PRINTER'S NO. 1495
No. 1305 Session of 1999
INTRODUCED BY LESCOVITZ, CAWLEY, THOMAS, GEORGE, BELARDI,
PRESTON, WOJNAROSKI, FRANKEL, GORDNER, M. COHEN, READSHAW,
LEDERER, TRELLO, HERMAN, COSTA, VAN HORNE, LAUGHLIN, TRICH,
BELFANTI AND McCALL, APRIL 14, 1999
REFERRED TO COMMITTEE ON COMMERCE AND ECONOMIC DEVELOPMENT,
APRIL 14, 1999
AN ACT
1 Providing a loan program for small business in this
2 Commonwealth; and making an appropriation.
3 TABLE OF CONTENTS
4 Section 1. Short title.
5 Section 2. Definitions.
6 Section 3. Small Business Loan Fund.
7 Section 4. Small Business Loan Program established.
8 Section 5. Eligibility.
9 Section 6. Types of assistance available; loan guarantee,
10 direct loan.
11 Section 7. Loan guarantees; terms and restrictions.
12 Section 8. Direct loans; terms and restrictions.
13 Section 9. Reporting and inspection.
14 Section 10. Rules and regulations.
15 Section 11. Preferences and priorities.
16 Section 12. Disapproval.
1 Section 13. Default.
2 Section 14. Appropriation.
3 Section 15. Effective date.
4 The General Assembly of the Commonwealth of Pennsylvania
5 hereby enacts as follows:
6 Section 1. Short title.
7 This act shall be known and may be cited as the Small
8 Business Loan Act.
9 Section 2. Definitions.
10 The following words and phrases when used in this act shall
11 have the meanings given to them in this section unless the
12 context clearly indicates otherwise:
13 "Department." The Department of Community and Economic
14 Development of the Commonwealth.
15 "Financial institutions." Include, but are not limited to,
16 banks and other lending institutions whose regular course of
17 business entails the making of commercial and industrial loans.
18 "Fund." The Small Business Loan Fund established in section
19 3.
20 "Loan." A direct loan made by the Department of Community
21 and Economic Development pursuant to section 8.
22 "Loan guarantee." When loans are made by financial
23 institutions to eligible small business, the repayment of which
24 the Commonwealth guarantees pursuant to the provisions of this
25 act.
26 "Small business." The business concerns that are defined in
27 section 2(3) of the Small Business Act (Public Law 85-536, 15
28 U.S.C. § 632), and classified by the Small Business
29 Administration under 13 CFR Part 121 (relating to small business
30 size regulations) and which have fewer than 200 employees.
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1 Section 3. Small Business Loan Fund.
2 There is hereby established a separate account in the State
3 Treasury to be known as the Small Business Loan Fund. All
4 appropriations made by the General Assembly to implement this
5 act and all money received as repayment of loans and interest
6 payments pursuant to this act shall be deposited into the fund.
7 Section 4. Small Business Loan Program established.
8 There is hereby established the Small Business Loan Program
9 which shall be administered by the department in accordance with
10 the spirit and intent of this act.
11 Section 5. Eligibility.
12 Consideration for loans under this act shall be extended to
13 all applicants who meet the following requirements:
14 (1) The applicant must be financially and legally
15 responsible, based upon criminal history, credit history and
16 business history.
17 (2) The applicant and any affiliate shall have paid in
18 full all taxes due and owing the Federal and State
19 governments and any other level of government or shall
20 present evidence noting a satisfactory arrangement which has
21 been agreed to by all parties to make the payment.
22 (3) The applicant may be a sole proprietorship,
23 partnership or corporation. Where the enterprise is a
24 proprietorship, the applicant must be otherwise eligible and
25 must manage and control the enterprise. Where the applicant
26 is a proprietorship, the applicant must be a resident of this
27 Commonwealth or must certify that residency will be
28 established on or before closing of the loan or loan
29 guarantee. Where the enterprise is a partnership, at least
30 51% of the partners must be residents of this Commonwealth or
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1 must certify that residency will be established on or before
2 closing of the loan or loan guarantee. Where the enterprise
3 is a corporation, its officers and at least 51% of the owners
4 of the voting stock must be residents of this Commonwealth or
5 must certify that residency will be established on or before
6 closing of the loan or loan guarantee.
