) of this regulation actually control as well as own at least 70 percent of the business enterprise.

B. Establishing Eligibility.

  (1) The applicant's owner may establish the economic impediment of lack of formal education under §A(4)(c) of this regulation by demonstrating that the applicant's owner has not achieved the type or level of academic or vocational training that in the Authority's determination is typical of business owners in the industry in which the applicant is operating.

  (2) The applicant or owners of the applicant may establish the economic impediment of lack of financial capacity under §A(4)(c) of this regulation by demonstrating that the applicant or owners of the applicant do not have the collateral, working capital, positive credit history, or financial experience, training, or expertise that in the Authority's determination is typical of businesses that are able to obtain financing through normal channels.

  (3) The applicant may establish the economic impediment of regional economic distress under §A(4)(c) of this regulation by demonstrating that the applicant is located or operates in areas defined as economically distressed by the State or federal government, or a local government, including:

    (a) Designated Neighborhoods, as designated by the Department of Housing and Community Development pursuant to Article 83B, §4-202, Annotated Code of Maryland;

    (b) Enterprise Zones, as designated by the Secretary pursuant to Article 83A, §5-401, Annotated Code of Maryland; and

    (c) Empowerment Zones, as designated by the federal government pursuant to 26 U.S.C. §1391.

  (4) To qualify as economically disadvantaged under §A(4)(c) of this regulation, each applicant or owner shall have a net worth of $500,000 or less. Net worth is calculated deducting any interest in the business receiving financial assistance from the Authority, and any equity in real estate, including the applicant's or owner's primary personal residence, that is being used for collateral for the financial assistance from the Authority.

C. Applicants shall also meet the following requirements to qualify for financial assistance:

  (1) Be in good standing and qualified to do business in Maryland;

  (2) Have the legal capacity and all necessary legal authorization to incur the obligations of the financial assistance;

  (3) Demonstrate creditworthiness and repayment capability acceptable to the Authority;

  (4) For a direct loan, in the reasonable determination of the Authority, be unable to afford or secure private financing or to obtain other public or private sources of funds needed to perform the contract;

  (5) For a guarantied loan, provide evidence that the applicant has applied for and been denied a loan for the same amount on similar terms by a financial institution;

  (6) For an equity guaranty, show that the investor is not a person who:

    (a) Previously held an equity investment in the applicant;

    (b) Previously participated in the management of the applicant; or

    (c) In any other manner is related to:

      (i) The applicant, or

      (ii) Any of its current stockholders, officers, or other management personnel;

  (7) Demonstrate the capacity to manage the business enterprise for which financial assistance is sought.

#### Regulation .05 Eligible Uses.

*COMAR 24.05.07.05*

The proceeds of the financial assistance shall be used for working capital or for machinery or equipment needed to perform a contract. Machinery and equipment may be financed only if the cost of the equipment can be repaid from contract proceeds and if the Authority has entered into an agreement with the applicant necessary to secure the financial assistance.

#### Regulation .06 Applications for Financial Assistance.

*COMAR 24.05.07.06*

A. To apply for financial assistance under the Program, an applicant shall submit to the Authority an application that includes:

  (1) A detailed description of the project;

  (2) An itemization of known and estimated costs, to include cash flow projections with underlying assumptions on the contract;

  (3) The total amount of investment required to perform the contract;

  (4) The funds available to the applicant without financial assistance from the Authority;

  (5) The amount of financial assistance sought from the Authority;

  (6) Information that relates to the inability of the applicant to obtain adequate financing on reasonable terms through normal lending channels;

  (7) Information that relates to the financial status of the applicant, including:

    (a) A balance sheet dated within 90 days of the application,

    (b) A profit and loss statement dated within 90 days of the application,

    (c) Credit references, and

    (d) Detailed information on the status of outstanding indebtedness including copies of notes, security agreements, and other evidence of obligations;

  (8) Information on available collateral;

  (9) A copy of the applicant's articles of incorporation (filed with the state of incorporation), bylaws, partnership agreement, or other organizational documents;

  (10) A copy of the deeds to all real property offered as collateral; and

  (11) Other relevant information the Authority requests.

B. If an applicant is unable to provide the application information required by §A(1)—(3) of this regulation, the application shall nevertheless be deemed fully completed if the applicant:

  (1) Provides the information required in §A(4)—(11) of this regulation in the application;

  (2) Agrees that before disbursement of any funds for a project, the applicant shall submit to the Director the information required in §A(1)—(3) of this regulation; and

  (3) Requests the Authority to delegate to the Director the review and approval of the information required in §A(1)—(3) of this regulation.

