Is there any way to get these two together?
Basically, participating banks that make loans to small businesses will receive an equal amount of deposits from the state. Borrowers will receive loans at 2 percentage points below the going rate. In exchange, the state will accept less interest from the banks on its deposits.
The program, which could be making loans by the end of the year, would seem like a win for all sides. Banks get a steady source of low-cost money to lend, businesses receive the low-rate loans they need to expand, and the state winds up with more residents working and a stronger economy.
But the question is whether many lenders will participate. If history is any guide, small businesses could be in for a big disappointment.
The program will be fashioned after another state-sponsored effort launched in 2009 to promote lending to minority businesses. Only three community banks participate in that program, which has generated 19 loans totaling $5.5 million — out of $50 million available. Hardly a raging success.
Clearly, small businesses need help securing capital at a time when banks remain cautious after the 2008 credit crisis.
An informal survey of more than 200 small-business owners in Maryland in the past year found that their No. 1 concern was access to credit, according to Maryland Business, which advocates for small enterprises.
"We still see folks struggling," says Jim Racheff, chair of the Maryland Business advisory board. "A number of businesses say they are still concerned about being able to have reliable, predictable access to credit."
Racheff, also CEO of DMS Inc. in Frederick, saw firsthand how big banks retreated during the credit crunch.
DMS, an information technology company that's been around since the early 1980s, had done business with Bank of America for nearly 20 years. But Racheff says once the credit crisis hit, Bank of America told him it was dropping DMS as a customer — along with many other small businesses.
"I had access to credit, and then I didn't," even though nothing had changed at the company, he says.
Racheff says he sold his house to quickly raise cash to keep the business running in the short term while he lined up another source of credit.
"When you talk to small businesses, one of their top issues is always access to capital," says Del. C. William Frick, a Montgomery County Democrat, who introduced the legislation.
In recent years, Frick has pushed for the state to deposit its money in Maryland community banks as a way to promote lending to small businesses.
Frick's original legislation steered state deposits into community banks with under $5 billion in assets — knocking out big players here such as Bank of America and M&T.
Massachusetts launched a similar program just over a year ago. More than $230 million of state money has been deposited in 44 participating community banks. And in the first six months, they made 892 loans to small businesses — although the state acknowledges that some of those loans might have been made without the program. Still, that's impressive.
But the Maryland Bankers Association balked at excluding big banks, Frick says, and a compromise was reached.
Banks of all sizes will be able to participate in what's called the Linked Deposit Program for Small Businesses. The state will deposit $1 in participating banks for every $1 they lend to a small businesses.
The definition of a small business varies, based on what it does, how many people it employs and its reveune. Loan amounts can be up to $1 million for a term not to exceed 10 years.
"Times are tough, and business margins hinge on such small differences that the 2 percent can really help a business succeed," says Carol Gilbert, assistant secretary to the state's division of neighborhood revitalization.
The Linked Deposit Program for Minority Business Enterprises runs much the same way, although it hasn't taken off. It's unclear why.
Gilbert suggests that the loans aren't profitable for banks. Some bank officials say the program is too small, too narrowly focused or requires too much paperwork.
Judy Greenwald, a senior vice president at Columbia Bank in Washington County, says her bank has made more than a dozen loans through the minority business program. The loans are profitable, she says, even when money is lent at an interest rate of 2 percent to 3 percent.
"It's been really easy to work with," Greenwald adds. "I don't know why more banks aren't doing it, to be honest with you."
Regulations for the new program will have to be drawn up. Before that happens, Gilbert says, banks, legislators, small businesses and state agencies will brainstorm on how to make both programs successful.
Some community banks worry the small-business program will come with onerous paperwork. Others banks note that the problem isn't getting money to lend but finding enough qualified borrowers.
Mary Ann Scully, chairman and CEO of Howard Bank in Ellicott City, says she's on the fence about participating until she sees the new regulations. But she adds, "I think this one has a fighting chance for working."
Let's hope so. Many small businesses in Maryland are counting on that.