[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.

 CHANGES TO SBA FINANCING PROGRAMS NEEDED FOR REVITALIZATION OF SMALL 
                             MANUFACTURERS

=======================================================================

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                     WASHINGTON, DC, MARCH 20, 2003

                               __________

                            Serial No. 108-4

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house



                                 ______

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                            WASHINGTON : 2003
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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri                 DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia             CHARLES GONZALEZ, Texas
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa                     BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Bew, Ronald, Small Business Administration.......................     4
Phelps, John, Rockford Local Development Corp....................     7
Bartram, David H., U.S. Bank/SBA Division........................     9
Moncrief, L. Ray, Kentucky Highlands Investment Corp.............    10
Gast, Zach, Ass'n for Enterprise Opportunity.....................    12
Finkel, Robert, Prism Capital....................................    14

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    37
    Velazquez, Hon. Nydia M......................................    38
    Millender-McDonald, Hon. Juanita.............................    40
Prepared statements:
    Bew, Ronald..................................................    45
    Phelps, John.................................................    52
    Bartram, David...............................................    67
    Moncrief, L. Ray.............................................    73
    Prinster, Ceyl...............................................    82
    Finkel, Robert...............................................    85
    Gellerman, Lynn..............................................    94

                                 (iii)

 
      TO SBA FINANCING PROGRAMS NEEDED FORREVITALIZATION OF SMALL 
                             MANUFACTURERS

                              ----------                              


                        THURSDAY, MARCH 20, 2003

                  House of Representatives,
                        Committee on Small Business
                                                   Washington, D.C.
    The committee met, pursuant to call, at 9:38 a.m. in Room 
2360, Rayburn House Office Building, Hon. Donald A. Manzullo, 
[chairman of the committee] presiding.
    Present: Representatives Velazquez, Akin, Ballance, 
Napolitano, Bordallo, and Majette.
    Chairman Manzullo. Good afternoon. I would like to welcome 
everyone to the committee's first in a series of hearings on 
the most important legislative initiative the committee will 
consider this year--the reauthorization of the SBA programs. I 
look forward to working with the committee, the Administration, 
and the small business community to draft a reauthorization 
bill that addresses the concerns of small businesses and small 
manufacturers in particular.
    Fifty years ago, America was engaged in the great 
ideological conflict with communism. President Eisenhower 
created the Small Business Administration to ensure that 
America's small business industrial base would be healthy 
enough to assist in that great ideological conflict. Fifty 
years ago, America's small manufacturers provided many of the 
high-paying jobs that thrust this country into an era of 
unprecedented economic growth and security.
    Fifty years later America is again faced with a great 
struggle for a secure America for ourselves and our posterity. 
A key force of this batter will be America's small businesses. 
Unlike 50 years ago, America's small manufacturers are not in 
the same position to provide the high paying jobs to help this 
country secure its economic future.
    While others believe this great struggle for economic 
security can be won in a post-manufacturing society, I 
respectfully disagree. Only through a healthy manufacturing 
sector and small manufacturing sector, in particular, will 
America be able to provide the high quality jobs that allow 
people to buy homes, cars, eat in restaurants, travel, and 
purchase consumer goods that create true economic growth and 
security.
    During this reauthorization process, I will be examining 
each SBA program to determine whether it maximizes assistance 
to small manufacturers. This does not represent anything new; 
rather, it returns the SBA to its original purpose--maintaining 
a sound small business industrial base. even though at least 
one survey of America's small industrial businesses showed that 
they were optimistic, the fundamental question remains are we 
in congress and the government doing enough to ensure this 
optimism comes to fruition.
    At today's hearing, we will examine the various financing 
programs operated by the SBA--the 7(a), 504, microloans, SBICs, 
and New Market Venture Capital Companies. These programs have 
provided useful in providing financing to hundreds of thousands 
of small businesses. But are they designed to truly help 
America's small manufacturers? Do they provide the right type 
of financing and make sufficient funds available to meet the 
needs of America's small manufacturers? If not, what changes 
have to be made? Or are offshoots of these programs needed that 
are targeted to small manufacturers in the same way that SBA 
has targeted financial assistance for exporters?
    Let me make it clear. This is only the first step in the 
long process. The committee remains open to any suggestions 
from anyone that will help focus the SBA programs on small 
manufacturers. What has been said here today may be forgotten, 
but the action this committee takes during the next six months 
may well be long-remembered by the owners of America's small 
manufacturers and their children and grandchildren.
    Let me announce that on March 26, next week, we are going 
to be having a hearing on why the Department of Defense is 
allowing Pratt & Whitney to buy titanium from Russia to go on 
C-17s and on tankers that are being used by the United States 
Government.
    We have formed a coalition. It started with a question, 
started by Tim Ryan who was then on our committee for a short 
period of time, and then went to Armed Services, as to why the 
