STATE AND LOCAL DEVELOPMENT COMPANY LOAN PROGRAM

Under title V of the act, the Small Business Administration is authorized to make loans to both State and local development companies for the financial assistance of small business in their areas.

Under section 501, loans may be made to State development companies up to any amount which the company has already borrowed from other sources and may be used in any way necessary for the sound financing of identifiable small businesses.

Under section 502, loans up to $250,000 for each identifiable small business may be made to local development companies of broad community ownership, and the funds must be applied to financing plant construction, conversion, or expansion, including acquisition of land. Such loans must be secured. Section 502 loans may also be made to State development companies.

APPLICATIONS RECEIVED AND MONEY LOANED1

Through October 31, 1959, 38 applications had been received by SBA for section 502 loans; 21 of these applications had been granted; 3 had been withdrawn; 4 had been denied; and 1 was cancelled. Nine applications were under review.

Authorized loans ranged from $10,000 to $425,000, reaching a total of $2,527,250. Most of these loans involved at least 10 percent participation by local banks, which would account for any loans in excess of $250,000.

One application had been received for a section 501 loan, and this was from the Business Development Co., of Rhode Island. In April 1959, this company applied for a $627,500 loan for the financing of certain identifiable small businesses. Shortly after the application was received, the availability of funds from private sources increased substantially, and the loan was approved in the reduced sum of $313,750.

The total of loans to State and local development companies through October 31, 1959, was $2,841,000.

SMALL BUSINESS INVESTMENT ACT OF 1958

TITLE V-LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES SEC. 501. (a) The Administration is authorized to make loans to State development companies to assist in carrying out the purposes of this Act. Any funds advanced under this subsection shall be in exchange for obligations of the development company which bear interest at such rate, and contain such other terms, as the Administration may fix, and funds may be so advanced without regard to the use and investment by the development company of funds secured by it from other sources.

(b) The total amount of obligations purchased and outstanding at any one time by the Administration under this section from any one State development company shall not exceed the total amount borrowed by it from all other sources. Funds advanced to a State development company under this section shall be treated on an equal basis with those funds borrowed by such company after the date of the enactment of this Act, regardless of source, which have the highest priority, except when this requirement is waived by the Administrator.

1 Source: Small Business Administration.

47608-59-10

SEC. 502. The Administration may, in addition to its authority under section 501, make loans for plant construction, conversion or expansion, including the acquisition of land, to State and local development companies, and such loans may be made or effected either directly or in cooperation with banks or other lending institutions through agreements to participate on an immediate or deferred basis: Provided, however, That the foregoing powers shall be subject to the following restrictions and limitations:

(1) All loans made shall be so secured as reasonably to assure repayment. In agreements to participate in loans on a deferred basis under this subsection, such participation by the Administration shall not be in excess of 90 per centum of the balance of the loan outstanding at the time of disbursement.

(2) The proceeds of any such loan shall be used solely by such borrower to assist an identifiable small-business concern and for a sound business purpose approved by the Administration.

(3) Loans made by the Administration under this section shall be limited to $250,000 for each such identifiable small-business concern.

(4) Any development company assisted under this section must meet criteria established by the Administration, including the extent of participation to be required or amount of paid-in capital to be used in each instance as is determined to be reasonable by the Administration.

(5) No loans, including extensions or renewals thereof, shall be made by the Administration for a period or periods exceeding ten years plus such additional period as is estimated may be required to complete construction, conversion, or expansion, but the Administration may extend the maturity of or renew any loan made pursuant to this section beyond the period stated for additional periods, not to exceed ten years, if such extension or renewal will aid in the orderly liquidation of such loan. Any such loan shall bear interest at a rate fixed by the Administration.

(6) No loan shall be made under this section to any local development company after June 30, 1961. (Public Law 85-699; 72 Stat. 689, 696; 15 U.S.C. 661, 695-696.)

SMALL BUSINESS ADMINISTRATION REGULATIONS

[From the Federal Register, Wednesday, Dec. 31, 1958]

PART 108-LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES

AUTHORITY: §§ 108.1 to 108.502-1 issued under sec. 5, Pub. Law 85-536, sec. 308, Pub. Law 85–699.