#### Regulation .07 Guarantied Loan Terms and Requirements.

*COMAR 24.05.07.07*

Guarantied loans shall meet the following requirements:

A. Maximum Guaranty Amount. The part of the loan to be guarantied may not exceed $500,000.

B. Interest Rate. The interest rate to be paid on guarantied loans shall be a reasonable rate approved by the Authority.

C. Security. Guarantied loans shall be secured by liens on machinery and equipment purchased with guarantied loan proceeds, assignment of the contract to the lender or the Authority, as appropriate, the personal guaranties of the applicant's owners, and any other collateral approved by the lender and the Authority, which may include, but is not limited to, liens on the business assets of the applicant and deeds of trust on real property owned by the applicant or the applicant's owners.

D. Term. The term of each loan guaranty may not exceed the term of the contract for which the loan is provided, unless the Authority finds that a longer term better carries out the purposes of the Act.

E. Late Charges. Late charges, as permitted by law, may be imposed.

F. Title Insurance. If the guarantied loan is to be secured by real property, the Authority may require the:

  (1) Applicant to provide an American Land Title Association Loan Policy issued by a title insurance company acceptable to the Authority for an amount equal to the maximum principal amount of the loan, insuring the Authority, evidencing that title to property offered as collateral on the date of closing is vested in the applicant, and containing only standard exceptions and encumbrances approved by the Authority.

  (2) Title insurance policy to be accompanied by a survey, certified in the manner required by the Authority and the title company issuing the title insurance, showing that there are no easements or encroachments upon or other matters pertaining to the property, except those acceptable to the Authority. The title insurance policy may not contain any survey exceptions.

G. Appraisals. The Authority may require appraisals done by qualified appraisers showing the value of property which is offered as collateral for the financial assistance.

H. Insurance. Before providing financial assistance, the Authority may require the applicant or the applicant's owners and key managers to obtain and assign to the Authority and the lender life insurance in the amount of the financial assistance. The Authority may also require business interruption insurance, hazard and casualty insurance, liability insurance, vehicle insurance, flood insurance, homeowner's insurance, workers' compensation insurance, and other appropriate forms of insurance.

#### Regulation .08 Guarantied Loan Application and Processing Procedures.

*COMAR 24.05.07.08*

A. Loan Application.

  (1) Guarantied loan applications shall be made upon standard forms prescribed by the Authority.

  (2) Each application shall include the following documentation:

    (a) A fully completed and properly executed application, executed by the lender and the applicant;

    (b) A copy of a letter evidencing that the applicant has applied for and been denied a loan for the same amount or a lesser amount of money and having similar terms by a financial institution; or

    (c) An executed copy of the lender's commitment letter that provides a commitment of financing contingent upon the Authority's approval of a guaranty of the lender's loan.

B. Processing of Application.

  (1) After execution of the application, the lender shall submit it to the Authority along with a copy of a commitment letter from the lender to provide financing which, at the minimum, shall state the amount, rate, and terms of the financing.

  (2) To make a determination of the eligibility of the applicant and the contract in accordance with Regulations .03B(4) and .04 of this chapter, the Authority's staff shall perform an initial review of each application and may also perform a preliminary audit investigation of the applicant's books and records.

C. Loan Approval. Approval of a loan guaranty shall be evidenced by a signed resolution of the Authority.

D. Loan Documents. The guarantied loan documents may include:

  (1) Promissory notes;

  (2) Deeds of trust;

  (3) Loan and security agreements;

  (4) Financing statements;

  (5) Personal and corporate guarantee agreements;

  (6) A guaranty agreement;

  (7) Assignments of contracts and notices of assignment;

  (8) Assignment of life insurance; and

  (9) Other documents the Authority may require.

E. Fees. As a precondition to the effectiveness of the guaranty, the Authority shall receive in advance a guaranty fee of 1 percent of the outstanding principal amount of the guarantied loan from the lender.

#### Regulation .09 Equity Guaranty Terms and Requirements.

*COMAR 24.05.07.09*

A. Equity guaranties shall meet the requirements in §§B—H of this regulation.

B. Maximum Equity Guaranty Amount. The maximum equity guaranty amount may not exceed the lesser of:

  (1) 10 percent of the investor's equity investment in the applicant; or

  (2) $500,000.

C. Terms. The terms of the equity guaranty shall be determined by the Authority.

D. Security. The equity guarantees shall be secured by the personal guaranties of the applicant's owners and any other collateral required by the Authority, which may include, but is not limited to, liens on the business assets of the applicant and deeds of trust on real property owned by the applicant or the applicant's owners.

E. Late Charges. Late charges, as permitted by law, may be imposed.

F. Change of Applicant Eligibility. If at any time the applicant ceases to satisfy the requirements of Regulation .04 of this chapter, the Authority may, in accordance with the terms of the equity guaranty documents between the Authority, the investor, and the applicant, accelerate the payment of the entire equity investment.