titanium manufacturing industry is under seize, and why the 
United States Government is going to Russia, who is not even an 
ally in this conflict, to buy titanium. It is a continuation of 
a government scandal that we uncovered here a year and a half 
ago when we found out that the United States Government was 
buying black berets from Sri Lanka, Indian, Union of South 
Africa, China, and Canada.
    There are 615,999 black berets made in China rotting in a 
warehouse in Mechanicsburg, Pennsylvania thanks to Mrs. 
Velazquez and me. We insisted that our fighting men and women 
should be using products made in America, and we are undergoing 
a very interesting and aggressive campaign to make sure the 
Berry Amendment is enforced to save the textile industry, to 
save the manufacturing industry in this country.
    We are going to have amendments to the Berry Amendment to 
make sure it applies to the Government Printing Office. This 
was the organization that took up a subcontract from the Air 
Force that put out an RFP for 115,000 baseball caps. After six 
explanations as to what a simple baseball cap would look like, 
the Air Force canceled the contract, assigned it to the 
Government Printing Office, which is not governed by the Berry 
Amendment yet. It will be by the time Congress is done.
    When Mrs. Velazquez and I found out who got the contract on 
those baseball caps, guess in which country GPO had contracted 
to make those baseball caps? China. And we severed that 
contract because we were very upset over what is going on with 
our manufacturing base in America.
    That is a continuation, that is an inkling of the nature of 
the hearings we are going to have on manufacturing. This is 
hardball. We have lost 10,000 manufacturing jobs in the 
congressional district that I represent in the last two years, 
and so has the Speaker of the House.
    There is a hollowing out of manufacturing that is going on, 
and even when we see items that are supposedly made in America, 
hey, guys, check to see what the contents are. The hollowing 
out is we are becoming a nation of assemblers as opposed to a 
nation of manufacturers.
    So we are on a roll, Mrs. Velazquez. We are going to get 
this job done. We are going to save a lot of jobs in America. I 
yield to you.
    [Mr. Manzullo's statement may be found in the appendix.]
    Ms. Velazquez. Thank you, Mr. Chairman.
    As the committee begins the process of reauthorizing the 
Small Business Administration today, we look at one of the most 
critical challenges facing small business--access to capital. 
When small businesses cannot find capital, they cannot survive.
    With the current economic downturn, finding capital is 
becoming harder and harder for small firms. Many are forced to 
use credit cards or depend on family and friends to fill this 
financing vacuum.
    Thankfully the SBA loan programs were created to fill this 
gap. Last year these programs provided $21 billion in capital, 
accounting for 40 percent of all long-term small business 
lending to this nation's entrepreneurs. These programs play a 
valuable role in helping our nation's small businesses.
    And in today's hearing, we will look at how the SBA loan 
programs can be improved to meet the financing needs of small 
businesses.
    This year has been a difficult one for the SBA loan 
programs. Higher fees, lack of funding, and problems with 
subsidy rates have plagued some of the SBA's most important 
lending programs like the 7(a), 504, and SBIC.
    Given this, the reauthorization we are about to undertake 
will be all the more difficult. Because of the very complex 
issues surrounding the SBA loan programs, I believe we should 
only reauthorize the agency for one year at a time while the 
problems are sorted out. This will be in the best interests of 
the agency and the small business owners it serves.
    Aside from this nuts and bolts problem, we also need to 
answer some more philosophical questions surrounding the 
mission of the loan programs. The agency has been so focused on 
other things, including making more small loans and offering 
short-term credit, that it seems to have lost sight of the 
reason the SBA loan programs were created in the first place--
to provide long-term capital to this nation's small businesses. 
This was their original purpose.
    In keeping with this spirit, we need to find new and 
creative ways to make the SBA programs into the premier lending 
tools of the 21st century that they could be and should be. By 
opening up avenues of capital, we open up opportunities for 
small businesses.
    First and foremost we need to drastically reduce the 
paperwork burden of the lending programs. There is simply too 
much red tape. Right now lenders must assembly 120 documents 
that comprise 1,000 pages to make a loan. This discourages them 
from making loans, and small businesses from using the 
programs.
    If we can streamline the programs and make them more user 
friendly, then more lenders and small businesses will tap into 
them. We want to avoid its lenders and small businesses sitting 
on top of a mount of paperwork when using the SBA's loan 
programs. This is not an incentive, but rather a disincentive. 
In offering more incentives to entice lenders and small 
business owners to use the programs we can get capital where it 
belongs--into the hands of small business owners.
    Much like our nation, the SBA and its loan programs are at 
a crossroads. Right now the SBA loan programs make up almost 
half of all financing, both public and private. Imagine what 
they could do if they were adequately funded and operating 
under new and innovative policies. These programs could finance 
the next Microsoft or FedEx, which have revolutionized the way 
we do business.
    Working together, I know that we can make the lending 
environment more conducive to small businesses. Given the 
current economic situation small businesses need our help now 
more than ever, and it is the SBA loan programs that can make a 
real difference.
    Thank you, Mr. Chairman.
    [Ms. Velazquez's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    Our first witness is Mr. Ronald Bew, Associate 
Administrator for Capital Access at the SBA.
    We have the lights at the five-minute. If you all could 
follow that as closely as possible, we would appreciate it.
    I understand we may have a series of votes some time past 
ten o'clock, and we will adjourn accordingly and come on back.
    Mr. Bew, we look forward to your testimony.