GENERAL

$108.1 Policy. As part of the Congressional policy to improve and stimulate the national economy in general, and the small-business segment thereof in particular, by establishing a program to stimulate the flow of private equity capital and long-term loans for the sound financing of the operations, growth, expansion and modernization of small-business concerns, the Small Business Administration is authorized to make loans to State and local development companies which will further that policy. This policy shall be carried out in such manner as to insure the maximum participation of private financing sources. No such loan shall be made if the effect thereof will be to cause a substantial increase of unemployment in any area of the country.

§ 108.2 Definitions. For purposes of this part:

(a) "Administrator" means the Administrator of the Small Business Administration.

(b) "SBA" means the Small Business Administration.

(c) "Small-business concern" means a business concern which would qualify as

a small business under §§ 121.3-2 and 121.3-5 of this chapter.1

1 SBA advised the committee on December 2, 1959, that it will use for sec. 501 loans the definition of "small business" now used by small business investment companies. For sec. 502 loans it will use the definition applicable to the SBA financial assistance program.

(d) "Development company" means an enterprise incorporated under the law of one of the several States, the Territories of Alaska and Hawaii, the District of Columbia, or the Commonwealth of Puerto Rico with the authority to promote and assist the growth and development of small-business concerns in the areas covered by their operations, provided that said authority need not be an exclusive authority but may be part of an over-all authority to assist the growth and development of business generally in such areas. Such development company may be organized either as a profit or non-profit enterprise. A State development company is a corporation organized under or pursuant to a special legislative Act to operate statewide. A local development company is a corporation with a broad base of ownership incorporated under any applicable State laws by parties interested in furthering the economic development of their communities and environs.

(e) "Section 501 loan" means a loan authorized under section 501 of the Small Business Investment Act of 1958.

(f) "Section 502 loan" means a loan authorized under section 502 of the Small Business Investment Act of 1958.

$108.3 Procedures for loan applications—(a) Form of application. An application for a section 501 or 502 loan will be made upon "SBA Form 4" and shall include all other pertinent_information required in supporting schedules and forms. The application and supporting materials will be submitted in duplicate if the request is for a direct loan from SBA. If the loan is to be made in participation with a bank or other lending institution the application and supporting materials will be submitted in triplicate. Detailed instructions on filling out application forms will be found on SBA Form 4 and SBA Form 4A.

(b) Place of filing. Application may be made to any SBA field office serving the area in which the applicant is located, if no bank participation in the loan is available. If a bank participation is available, the application shall be submitted to such bank or other lending institution which will in turn execute the Application for Participation Agreement contained on page 4 of SBA Form 4 and transmit two copies of the application and supporting materials to any SBA field office serving the area in which the applicant or participating institution may be located. (c) Acceptance of application. A loan application may be rejected before docketing for processing by SBA when the application is incomplete in any material respect.

SEC. 501. (a) The Administration is authorized to make loans to State development companies to assist in carrying out the purposes of this Act. Any funds advanced under this subsection shall be in exchange for obligations of the development company which bear interest at such rate, and contain such other terms, as the Administration may fix, and funds may be so advanced without regard to the use and investment by the development company of funds secured by it from other sources.

(b) The total amount of obligations purchased and outstanding at any one time by the Administration under this section from any one State development company shall not exceed the total amount borrowed by it from all other sources. Funds advanced to a State development company under this section shall be treated on an equal basis with those funds borrowed by such company after the date of the enactment of this Act, rega dless of source, which have the highest priority, except when this requirement is waived the Administrator.

§108.501-1 Section 501 loans. (a) SBA is authorized to make loans to State development companies to assist in carrying out the purposes of the Small Business Investment Act of 1958, in such manner as will stimulate and supplement the flow of private equity capital and long-term loan funds for the sound financing of the operations, growth, expansion and modernization of small-business concerns. (b) Such loans may be made without regard to the use and investment by the development company of funds secured by it from other sources. If the SBA should find that the State development company has other funds available which may fulfill in whole or in part the purpose of the requested loan, it may refuse to make the requested loan or it may approve the loan in a reduced amount. However, SBA has the right in its sole discretion to determine at the time of considering a loan to a State development company whether funds then available to it from other sources can be used to better advantage if used for the purpose for which the SBA loan was requested.

