A SMALL COMPANY found itself in a bind. To win a government contract, the firm had to show that it could get adequate financing to complete the work. It approached a bank for a loan, only to be told to reapply when the contract was won. Catch 22.
In Maryland an eligible company can turn to the state for help. Contract Financing is one of the programs offered by the Maryland Small Business Development Financing Authority, part of the Maryland Department of Economic & Employment Development. The others are Equity Participation, Long Term Guaranty, and the Surety Bond program.
Except for the bond program, eligibility is limited to businesses that are at least 70 percent owned by a minority or an economically disadvantaged person. MSBDFA provides direct loans or guarantees for loans made by banks or others.
Contract Financing: MSBDFA can help businesses that want to begin, continue or complete a contract from a government agency or from a public utility. Loans may be used to provide working capital or purchase supplies or materials to be used in the contract work. The entire loan must be repaid by the end of the contract. This is one of the few financing support programs that allows working capital to be the major purpose for the loan. Purchasing equipment is also permitted if it is used directly for the contract.
MSBDFA can guarantee up to 90 percent of a loan (principal and interest) from a financial institution or money from a new investor up to a maximum principal amount of $250,000. Note: the new investor may not already own stock or be on the management team. Alternatively, MSBDFA can provide a direct loan.
The interest rate for a direct loan is the prime commercial bank lending rate on the day the loan starts. A bank loan guaranteed by MSBDFA is limited to prime plus 2 percent. The state charges the bank a fee of 1 percent of the loan amount.
Long Term Guaranty: This program provides loan guarantees and/or interest subsidies for a loan or line of credit. MSBDFA usually requires that you have at least 18 months experience in the same line or work. The funds may be used for working capital or to expand the business. Expansion requires the purchase of machinery and/or equipment, with no more than half of the loan used to make improvements to land or buildings. Your collateral can include government or utility contracts, business assets (except accounts receivable), investment securities or the cash surrender value of a life insurance policy.
The guarantee is limited to 80 percent of a loan, which can range from $5,000 to $750,000 for a term of up to 10 years. The bank must pay MSBDFA 3/4 of 1 percent of the loan amount as a fee. The interest rate is limited to 1 percent above the prime. However that probably will increase in mid-1991 to 2 percent.
MSBDFA can subsidize your loan by paying up to 4 percentage points of the interest. A subsidy is based on need and can be revoked at any time if the firm's finances improve.
At the start: Contact a bank or other financing source. If the bank will extend a loan, but only with a guarantee, ask the bank to provide MSBDFA with a letter of intent. If the bank believes the likelihood of default is very high, it will reject you even with a guarantee. In this case, obtain a letter of denial and approach MSBDFA for a direct loan.
MSBDFA or the bank can provide application forms. MSBDFA's office is in Baltimore and you can contact its executive director, Stanley Tucker, at 333-4270.
The application must be accompanied by the lender's letter, fees, personal and business tax records and accounting statements, and a business plan that includes revenue projections. The submission will be carefully reviewed to help the staff get a "gut" sense of the status of your business. MSBDFA will consider the number of jobs and how many additional jobs could be created under your leadership.
The staff will inform you within two weeks if everything is in order. A direct loan or a guarantee must be approved by MSBDFA's advisory board, which mostly consists of business people and meets the third Thursday of each month. If you want your application to go to the board in March, paperwork must be submitted to the staff by the end of February. Any negotiated parts of "the deal" must be settled before the board meeting.
Following approval, documentation is sent to the Attorney General's Office for review. After this hurdle, a settlement date is set.
The bottom line: Start early! Substantial documentation is required to support your application. The process could take three to six months from the time you start to write your business plan to the settlement date.
Patrick Rossello, president of The Business Consulting Group, belongs to a number of local advisory boards. This series on MSBDFA will continue next Monday. A reprint will be available for $1. At the end of the series, the column will contain information on how to order reprints, or readers can call The Evening Sun at 332-6236.