G. Change of Ownership. If at any time during the term of the equity guaranty the applicant sells, ceases to own, assigns, transfers, or otherwise disposes of, all or any part of the business performing the contract, the Authority, in accordance with the terms of the equity guaranty documents between the Authority, the investor, and the applicant, may accelerate the payment of the entire principal and interest due under the guarantied loan.

H. Insurance. The Authority may require the applicant or the applicant's owners and key managers to obtain and assign to the Authority life insurance in the amount of the equity guaranty. The Authority may also require business interruption insurance, hazard and casualty insurance, flood insurance, homeowner's insurance, workers' compensation insurance, and other appropriate forms of insurance.

#### Regulation .10 Equity Guaranty Application and Processing Procedures.

*COMAR 24.05.07.10*

A. Application. Equity guaranty applications shall be made upon standard forms prescribed by the Authority. Each application shall be properly and fully completed and properly executed by the applicant.

B. Processing of Application. To make a determination of the eligibility of the applicant and the investor in accordance with Regulation .04 of this chapter, the Authority's staff shall perform an initial review of each equity guaranty application and may also perform a preliminary audit investigation of the applicant's and the investor's books and records.

C. Final Processing. Before approval of the equity guaranty, the applicant shall provide, for the Authority's review and approval, a copy of a commitment letter from the investor to provide equity financing which, at a minimum, shall state the amount, rate, and terms of the financing.

D. Equity Guaranty Approval. Approval of an equity guaranty shall be evidenced by a resolution of the Authority.

E. Equity Guaranty Documents. The equity guaranty documents may include, among others:

  (1) A guaranty agreement;

  (2) Personal and corporate guarantees;

  (3) Evidence of proper equity investment approvals and filings by the applicant;

  (4) Assignments of life insurance;

  (5) Assignments of contracts and notices of assignment;

  (6) Evidence of equity investment, such as stock certificates; and

  (7) Other documents the Authority may require.

F. Fees. As a precondition to the effectiveness of the equity guaranty, the Authority shall receive in advance a guaranty fee of 1 percent of the outstanding equity investment amount from the applicant.

#### Regulation .11 Direct Loan Terms and Requirements.

*COMAR 24.05.07.11*

A. Direct loans shall meet the requirements in §§B—M of this regulation.

B. Maximum Direct Loan Amount. The maximum direct loan amount may not exceed $500,000.

C. Interest Rate. The interest rate to be paid on a direct loan shall equal the market rate for a conventional loan of comparable risk unless the Authority finds that a lower rate better carries out the purposes of the Act.

D. Security. Each direct loan shall be secured by the assignment of the contract to the Authority, the personal guaranties of the applicant's owners and any other collateral required by the Authority, which may include, but is not limited to, liens on the business assets of the applicant and deeds of trust on real property owned by the applicant or the applicant's owners.

E. Term. The term of each direct loan may not exceed the term of the contract, unless the Authority finds that a longer term better carries out the purposes of the Act.

F. Payment Schedule. The Authority shall prepare a payment schedule that provides money to the applicant in the amounts and at times that the applicant needs the money to perform the contract.

G. Late Charge. Late charges, as permitted by law, may be imposed.

H. Cosigning Requests. Before each advance of money is released to the applicant, the applicant and the Authority shall cosign the request for money.

I. Repayment. The Authority's direct loan documents shall contain provisions for repayment of the direct loan.

J. Change of Applicant Eligibility. If at any time the applicant ceases to satisfy the requirements of Regulation .04 of this chapter, the Authority may, in accordance with the terms of the direct loan documents between the Authority and the applicant, accelerate the payment of the entire principal and interest due under the direct loan.

K. Change of Ownership. If at any time during the term of the direct loan the applicant or any owner of the applicant sells, ceases to own, assigns, transfers, or otherwise disposes of, all or any part of the business performing the contract, the Authority, in accordance with the terms of the direct loan documents between the Authority and the applicant, may accelerate the payment of the entire principal and interest due under the direct loan.

L. Title Insurance. If the direct loan is to be secured by real property, the Authority may require:

  (1) The applicant to provide an American Land Title Association Loan Policy—1970, as amended, issued by a title insurance company acceptable to the Authority for an amount equal to the maximum principal amount of the direct loan, insuring the Authority, evidencing that title to property offered as collateral is vested in the applicant on the date of closing, and containing only standard exceptions and encumbrances approved by the Authority.

  (2) That the title insurance policy be accompanied by a survey, certified in the manner required by the Authority and the title company issuing the title insurance, showing that there are no easements or encroachments upon or other matters pertaining to the property, except those acceptable to the Authority. The title insurance policy may not contain any survey exceptions.

M. Insurance. The Authority may require the applicant or the applicant's owners and key managers to obtain life insurance in the amount of the direct loan. The Authority may also require business interruption insurance, hazard and casualty insurance, flood insurance, homeowner's insurance, workers' compensation insurance, and other appropriate forms of insurance.