(1) Loan amount. The maximum amount of obligations purchased and outstanding at any one time by SBA for a section 501 loan to any one State development company may not at any time exceed the total amount borrowed and outstanding by such company from other sources. Subject to the foregoing limitation, a loan authorized under this authority shall be in such amount as determined by SBA to be consistent with sound business practice and the purposes for which such loan is requested.

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(2) Repayment of loan. Except when this requirement is waived by SBA, the rate of repayment shall be adjusted by SBA so that a 501 loan shall be repaid at no lesser rate than the other debts of the development company which first become due; provided, however, that at no time will a 501 loan to a development company exceed the limitation set forth in paragraph (a) of this section.

(3) Security. Except where this requirement is waived by SBA when the circumstances justify such action, funds advanced to a development company under a 501 Loan shall be secured on an equal basis with those funds borrowed by such company after August 21, 1958, regardless of source. Equal basis does not require that all SBA funds be secured to the highest degree that any other development company funds are secured. It means that SBA funds shall be secured on a ratable basis.

(4) Loan purposes. (i) Subject to the approval of SBA, the proceeds of loans to State development companies may be used to provide equity capital and make long-term loans to small-business concerns. For the purpose of this section a long-term loan shall have a final maturity of not less than five years. State development companies may use section 501 loan proceeds to purchase capital stock in, or to relend to, small-business concerns in need of assistance to finance their operations, growth, expansion or modernization: Provided, however, That said authority to purchase or otherwise acquire capital stock or any other proprietary interest in a borrower shall extend only to State development companies which are owned and controlled by private interests.

(ii) Prior to the approval of a loan to a State development company, the applicant must disclose to SBA the purposes for which the loan will be used and establish to the satisfaction of SBA that the loan will further the intent of the Small Business Investment Act of 1958.

(iii) No loan will be made unless the proceeds thereof will be used within such period of time as may be approved by SBA. The proceeds of a loan may, in a proper case, be used to replace interim financing obtained subsequent to the application for the loan.

(5) Interest rate. Interest on 501 loans shall be five per centum per annum. (6) Maturity of loans. A loan shall not be made for a term longer than twenty years. Repayment of obligations may be amortized on any mutually satisfactory basis. Payment of all or any part of a loan may be anticipated without penalty on any interest payment date.

(7) Firm commitment. A firm commitment may be given by SBA subject to the payment of a commitment fee computed on the basis of one per centum per annum.

(8) Indulgence. SBA, in its discretion, may allow a deviation from or a modification of the terms of a loan at the request of a State development company upon a showing of good cause, provided, however, that in allowing such deviation or modification the SBA may attach to such allowance whatever conditions it believes to be desirable, in which event the privileges under the allowance may be exercised only under prescribed conditions.

LOANS UNDER SECTION 502

§ 108.502 Statutory provision.

The Administration may, in addition to its authority under section 501, make loans for plant construction, conversion or expansion, including the acquisition of land, to State and local development companies, and such loans may be made or effected either directly or in cooperation with banks or other lending institutions through agreements to participate on an immediate or deferred basis: Provided, however, That the foregoing powers shall be subject to the following restrictions and limitations:

(1) All loans made shall be so secured as reasonably to assure repayment. In agreements to participate in loans on a deferred basis under this subsection, such participation by the Administration shall not be in excess of 90 per centum of the balance of the loan outstanding at the time of disbursement.

(2) The proceeds of any such loan shall be used solely by such borrower to assist an identifiable smallbusiness concern and for a sound business purpose approved by the Administration.

(3) Loans made by the Administration under this section shall be limited to $250,000 for each such identifiable small-business concern.

(4) Any development company assisted under this section must meet criteria established by the Administration, including the extent of participation to be required or amount of paid-in capital to be used in each instance as is determined to be reasonable by the Administration.