 STATEMENT OF RONALD BEW, ASSOCIATE ADMINISTRATOR FOR CAPITAL 
             ACCESS, SMALL BUSINESS ADMINISTRATION

    Mr. Bew. Thank you, Mr. Chairman.
    Chairman Manzullo. If perhaps you need one or two more 
minutes because of your key position there representing the 
administration, we can accommodate you.
    Mr. Bew. Thank you, sir.
    Chairman Manzullo. Thank you.
    Mr. Bew. Good morning. Thank you, Mr. Chairman, Ranking 
Member, and Members of the Committee. I appreciate the 
opportunity to discuss SBA's financial assistance programs.
    Before I begin, the thoughts and prayers of the SBA with 
our servicemen and women protecting our freedoms.
    President Bush recognizes the vital role that small 
businesses play in creating opportunity for millions of 
Americans. One of the key items in the President's small 
business agenda is assisting entrepreneurs. SBA's role in 
achieving that goal is to increase opportunities to start and 
grow small businesses by expanding access to capital and 
providing technical assistance.
    I am proud of the accomplishments Capital Access has 
achieved so far. We have dramatically increased small 
businesses' access to credit: one, through the improvements in 
the SBA Express; two, adding credit unions as eligible 
intermediaries; three, exploring wider coverage in our 504 
program; four, looking to private sector solutions to help us 
in our oversight and portfolio management; and five, providing 
65 percent by number of all venture capital investments through 
our SBICs.
    When I came to the SBA, the administrator set clear goals 
for me: improve access to capital, expand economic opportunity, 
and help small businesses do what they do best, create jobs and 
stimulate our economy. Small businesses create two-thirds of 
all new jobs in this country. This chart illustrates our 
contribution.
    This administration is committed to reaching more small 
businesses while using the same amount of taxpayer resources. 
By reducing the average loan size, we are assisting more small 
businesses and creating more jobs. In 2002, Capital Access 
created or retained 573,000 jobs.
    Historically, we calculated job creation and retention by 
estimating one job created or retained for every $32,000 lent. 
Now SBA is using actual portfolio data to determine job 
creation. The data indicates that smaller loans create more 
jobs than larger loans.
    In fact, loans under $50,000 have the greatest return on 
the number of jobs created, requiring only $14,717 to create 
one job whereas loans between $1 million and $2 million require 
over $140,000 to create one job.
    Clearly, these numbers prove we get more impact on job 
creation from smaller loans. This is one more indication that 
our performance goals will continue to create greater 
employment opportunities to assist in the recovering economy.
    Additionally, SBA found that the smaller loans are helping 
more emerging small businesses, including minorities and women. 
While the dollar amount lent to minorities has remained 
unchanged or increased slightly, the number of loans has 
increased dramatically over the past year. In the first five 
months of 2003, we are 43 percent ahead of last year's numbers 
for lending to minorities, 43 percent, and 35 percent ahead for 
women.
    We believe that reducing the average loan size has provided 
increased economic opportunities to more emerging small 
businesses, thus improving the effect our programs have in 
helping the economy.
    Now let me be clear, we are not ignoring small businesses 
that need larger loans. The goal of the administration is to 
maximize the economic impact of our loan program. That means 
job creation and retention, and marketing focus on small loans 
is meant to do precisely that.
    As part of our goal to make smaller loans, SBA consulted 
with the industry to improve the SBA Express Program. In SBA 
Express, the guarantee is 50 percent in exchange for the 
lenders using their own processes and forms to make the credit 
decision. We are still evaluating aspects of the pilot.
    The most important task is to find a right balance between 