7 (4) The applicant shall commit to full time management
8 and control of the enterprise on a daily basis and shall
9 commit to work full time in the enterprise. If the applicant
10 is otherwise employed, the applicant shall terminate such
11 other employment prior to or at the time of closing.
12 (5) The applicant, if a natural person, shall be 18
13 years of age or older.
14 (6) The applicant having previously received loans from
15 the fund shall be current with respect to all amounts due
16 under the loans.
17 (7) The applicant shall show, through experience,
18 training or education, or a combination thereof, that the
19 applicant is capable of performing the responsibilities in
20 connection with the ownership, management or control of the
21 small business.
22 (8) The applicant and the small business shall not be
23 involved as a debtor in any bankruptcy proceeding.
24 (9) The applicant is a small business authorized to do
25 business in this Commonwealth.
26 (10) The applicant has applied for but has not been able
27 to obtain the desired loan from at least one financial
28 institution and furnishes proof of the refusal, and the
29 reasons therefor.
30 (11) The applicant furnishes information to show that
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1 the applicant has or will have the ability to repay the loan
2 out of income from the business. A preview of the business's
3 first 36 months of operation must accompany the application.
4 (12) Not more than 75% of the loan may be financed
5 through this act. A financial institution must provide the
6 remaining 25% of the loan.
7 (13) If the applicant is an existing firm, the applicant
8 must furnish financial statements which show the applicable
9 date of the information given, and are signed and certified
10 by the proprietor, partner or corporation and a certified
11 public accountant. The department shall require that the
12 statements be audited and shall ask for financial statements
13 for the past three years.
14 (14) If the applicant is a new small business concern, a
15 signed detailed proposal of the applicant's planned business
16 activities and how the loan funds will be spent. The proposal
17 shall include projected budgets and projected financial
18 statements for the first 36 months of business operations. An
19 audit of the business by a certified public accountant must
20 be made available every 12 months.
21 (15) The purpose of the loan must be in conformity with
22 the provisions of this act.
23 (16) The applicant must agree that if the applicant
24 expands the business, through subsidiaries or otherwise, the
25 expansion will be done within this Commonwealth if requested
26 by the department.
27 Section 6. Types of assistance available; loan guarantee,
28 direct loan.
29 The Small Business Loan Program shall include:
30 (1) Loan guarantees made to financial institutions for
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1 the benefit of small business persons who have received loans
2 from the financial institutions in accordance with the
3 provisions of this act.
4 (2) Direct loans, which shall be made by the department
5 pursuant to the provisions of section 8 from the fund when
6 another commercial loan is not available and a loan guarantee
7 under this act is also not available.
8 Section 7. Loan guarantees; terms and restrictions.
9 (a) Guarantees.--The department may guarantee loans made by
10 private lending institutions to eligible small businesses
11 provided that each loan guaranteed shall be approved by the
12 department under the terms and conditions consistent with the
13 intent and purpose of this act.
14 (b) Loans in default.--Funds for the payment of loans in
15 default shall come from the fund.
16 (c) Provisions for guaranteed loans.--Each loan that is
17 guaranteed under this act shall:
18 (1) Be for a term not to exceed the greater of the
19 useful life of the asset being financed, or ten years if used
20 for the purchase of capital assets.
21 (2) Be for a term not to exceed five years if used for
22 working capital.
23 (3) Bear regular interest rates which shall be no more
24 than the average interest rates charged by the financial
25 institution to commercial borrowers for the same type of
26 loan.
27 (4) For any business that after a period of five years
28 provides a financial statement that demonstrates its ability
29 to secure conventional financing for the loan balance, be
30 required to convert to conventional financial institution
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1 financing.
2 (d) Guarantee fee may be charged.--The department may charge
3 the borrower a reasonable guarantee fee which shall be computed
4 as a percentage of the loan principal outstanding at the
5 beginning of each year. The guarantee fee shall not be more than
6 1% and may be as low as a fraction of a percentage point of the
7 loan principal each year. The fee shall be deposited in the
8 fund.
