This is the first of a series on the Maryland Small Business Development Financing Authority.
DURING GOOD OR BAD TIMES, it may be difficult for minority or "economically disadvantaged" business owners to obtain loans. To assist these two groups, the state in 1978 created the Maryland Small Business Development Financing Authority.
MSBDFA is known by its initials -- pronounced phonetically as "Miss Bidfa." A few years ago a new executive to Baltimore thought this was the name of a special woman whom he should meet because she really seemed to be in the center of financing activity.
MSBDFA is a part of the Maryland Department of Economic and Employment Development, and it can guarantee a loan or make a direct loan to an eligible business.
The numbers: During the 18 months ending December 31, MSBDFA received 2,600 inquiries. Officials at the authority say it actually helped 50 businesses and thereby created or saved 1,301 jobs. The amount of direct loans or loan guarantees totaled $7.9 million.
Program areas: There are four major ones: Surety Bond Guaranty, Contract Financing, Long-Term Guaranty, and Equity Participation Investments. One of the main purposes of the MSBDFA programs is to promote economic development and XTC employment growth, so a key question about any loan application is: Will it add new jobs or at least retain existing ones?
For information about MSBDFA, contact Stanley Tucker, director, his office in Baltimore. The phone number is 333-4270.
Eligibility: To qualify for help, your business must be at least 70 percent owned by a minority or an economically disadvantaged person -- except for the Surety Bond program, for which there are no ethnic or economic restrictions.
From the start MSBDFA aimed primarily at helping black-owned businesses, but in recent years has broadened its focus of its outreach to include women, Hispanics and the handicapped.
White male businessmen are certainly not a minority, but they also can qualify if they are economically disadvantaged, meaning that both their personal financial resources and those of their business are exhausted.
Here's an example: A local firm approached a bank for a loan but the money was denied because the company was relatively new and had no track record of sales. Moreover, the firm happened to be part of an industry that is ineligible for loan help from the U.S. Small Business Administration.
The owners obtained all the personal loans they could to keep the firm afloat, but the company's cash flow still dwindled. By the time the owners approached MSBDFA, both they and the firm were in terrible shape financially -- which seemed to assure eligibility.
Does this mean that any troubled business can get help from MSBDFA? Not necessarily. There has to be a belief on the part of the lender that the business will succeed if the financing is approved. If the firm is clearly doomed to fail, MSBDFA would be acting irresponsibly if it approved the application.
State vs. federal: A business can approach either MSBDFA or the SBA for a loan guarantee. Keep in mind a couple of differences that may make the state's programs more attractive to the borrower and less attractive to the lender. These differences involve the loan rates and the collection procedures should you default on the loan.
The SBA guarantee program restricts the banks to a loan rate that ranges from 2.25 percent to 2.75 percent above the prime rate. MSBDFA's rate is lower at 1 percent to 2 percent above prime.
The MSBDFA guarantee is a type that means more work for the bank if your loan is not repaid. The bank must complete all collection efforts before asking MSBDFA to pay any remaining balance. If the loan was secured by collateral, the lender must take possession of the collateral, sell it and use the cash to pay the loan. Any money still owed will then be paid to the bank by MSBDFA.
In contrast, the SBA program is a full guarantee. This means that if you default on the loan, the bank can immediately apply to the SBA for payment of the balance -- no lawyers, courts or auctions. The loan is passed to the SBA, which starts the process to convert any collateralized assets to cash.
These differences can result in your lender requesting that you turn to the SBA rather than to MSBDFA. The lender may feel that the probability is relatively high that your loan will require some collection activity. As a result, the lender might approve your loan only if it is guaranteed by the SBA rather than the MSBDFA since the collection procedures are so much easier.
Direct loans: MSBDFA also has a direct loan program where no bank is needed, since money is lent directly by the state.
The bottom line: When you need government help to be properly financed, be sure to check out the state programs. Maryland has a vested interest in your business.
Patrick Rossello, president of The Business Consulting Group, is a member of a number of local advisory boards including the Baltimore Economic Development Corp. The series on MSBDFA will continue next Monday in Money at Work. Reprints will be available for $1 each. At the end of the series, the column will contain information on how to order the reprints, or readers can call The Baltimore Sun at 332-6236.