Chapter 08. Small Business Development Guaranty Fund
Regulation .01 Purpose.LinkCopy Citation
These regulations prescribe the policies, procedures, and authorizations for encouraging financial institutions to make loans to socially or economically disadvantaged persons to enable them to obtain the financing needed to sustain and expand their businesses and to hire and train employees.
Regulation .02 Objective.LinkCopy Citation
The basic objective of the Program is to guarantee loans and, in some cases, to provide interest subsidies to economically or socially disadvantaged business persons for working capital, the acquisition and related installation of machinery or equipment, certain necessary improvements to real property leased or owned in fee simple by the applicant, or the acquisition of real property if used in the business, in order to assist economically or socially disadvantaged business persons.
Regulation .03 Definitions.LinkCopy Citation
A.
In this chapter, the following terms have the meanings indicated.
B.
Terms Defined.
(1)
“Act” means Economic Development Article, Title 5, Subtitle 5, inclusive, Annotated Code of Maryland, as amended.
(2)
“Applicant” means a sole proprietor, a partnership, a limited liability company, a limited liability partnership, a cooperative, an unincorporated association, or a corporation applying for financial assistance under the Program.
(3)
"Authority" means the Maryland Small Business Development Financing Authority.
(4)
“Department” means the Department of Commerce, a principal department of the State.
(5)
“Director” means the Executive Director or Deputy Director of the Authority.
(6)
“Financial assistance” means a guaranty or an interest subsidy provided by the Authority.
(7)
“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.
(8)
“Guaranty” means a loan guaranty made under the Program.
(9)
“Guaranty agreement” means the agreement between the Authority and the lender providing for the terms of the Authority's guaranty of a loan and, if applicable, for an interest subsidy.
(10)
“Interest subsidy” means a subsidy to be paid by the Authority to a lender to reduce the applicant's interest payments to the lender.
(11)
“Lender” means a financial institution that makes a loan that is guarantied by the Authority under the Program.
(12)
“Loan” means a loan made to the applicant by a lender and guarantied by the Authority under the Program.
(13)
“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, deed of trust, pledge, assignment, loan and security agreement, or guarantee.
(14)
“Program” means the guaranty program, as authorized by the Act.
(15)
“Secretary” means the Secretary of Commerce.
(16)
“Working capital” means funds used to meet the cash needs of an operating business entity, excluding capital purchases.
Regulation .04 Eligible Applicants.LinkCopy Citation
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 disability that severely limits the ability of the applicant to obtain financial assistance, but does not limit the ability of the applicant to perform the activity for which the applicant would be receiving financial assistance, or
(c)
Has any other social or economic impediment that is beyond the personal control of the applicant, such as 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 activity for which the applicant would be receiving financial assistance; and
(5)
The applicant or owners of the applicant who qualify as socially or economically disadvantaged under §A(4) of this regulation shall 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 Housing and Community Development Article, §6-305, Annotated Code of Maryland;
(b)
Enterprise Zones, as designated by the Secretary pursuant to Economic Development Article, §5-704, 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 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)
Provide evidence that the applicant has applied for and been denied a loan for the same amount or a lesser amount, within the last 90 days and on similar terms by a financial institution; and
(5)
Demonstrate sufficient experience and the capacity to manage the business enterprise for which financial assistance is sought.
Regulation .05 Eligible Uses.LinkCopy Citation
The purposes for which the loan is to be used include:
A.
Working capital;
B.
The acquisition and related installation of machinery or equipment;
C.
Necessary improvements to real property leased or owned in fee simple by the applicant; or
D.
The acquisition of real property to be owned in fee simple by the applicant if:
(1)
The real property is to be used in the operation of the applicant's trade or business for which the loan and guarantee are sought, and
(2)
A lien is placed on the real property by the financial institution.
Regulation .06 Loan and Guaranty Terms and Requirements.LinkCopy Citation
A.
In order to qualify for a guaranty, all loans shall meet the requirements in §§B—K of this regulation.
