T he majority usually rules. However, when competitive advantage - PDF document

Minority Rules Lending to Minority- and Woman-Owned Businesses by Michael J. Lubben T he majority usually rules. However, when competitive advantage over non-MWBEs, it is critical for the lending to minority- and woman-owned busi- lender to understand the foundation for MWBE certifications, nesses it is important for the lender to know its basis, and the implications to the business of a failure to the minority rules. Minority- and woman- maintain its MWBE status. owned business enterprises (MWBEs) are a This article is intended to give lenders an overview of some rapidly growing presence in our economy, of the programs in place to benefit a business organized as a with minorities owning approximately 18 percent of our MWBE, and the specific due diligence items that are impor- nation’s businesses in 2002. 1 New minority-owned firms have tant for a lender lending to a MWBE. been growing at more than four times the rate of all firms in New Jersey State and Federal Initiatives the U.S., and at nearly twice the rate of all firms in annual sales, according to U.S. census data. Nationwide, minorities There are few governmental lending programs that are spe- account for approximately 33 percent of the population, and cific to MWBEs. Although many MWBEs (and lenders) partic- women make up more than 50 percent of the population. 2 ipate in loan programs issued under the U.S. Small Business Couple these facts with massive governmental spending Administration and the New Jersey Economic Development on infrastructure and other projects through the American Authority, these and similar programs generally are open to Recovery and Reinvestment Act of 2009, and government all businesses that meet certain criteria (such as revenue size, policies to increase minority participation in government for example), irrespective of whether the business is a MWBE. contracts, and what do you get? Opportunities, and not just Instead of providing lending benefits, most of the govern- for MWBEs, but for banks and other lenders doing business ment programs designed for MWBEs relate to set-aside and with these firms. procurement programs. Set-aside programs require state and So why exactly is any of this relevant or helpful to a government agencies to award minimum amounts of their lender? First, knowing your borrower (or potential borrower), overall purchasing and contracting needs to MWBEs. the industry in which it operates, and the macro-socio and Governmental programs to incentivize the use of MWBE economic factors that influence its success (or lack thereof), is contractors and subcontractors exist at the state and federal a necessity in today’s lending environment. Second, a good level. In New Jersey, for example, Governor Jon Corzine signed lender, like a good lawyer or accountant, will want to add Executive Order 151 (EO 151) in 2009. EO 151 reaffirmed the value to its relationship with its borrowers. The more success- state’s commitment to increase the participation of minority- ful and efficient your borrower, the better for the lender (and and woman-owned businesses in the state’s purchasing and its loan portfolio) as well. Third, and perhaps most critical procurement process as set forth in Executive Order 34 (signed when lending to a MWBE, is the need to understand why the in 2006). More importantly, EO 151 requires all construction MWBE designation is important to your borrower, and what contracts entered into and funded by the state, in whole or in would happen if that designation were eliminated. part, to include mandatory language requiring contractors to A prudent lender would not lend to a highly regulated enti- make a “good faith effort” to recruit and employ minorities ty without understanding the regulatory framework within and women. EO 151 also directed the Division of Minority and which the company must operate. Similarly, if a company is Women Business Development (established by EO 34) to work minority- or woman-owned, and is using that status to gain a with various state departments and agencies to ensure alloca- 28 N EW J ERSEY L AWYER | October 2010 WWW . NJSBA . COM

tion of a specific percentage of each to third parties that the MWBE is certi- million, with employees of up to 1,500, department’s contracts to minority- and fied to have satisfied specified criteria before exceeding the size limitations. A woman-owned businesses. regarding its ownership and operations, “disadvantaged” business is a business With billions of government stimu- which may be important to the third with at least 51 percent ownership by lus dollars being deployed throughout party. Failure to maintain an applicable individuals who are socially or economi- the country and in New Jersey, and gov- certification could be disastrous for the cally disadvantaged. Individuals who are ernmental programs and incentives in MWBE (and the lender) if the certifica- members of the following groups are place specifically geared toward steering tion is required as a condition of a third- presumed to be socially disadvantaged: these dollars to MWBEs, businesses that party contract. African and Hispanic Americans, Native are able to take advantage of these Each certification program (and certi- Americans (American Indians, Eskimos, opportunities could be strong borrower fying entity) is in place for specific pur- Aleuts, and Native Hawaiians), Asian candidates for lenders. poses. For example, to take advantage of Pacific Americans and Subcontinent certain federal government procure- Asian Americans. Women, veterans and Due Diligence ment programs, the MWBE would need individuals with disabilities are also eli- Once a lender decides to dive into a federal certification. Federal certifica- gible owners, provided they meet certain the MWBE pool and lend to one of these tions are required for procurement of a additional criteria. entities, it needs to understand the due federal contract. In addition, some diligence issues peculiar to MWBEs. states, and also some corporate pro- State Certification Generally speaking, the due diligence a grams, accept the federal certifications. The state of New Jersey and its lender will perform on a MWBE borrow- This article is not intended to describe municipalities will require the state- er will be the same as the lender would all of the certification programs that issued minority and women business conduct on a non-MWBE borrower. The may be available. Following, however, is enterprise certification in order for a key question to be asked at the outset of a description of some of the more popu- MWBE to take advantage of certain con- tracting opportunities in New Jersey. 4 To the underwriting process is whether the lar certification programs in existence. borrower relies on, or uses in any way, The key for the lender is identifying be eligible for certification under this its status as a MWBE in order to conduct when a certification is necessary or being program, a business must be managed its business. Stated differently, what utilized by its borrower, and then under- by, and the daily business operations would happen to this company’s busi- standing and confirming that the bor- must be controlled by, one or more ness if it ceased to be a MWBE? Does it rower is meeting the applicable criteria minorities or women owner(s). Addi- lose key contracts? If its status as a for continued eligibility under any appli- tionally, the business must be at least 51 MWBE is critical to its operations, the cable certification program. percent owned by one or more minori- lender will need to understand why that ties or women. In order to satisfy the is, and what is necessary for it to main- Federal Certification requirement for operational control, the tain its status as a MWBE. The U.S. Small Business Administra- women or minority owners shall tion (SBA) is a primary certifying agent demonstrate technical competence in Identifying Applicable Certifications for companies seeking eligibility for cer- the affairs of the business. If a company holds itself out as a tain federal contracts. Under the SBA 8(a) BD Program, 3 the SBA certifies busi- MWBE, chances are good it is using that Private Certification Programs status to enhance its business opportuni- nesses that meet certain size and owner- Many private corporations have sup- ties, for example to bid on and obtain ship criteria, enabling them to be eligi- plier diversity and similar programs in government contracts or contracts from ble to do business with the federal place that are intended to grow the cor- large companies looking to satisfy require- government with respect to particular poration’s use of MWBEs as suppliers ments of a supplier diversity program. If contracts. The SBA 8(a) BD Program is a and contractors, and to help the corpo- the company is, in fact, receiving favor- business development program created ration in connection with its own gov- able treatment as a MWBE ( e. g ., being to help small disadvantaged businesses ernmental contracting needs and awarded a contract), it likely is (or should compete in the American economy and requirements. These corporations may be) certified as a minority- or woman- access the federal procurement market. accept federal or state certifications, like owned business under either a federal, Small is a relative term; depending on an SBA 8(a) or New Jersey MWBE certifi- state or private certification program. the industry, the annual sales of a certi- cation mentioned above. In addition, Certification programs can confirm fied entity could be as much as $21.5 they may require or accept a certifica- 29 N EW J ERSEY L AWYER | October 2010 WWW . NJSBA . COM