simplification and maintaining adequate oversight. To date, SBA 
Express and smaller loans in general tend to have lower 
defaults than larger loans.
    As for funding, the 7(a) funding request for 2004 is in 
line with historical levels. In 2002, the SBA had a lending 
level of $9.4 billion in 7(a) loans. Additionally, in 2002, the 
SBA guaranteed $1.8 billion under the STAR program.
    STAR, which expired in January, was specifically designed 
to assist small businesses that had been negatively affected by 
the September 11th terrorist attacks. Some have suggested that 
SBA's baseline for 7(a) should include STAR amounts. However, 
because STAR was designated for 9/11 relief, we cannot assume 
that those borrowers would have sought out a 7(a) loan if there 
had not been a terrorist attack.
    As you know, SBA is celebrating its fiftieth anniversary 
this year. We feel this is an excellent opportunity to take a 
look back and reflect on our successes and then move forward 
with renewed vision.
    Administrator Barreto and I are very happy with SBA's 
results so far but we know that we can accomplish more. The 
administration is submitting legislative proposals for your 
consideration. The proposals are designed to improve existing 
SBA programs to better serve America's small businesses and 
stimulate our economy.
    I would like to highlight four of them:
    One, small business lending companies oversight 
improvement. SBA is the sole regulator of the SBLCs. Our 
proposal will allow SBA to regulate these SBLCs in a manner 
consistent with other federal regulators. This proposal is in 
response to recommendations from the inspector general, the GAO 
and congressional committees.
    Two, improvements to the microloan program. We are 
proposing changing the eligibility requirement with 
participation in the microloan program to include employees' 
experience and allowing intermediaries more flexibility in 
determining how to best serve their customers with technical 
assistance.
    Three, changes to the loan loss reserve applicable to the 
504 premier certified lending program. SBA recognizes that the 
original statutory formula is unduly restrictive and 
burdensome. The proposal is a less restrictive, more flexible 
graduated system commensurate with risk. It is our hope that 
this will encourage our 504 partners of whom choose not to 
participate in the PCLB lending due to the high reserves 
current requirement.
    And four, a statutory change to allow the SBIC program to 
remain at a zero subsidy.
    Finally, Mr. Chairman, I will address the question you 
posed in your invitation letter. All of our programs are 
available to the small manufacturers. The 504 and SBIC programs 
may be better suited to manufacturing expansion than others. I 
can tell you that in 2002, SBA provided financing of over $2.7 
billion to small businesses in the manufacturing sector as the 
chart reflects.
    However, in the 504 program, loans to manufacturing 
businesses have dropped over the last four years. As you are 
aware, SBA just completed the comment period for potential 
improvements to the 504 program. We see great opportunities for 
this program to assist more small manufacturers.
    We are looking forward to working with you to come up with 
creative solutions to assist small manufacturers and to 
discussing those needs with you and other witnesses here today.
    Thank you for your time, and I am happy to answer questions 
you may have.
    [Mr. Bew's statement may be found in the appendix.]
    Chairman Manzullo. I thank you for preparing your testimony 
to coincide with the theme of the hearing. It is extremely 
refreshing. Thank you so much.
    Mr. Bew. All right.
    Chairman Manzullo. Our next witness is my constituent, John 
Phelps. John is the Executive Director of Rockford Local 
Development Corporation in Rockford, Illinois, a city which in 
1981 led the nation in unemployment at 24.9 percent. We know 
something about unemployment and manufacturing, do we not, 
John.
    Mr. Phelps. Yes, we do, Chairman.
    Chairman Manzullo. Thank you. I look forward to your 
testimony.