B.
Maximum Guaranty Amount. The Authority may not guaranty more than 80 percent of the principal of a loan or more than 80 percent of the interest on the loan accrued for up to 120 days beginning with the date of a payment default payable by the Authority after the Authority receives written notice of the payment default. The maximum amount payable by the Authority under its guaranty may not exceed $1,000,000.
C.
Minimum Loan Amount. The loan amount may not be less than $5,000.
D.
Interest Rate. The rate of interest on the loan shall be not greater than the rate of interest determined by the Authority to be the monthly weighted average of the prime lending rate, plus 2 percent, prevailing from time to time in the City of Baltimore on unsecured commercial loans.
E.
Security. Guarantied loans shall be secured by liens on machinery and equipment purchased with guarantied loan proceeds, 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.
F.
Term. The loan shall mature not more than 10 years from the date of closing the loan.
G.
Economic Impact. The economic impact of the loan shall be substantial. To determine the economic impact of a project, the Authority may consider:
(1)
The amount of the guaranty obligation;
(2)
The terms of the loan to be guaranteed;
(3)
The number of new jobs that will be created by the loan;
(4)
The number of jobs that will be retained because of the loan; and
(5)
Any other factor that the Authority considers relevant.
H.
Late Charges. Late charges, as permitted by law, may be imposed.
I.
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, as amended, 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.
J.
Appraisals. The Authority may require appraisals showing the value of property which is offered as collateral for the financial assistance.
K.
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 lender and the Authority life insurance in an amount acceptable to the Authority. 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 .07 Interest Subsidy.LinkCopy Citation
In addition to the granting of a loan guaranty, the Authority may for the benefit of an applicant provide an interest subsidy to a financial institution issuing a loan guarantied by the Authority pursuant to this regulation which:
A.
Is payable quarterly;
B.
Does not exceed the difference between the rate of interest requested by the financial institution to make the loan (which rate may not exceed the rate of interest determined by the Authority to be the monthly weighted average of the prime lending rate, plus 2 percent, prevailing from time to time in the City of Baltimore on unsecured commercial loans) and the discount rate of interest employed by the Federal Reserve Bank of the United States, the difference to be determined by the Authority as of the date of closing of the loan for which the guaranty is given;
C.
Is payable during the term of the loan, excluding any period in which the Authority determines that the loan is in default;
D.
May be approved for the life of the loan or may be approved for 1 year, renewable annually at the Authority's discretion; and
E.
May not exceed 4 percent.
Regulation .08 Financial Assistance Application and Processing Procedures.LinkCopy Citation
A.
Application. Guaranty and interest subsidy applications shall be made upon standard forms prescribed by the Authority. Each application shall be accompanied by a detailed business plan which shall include but is not limited to the following:
(1)
A detailed description of the proposed use or uses of the proceeds of the loan including projected cash flow analyses with underlying assumptions, marketing plans, or descriptions and appraisals;
(2)
A detailed description of the funds available to the applicant;
(3)
A detailed description of the proposed loan documents to be executed by the financial institution and the applicant;
(4)
A detailed description of the property proposed as collateral for the loan together with the financial institution's certification as to value;
(5)
Information that relates to the inability of the applicant to obtain adequate financing on reasonable terms through normal lending channels;
(6)
Information that relates to the financial status of the applicant, including:
(a)
A balance sheet dated within 90 days of the date of application,
(b)
A profit and loss statement dated within 90 days of the date of application,
(c)
Credit references, and
(d)
The status of outstanding indebtedness;
(7)
A proposed disbursement schedule;
(8)
A proposed amortization schedule;
(9)
A detailed description of the applicant's experience in the trade or business for which the loan and guaranty are sought;
(10)
Information that relates to satisfaction of the applicant's meeting the requirements of Regulation .04 of this chapter;
(11)
A copy of the articles of incorporation filed with the state of incorporation, bylaws, partnership agreement, or other organizational documents;
(12)
A copy of the deeds and deeds of trust to all real property offered as collateral and of the certificates of title to vehicles;
(13)
A copy of the letter from a financial institution dated within 90 days of the date of application 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;
(14)
Information that relates to the economic impact to be created by the loan;
(15)
A copy of a signed commitment letter from the lender outlining the terms and conditions under which the loan will be made;
(16)
Other relevant information that the Authority requests.