(5) No loans, including extensions or renewals thereof, shall be made by the Administration for a period or periods exceeding ten years plus such additional period as is estimated may be required to complete construction, conversion or expansion, but the Administration may extend the maturity of or renew any loan made pursuant to this section beyond the period stated for additional periods, not to exceed ten years, if such extension or renewal will aid in the orderly liquidation of such loan. Any such loan shall bear interest at a rate fixed by the Administration.

(6) No loan shall be made under this section to any local development company after June 30, 1961.

§ 108.502-1 Section 502 loans. SBA is authorized to make loans to development companies to finance plant construction, conversion or expansion, including the acquisition of land: Provided, That such loans will assist an identifiable

small-business concern in accomplishing a sound business purpose: And, provided further, That no loan may be made under this section to any local development company after June 30, 1961.

(a) Sound business purpose. A loan will not be considered to be for a sound business purpose (1) if, in any case where the relocation of a small-business concern is involved, the relocation will result in the avoidance by such concern of obligations incurred in the location from which the move is to be made or if the primary incentive for such relocation is a local subsidy; (2) if the concern is being relocated from another area unless there is demonstrated to SBA a need to locate closer to the source of basic materials or to major consumers, or to consolidate operations in one location, or unless such relocation is justified by other reasons satisfactory to SBA; (3) if it is to accomplish an expansion or conversion which is unwarranted in the light of the small-business concern's past experience and management ability; (4) if it will subsidize inferior management; (5) if it provides funds for speculation; or (6) if its effect will be to encourage monopolies or be inconsistent with accepted standards of the American system of free competitive enterprise.

(b) Ineligible categories. A loan will not be made if (1) it provides assistance for an eleemosynary institution; (2) it is to finance the construction, acquisition, conversion or operation of facilities which are or will be used for recreational or amusement purposes; (3) it will provide assistance to a newspaper, magazine, radio or television broadcasting company or similar enterprise; (4) it provides assistance for a small-business concern, any part of whose gross income or that of any of its principal owners is derived from gambling activities; (5) a substantial portion of the small-business concern's gross income is derived from the sale of alcoholic beverages; or (6) it provides assistance for a small-business concern primarily engaged in lending or investment.

(c) Collateral. All loans made under this section shall be so secured as reasonably to assure repayment. The nature and value of the collateral as determined by the SBA shall be such that upon liquidation SBA can reasonably expect to be repaid in full. Collateral shall be insured against such hazards and risks as SBA may require.

(d) Loan Amount. (1) Loans made by SBA under this section shall be limited to $250,000 for each identifiable small-business concern. The total unpaid amount of any such SBA loan or loans in aid of a particular small-business concern shall never exceed $250,000. (2) Development companies may be eligible to be considered for such additional loans of not more than $250,000 each, as there may be additional identifiable small-business concerns to be assisted.

(e) Participation by the development company. A development company may be required to furnish a reasonable part of the funds necessary to accomplish the plant construction, conversion or expansion, or the acquisition of land. SBA may require that the funds to be furnished by the development company be derived from paid-in capital or surplus of the development company as well as from other sources. The amount of paid-in capital to be required will depend in part upon the amount of the loan, the maturity of the loan, the extent to which other borrowings of the development company may be subordinated to the SBA loan and such other factors as the SBA may consider appropriate to the individual case. For the purposes of this section "paid-in capital" is cash and property actually received in exchange for shares of stock issued by the development company or cash and property contributed to the development company without obligation therefor. (f) Other financing. (1) A loan will not be made unless the development company and the small-business concern shall show to the satisfaction of SBA that the desired financial assistance is not available on reasonable terms.

(2) In the case of a development company, it shall be satisfactorily demonstrated that the desired financing is not available by means of sale of stock in the development company; from funds agreed to be furnished by participating members of the development company; and by means of loans from not less than two lending institutions within the area served by the development company which have a sufficient legal and normal lending limit to cover the loan applied for. If such development company be a public corporation it shall show that such financial assistance is not reasonably available from an appropriation of public funds, nor by the public issuance of its bonds or other means.

(3) In the case of a small-business concern, the demonstration of the unavailability of the desired financial assistance on reasonable terms shall be in accordance with 120.4-2(a) of this chapter. SBA will rely on the development company's certification as to the unavailability of such other financial assistance to the smallbusiness concern.