 STATEMENT OF JOHN PHELPS, EXECUTIVE DIRECTOR, ROCKFORD LOCAL 
                    DEVELOPMENT CORPORATION.

    Mr. Phelps. Thank you, Chairman.
    Good morning, my name is John Phelps, and I am pleased to 
comment on the reauthorization of the 504 program and on our 
industry's proposals to help revitalize America's small 
manufacturing industries.
    The NADCO CDC members and first mortgage partners provided 
$6 billion in long-term capital to job-creating small 
businesses last year. SBA has just released data stating that 
504 created or retained more than 325,000 jobs in just the last 
three years. Using SBA's loan and job data, the 504 job 
creation costs for these three years is $20,268 per job.
    Thank you also, Chairman, for starting the SBA 
reauthorization process early this year. To continue our 
service to small business, the 504 program must be reauthorized 
prior to October 1, 2003. If not signed into law by that date, 
our authority to provide 504 ceases.
    Further, to ensure the program is delivered at no cost to 
the government, our user fees must also be reauthorized. We 
urge the committee to act quickly to authorize the program for 
another three years and to consider our program initiatives to 
expand the program.
    The 504 fees are a product of the subsidy model forecast 
developed by SBA and OMB. We believe the current process 
continues previous flaws. The default forecasts need further 
work, the 17 percent recovery forecast seems disconnected with 
the highly publicized successes of both the asset sales and 504 
liquidation pilot created by Congress. We ask you to seek 
further information on these figures so crucial to calculating 
our borrower fees.
    I would like to address the needs to support America's 
small manufacturing firms. NADCO believes that a return to a 
growing economy must include a revitalization of our core 
manufacturing industries. Given the connectivity of 
international markets, our small manufacturers must achieve 
extraordinary new levels of productivity to compete on both 
price and quality. Doing this requires additional capital 
expenditures for plant expansions and sophisticated new 
equipment.
    The National Association of Manufacturers, one of America's 
most respected trade groups, completed a survey last year on 
credit rationing by lenders. They concluded: Even with record 
low interest rates, 43 percent of small manufacturers said 
their cost of borrowing had increased due to lender fees and 
interest charges. Restrictive lending has impacted capital 
spending and new hiring for 37 percent of firms.
    With low interest rates and favorable loan terms from 504, 
we can provide substantial expansion capital to small 
manufacturers who are expanding their markets, products and 
most importantly, their employment levels.
    Our request to the committee is to provide an extraordinary 
series of changes to immediately address the capital needs of 
small manufacturer. These include: an update of the rural 
definition to assist rural manufacturers that have no 
supportive banks; provide debt refinancing to enable them to 
immediately lower their borrowing costs; enable a combination 
with 7(a) to allow greater financing for great plant and 
inventory; provide special debenture up to $4 million to reach 
capital-starved manufacturers; provide a special job ration of 
one job per 100,000 for purchase of more machinery for 
manufactures.
    I would like to share just one example of why our program 
changes are needed to jump start manufacturing in Rockford, 
Illinois.
    Increasing the loan size eligibility amount is critical to 
keeping W.A. Whitney in Rockford, Illinois and locally owned. 
This manufacturer of stamping machines and other large metal 
cutting machines employs 125 skilled machinists. It has been 
put up for sale by its corporate parent, and a local buy-out 
group faces a $3 million funding gap to purchase the business. 
Unless Rockford can bridge this gap, Whitney will likely be 
sold to an out-of-state or offshore competitor, and our 
community will lose 125 skilled manufacturing jobs.
    This need could be solved through use of a larger debenture 
as we propose in our legislative package.
    To put Americans back to work and to get new capital to 
manufacturing, our country needs 504 more than ever. NADCO is 
providing today your committee with a comprehensive legislative 
package that will expand access to 504 by growing capital-
starved borrowers.
    Additionally, we recently gave SBA more than 100 pages of 
program regulatory recommendations to enhance and grow the 
program. I am convinced that Administrator Barreto also plans 
to expand our program to reach small business. Our industry is 
working overtime to grow this program and provide its 
advantages to more businesses.
    We urge the committee and the administrator to support our 
proposals to expand economic stimulus. And I am pleased to 
answer any questions. Thank you.
    [Mr. Phelps' statement may be found in the appendix.]
    Chairman Manzullo. W.A. Whitney makes a laser cutting 
machine that's the most powerful in the world. It will cut 
through one and a half inches of armor plate. There is not 
anything like that.
    John, I want to work with you on keeping those jobs in 
Rockford. That is obviously cutting-edge technology we want to 
keep there.
    Mr. Phelps. Thank you, Mr. Chairman.
    Chairman Manzullo. Our next witness is David Bartram. David 
is Vice Chairman of the National Association of Government 
Guaranteed Lenders, and President of the SBA Division of the 
U.S. Bank. I look forward to your testimony.