N. Appraisals. The Authority may require appraisals by qualified appraisers showing the property's value for each item of real or personal property offered as collateral.

#### Regulation .12 Direct Loan Application and Processing Procedures.

*COMAR 24.05.07.12*

A. Loan Application. Loan applications shall be made upon standard forms prescribed by the Authority. Each application shall be fully completed and properly executed by the applicant.

B. Processing of Application.

  (1) To make a determination of the eligibility of the applicant and the contract in accordance with Regulations .03B(4) and .04 of this chapter, the Authority's staff shall perform an initial review of each application and may also perform a preliminary audit investigation of the applicant's books and records.

  (2) The Authority may obtain credit reports and lien and judgment reports and take other appropriate steps to investigate the creditworthiness of the applicant and the applicant's owners and the guarantors and the value of the collateral.

C. Loan Approval. Approval of a direct loan shall be evidenced by a resolution and commitment letter from the Authority to the applicant. The Authority is not obligated to take further action on a direct loan after issuance of a commitment letter until an applicant executes and returns a copy of the executed commitment letter to the Authority.

D. Direct Loan Documents. Direct loan documents may include:

  (1) Promissory notes;

  (2) Deeds of trust;

  (3) Loan and security agreements;

  (4) Financing statements;

  (5) Assignments of contracts and notices of assignment;

  (6) Assignments of life insurance;

  (7) Personal and corporate guaranties; and

  (8) Other documents the Authority may require.

E. Fees. Each applicant:

  (1) Shall pay a $250 application fee;

  (2) May also be required to reimburse the Authority for filing fees, the cost of credit reports and appraisals, and other expenses incurred in making the direct loan.

#### Regulation .13 Nondiscrimination.

*COMAR 24.05.07.13*

Each applicant shall comply with all applicable federal, State, and local laws and Departmental policies and programs regarding discrimination and equal opportunity in employment and credit practices including:

A. Title VII of the Civil Rights Act of 1964;

B. The provisions of the Governor's Code of Fair Employment Practices, as amended; and

C. The Department's Minority Business Enterprise Program, as amended.

#### Regulation .14 Program Administration.

*COMAR 24.05.07.14*

A. Any action or decision required or permitted to be taken or made by the Authority pursuant to the Act or these regulations may be taken by the Authority, the Secretary or the Secretary's designee, or, to the extent set forth in the Act or properly delegated by the Authority or the Secretary, the Executive Director of the Authority.

B. The Secretary may delegate to the Executive Director of the Authority or to any other official or employee of the Department or Authority the authority to review and execute any Program documents or loan documents.

#### Regulation .15 False Statements or Reports.

*COMAR 24.05.07.15*

A. A person may not knowingly make or cause any false statement or report to be made:

  (1) In any application or in any document furnished to the Authority;

  (2) For the purpose of influencing the action of the Authority on an application for financial assistance or for the purpose of influencing any action of the Authority affecting financial assistance whether or not the assistance may have been already extended.

B. A person, or the person's aiders and abettors, who violates or attempts to violate any provision of §A of this regulation is guilty of a misdemeanor and on conviction is subject to a fine not exceeding $50,000, or imprisonment not exceeding 5 years, or both.

C. In addition, any applicant who knowingly makes or causes to be made any material misstatement of fact, whether in the nature of an understatement or overstatement of financial condition or any other fact material to the Authority's action in any statement or report in or regarding an application for financial assistance or affecting financial assistance already extended, shall be subject to immediate acceleration of the financial assistance.

#### Regulation .16 Waiver.

*COMAR 24.05.07.16*

The Authority may waive or vary particular provisions of these regulations to the extent that the waiver is not inconsistent with the Act if:

A. Conformance to the requirements of any federal, State, or local programs in connection with a direct loan, equity guaranty or guarantied loan necessitates waiver or variance of a regulation; or

B. In the determination of the Authority, the application of a regulation in a specific case or in an emergency situation would be inequitable or contrary to the purposes of the Act.

#### Regulation .17 Severability.

*COMAR 24.05.07.17*

The provisions of these regulations are severable. A judgment by any court of competent jurisdiction finding or declaring that any provisions of these regulations or the application of any provision to any person or circumstance is invalid does not affect the validity of the remaining provisions of the regulations or any other application of these regulations, and the remaining regulations shall have full force and effect as if no judgment had been entered.

#### Regulation .18 Drug-Free and Alcohol-Free Workplace.

*COMAR 24.05.07.18*

The applicant shall comply, and remain in compliance, with the State's policy concerning drug-free and alcohol-free workplaces, as set forth in COMAR 01.01.1989.18, and shall make a good-faith effort to eliminate illegal drug use and alcohol and drug abuse from places at which work is performed in accordance with a State loan.