9 (e) Security interest to be provided.--The department shall,
10 to the extent possible, obtain and perfect a security interest,
11 in accordance with the provisions of 13 Pa.C.S. Div. 9 (relating
12 to secured transactions; sales of accounts, contract rights and
13 chattel paper) in the assets of the small business and, when
14 reasonable, in the personal assets of the applicant, provided
15 that:
16 (1) The security interest shall be made secondary to all
17 other necessary commercial loans obtained from financial
18 institutions prior to or after the approval of the loan
19 guarantee when the subordination is required in order to
20 obtain the loans.
21 (2) The security interest shall not interfere with the
22 efficient and effective operation of the business.
23 (3) The applicant shall have assets of at least 25% of
24 the loan and 75% of the loan shall be secured by tangibles
25 like land, building or equipment. The security interest may
26 be equity in a home or other real estate, chattel mortgages,
27 personal guarantees or assignment of current receivables.
28 (f) Other sources of funds or credit.--The department need
29 not consider an application for a loan guarantee if the amount
30 required is obtainable:
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1 (1) on reasonable terms through the public offering or
2 private placing of securities of the applicant;
3 (2) through the disposal at fair price of assets not
4 required by the applicant in the conduct of its existing
5 business or not reasonably necessary to its potential healthy
6 growth;
7 (3) without undue hardship through utilization of the
8 personal credit or resources of the owner, partners,
9 management or principal shareholders of the applicant; or
10 (4) where there is reason to believe that credit is
11 otherwise available on reasonable terms from sources other
12 than financial institutions such as local or regional venture
13 capital programs, corporations or authorities, other than
14 financial institutions.
15 Section 8. Direct loans; terms and restrictions.
16 (a) Direct loans.--The department may make direct loans to
17 eligible small businesses pursuant to section 6 for the
18 financing of plant construction, conversion, expansion, the
19 acquisition of land for expansion, the acquisition of equipment,
20 machinery, inventory supplies or materials or for the supplying
21 of working capital. At no time is the loan to be used for
22 payment of existing debts of the applicant or of the applicant's
23 business.
24 (b) Loans may be in conjunction with other loans.--The
25 direct loans may be made in conjunction with loans made by other
26 financial institutions, including the Federal Small Business
27 Administration, and loans guaranteed under the provisions of
28 section 7.
29 (c) Security interest to be provided.--The department shall,
30 to the extent possible, obtain and perfect a security interest,
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1 in accordance with the provisions of 13 Pa.C.S. Div. 9 (relating
2 to secured transactions; sales of accounts, contract rights and
3 chattel paper) in the assets of the small business and, when
4 reasonable, in the personal assets of the applicant, provided
5 that:
6 (1) The security interest shall be made secondary to all
7 other necessary commercial loans obtained from financial
8 institutions prior to or after the approval of the loan when
9 the subordination is required in order to obtain such loans.
10 (2) The security interest shall not interfere with the
11 efficient and effective operation of the business.
12 (3) The applicant has assets of at least 25% of the
13 loan, and 75% of the loan shall be secured by tangibles like
14 land, building or equipment. The security interest may be
15 equity in a home or other real estate, chattel mortgages,
16 personal guarantees or assignment of current receivables.
17 (d) Restrictions and limitations.--The loans shall be
18 subject to the following restrictions and limitations:
19 (1) The applicant must meet all the requirements of
20 section 5.
21 (2) The amount of the loan or loans to any one applicant
22 at any one time shall not exceed a total of $150,000 or 75%
23 of the total investment needed.
24 (3) The loan term shall not exceed the greater of the
25 useful life of the asset being financed or ten years for
26 those funds used to purchase capital assets.
27 (4) The loan term shall not exceed five years if used
28 for working capital.
29 (5) Each loan shall bear a simple interest rate for the
30 full term of the loan. The interest rate shall be no more
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1 than the average interest rates charged by the financial
2 institution to commercial borrowers for the same type of
3 loan. The rate shall not exceed 15%.
4 (6) The commencement date for the repayment of the first
5 installment on the principal of each loan may be deferred by
6 the department for up to two years. Interest must be paid at
7 once.
8 (7) The applicant must show a demonstrated need for the
9 service, product or business in the area or region, which
10 need may be determined by the small business center within
11 the region.
12 (e) Prohibited use of loan funds.--Loan funds shall not be
13 used for any of the following purposes:
14 (1) To pay off a creditor or creditors of the applicant
15 who are inadequately secured and are in a position to sustain
16 a loss.