B.
Processing of Application.
(1)
After execution of the application, the lender shall submit it to the Authority along with a copy of an executed 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 loan in accordance with these regulations, the Authority's staff shall perform an initial review of each application and may perform a preliminary audit investigation of the books and records of the applicant.
(3)
After receipt of an application for financial assistance from the guaranty fund, the Authority may determine by resolution that before the Authority makes its decision on the application, an applicant shall provide an audited financial statement which includes, but is not limited to, a balance sheet and profit and loss statement certified by an independent certified public accountant in accordance with generally accepted accounting principles.
C.
Approval. Approval of a loan guaranty and, if applicable, of an interest subsidy, shall be evidenced by a signed resolution of the Authority.
D.
Loan Documents. 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)
Assignment of life insurance; and
(8)
Other documents the Authority may require.
E.
Fees.
(1)
As a precondition to the effectiveness of the guaranty, the Authority shall receive from the lender at closing a guaranty fee up to 1.5 percent of the loan amount and after that, on each anniversary of the closing date, an annual guaranty fee up to 1.5 percent of the average outstanding principal balance of the loan, averaged over the preceding year, by the Authority or the Executive Director. In determining the rate of the guaranty fee, the Authority may consider the following factors:
(a)
Any other fees charged by the Authority or the lender;
(b)
The amount of the loan or the amount of the guaranty;
(c)
The economic impact caused by the loan; and
(d)
Any other factor that the Authority considers relevant.
(2)
The Authority shall require the lender or the applicant to reimburse the Authority for expenses it incurs in processing and closing the loan, such as credit reports and appraisals.
Regulation .09 Nondiscrimination.LinkCopy Citation
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 Title VII of the Civil Rights Act of 1964, the provisions of the Governor's Code of Fair Employment Practices, as amended, and the Department's Minority Business Enterprise Program, as amended.
Regulation .10 Program Administration.LinkCopy Citation
A.
An action or decision required or permitted to be taken or made by the Department 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 .11 False Statements or Reports.LinkCopy Citation
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 made, shall be subject to immediate acceleration of the financial assistance.
Regulation .12 Waiver.LinkCopy Citation
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 loan, guaranty or interest subsidy 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 .13 Severability.LinkCopy Citation
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.
Chapter annotations
Authority: Economic Development Article, §2-108 and Title 5, Subtitle 5, Annotated Code of Maryland
History: Effective date: April 3, 1989 (16:6 Md. R. 730)
History: Regulation .02 amended effective March 27, 1995 (22:6 Md. R. 476)
History: Regulation .03 amended effective March 27, 1995 (22:6 Md. R. 476)
History: Regulation .03B amended effective August 3, 1992 (19:15 Md. R. 1394)
History: Regulation .04 amended effective February 18, 2002 (29:3 Md. R. 223)
History: Regulation .04A amended effective March 27, 1995 (22:6 Md. R. 476)
History: Regulation .05 amended effective March 27, 1995 (22:6 Md. R. 476)
History: Regulation .06 amended effective August 3, 1992 (19:15 Md. R. 1394); February 18, 2002 (29:3 Md. R. 223)
History: Regulation .06K amended effective March 27, 1995 (22:6 Md. R. 476)
History: Regulation .07B amended effective August 3, 1992 (19:15 Md. R. 1394)
History: Regulation .08A amended effective August 3, 1992 (19:15 Md. R. 1394)
History: Regulation .08B, E amended effective March 27, 1995 (22:6 Md. R. 476)
History: Regulation .09 amended effective April 15, 1991 (18:7 Md. R. 775)