17 (2) To provide funds, directly or indirectly, for
18 payment, distribution or as a loan to owners, partners or
19 shareholders of the applicant's business, except as ordinary
20 compensation for services rendered.
21 (3) To refund a debt owed to a small business investment
22 company.
23 (4) To replenish funds used for any of the purposes
24 stated in paragraphs (1) through (3).
25 (5) To effect a change in the ownership of the business,
26 unless the ownership change will promote the sound
27 development or preserve the existence of the business.
28 (6) To provide or free funds for the speculation in any
29 kind of property, real or personal, tangible or intangible.
30 (7) To be received by a charitable institution or other
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1 nonprofit enterprise.
2 (8) To provide funds to an applicant primarily engaged
3 in the business of lending money.
4 (9) To provide funds for financing investments not
5 related or essential to the otherwise eligible small
6 business.
7 (10) To finance the acquisition, construction,
8 improvement or operation of real property which is, or is to
9 be, held primarily for sale or investment.
10 (11) To encourage a monopoly or any activity which would
11 be inconsistent with the purposes and intent of this act.
12 (12) To establish, acquire or operate a bar, tavern or
13 any other enterprise that has as its primary function the
14 dispensing of alcoholic beverages on a retail basis.
15 (13) To recover expenses incurred in preparing
16 applications, financial statements and related documents
17 required by the department.
18 (f) Disapproval of application.--An applicant whose
19 application has been disapproved by the department may not, for
20 a period of one year following the date of disapproval, submit
21 another application, unless the department invites the applicant
22 to submit another application.
23 Section 9. Reporting and inspection.
24 (a) Books and records to be supplied.--Each loan or
25 guarantee applicant or recipient shall provide, when requested,
26 for inspection at the business, books and records of the small
27 business which has applied for or has been granted a loan.
28 (b) Information to be updated.--Each loan or guarantee
29 applicant shall update the information given the department if
30 the application should be changed or the present conditions
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1 cause the information given to be inaccurate or misleading.
2 (c) Annual financial report to be filed.--Each loan or
3 guarantee recipient must provide the department with annual
4 financial reports until such time as the loan is satisfied.
5 Section 10. Rules and regulations.
6 In the performance of, and with respect to the purposes of
7 this act, the department may prescribe reasonable rules and
8 regulations to carry out the purposes of this act.
9 Section 11. Preferences and priorities.
10 In determining the preferences and priorities among eligible
11 applicants, the department shall consider, among other things:
12 (1) The financial condition of the applicant.
13 (2) The possible number of jobs to be created.
14 (3) The general economic condition of the area where the
15 small business is or will be located.
16 (4) The amount of assets available to secure the loan.
17 (5) The extent to which the loan will carry out the
18 purposes and intent of this act.
19 Section 12. Disapproval.
20 The department may disapprove the loan or loan guarantee
21 application for any of, but not limited to, the following
22 reasons:
23 (1) The purpose of the loan is to accomplish an
24 expansion or start a business which is unwarranted in light
25 of the applicant's past experience and management ability.
26 (2) The effect of making the loan would be to subsidize
27 inefficient management.
28 (3) The applicant cannot meet certain basic practical
29 credit requirements established by the department.
30 (4) The applicant's character is questionable as
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1 determined and set forth in writing with the specific reasons
2 by the department.
3 (5) The applicant fails to meet other basic criteria
4 deemed necessary by the department in justifying or granting
5 a loan or guarantee.
6 Section 13. Default.
7 The department shall make every effort to assist loan or loan
8 guarantee recipients. A committee that consists of five
9 individuals appointed by the department shall be responsible for
10 monitoring applicants who are delinquent 60 days or more. When
11 the committee finds that the borrower is experiencing financial
12 difficulties that cannot be reversed, the department shall move
13 quickly to protect the interests of the department and minimize
14 the losses.
15 Section 14. Appropriation.
16 There is hereby appropriated the sum of $5,000,000, or as
17 much thereof as may be necessary, to the Department of Community
18 and Economic Development to be used for the establishment,
19 development and operation of the Small Business Loan Program
20 established in section 4.
21 Section 15. Effective date.
22 This act shall take effect in 60 days.
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