    STATEMENT OF DAVID H. BARTRAM, PRESIDENT U.S. BANKS/SBA 
   DIVISION, AND VICE PRESIDENT, THE NATIONAL ASSOCIATION OF 
          GOVERNMENT GUARANTEED LENDERS, INCORPORATED

    Mr. Bartram. Thank you very much, Mr. Chairman, and I 
certainly appreciate the opportunity to be here to testify.
    I am David H. Bartram, President of the SBA Division of 
U.S. Bank. I am here today in my capacity as Vice Chairman of 
the National Association of Government Guaranteed Lenders.
    Let me begin my testimony by saying that we are deeply 
disappointed to learn that the SBA will not rescore STAR loans 
using the new econometric model made this fiscal year before 
the expiration of the program on January 10th. Clearly, STAR 
loans are 7(a) loans since the terms and fees are identical to 
7(a) loans made during this fiscal year. And S. 141 provides 
for econometric model to be used retroactive to October 1 of 
2002.
    We believe these loans should be rescored, and we ask that 
this committee and Congress vigorously pursue this issue. 
Without rescoring of STAR loans made this fiscal year, there is 
a strong likelihood that the SBA will not have sufficient loan 
funds to meet demand for the balance of this fiscal year.
    Additionally, the administration's requested Fiscal Year 
2004 program level would be more than 25 percent below the 
projected level of demand of $12.5 billion. A $9.3 billion 
program would most likely result in SBA rationing of credit, 
something that the leadership of this committee has already 
objected to for the current fiscal year.
    A Fiscal Year 2004 7(a) loan program of only $9.3 billion 
will likely lead to impose loans size caps again next year.
    For whatever reason, the administration continues to say 
that the FY 04 requested 7(a) program level is in line with 
historical usage. We all know that the history changed on 9/11 
of 2001. This SBA in a recent response to committee questions 
says 9/11 was a one-time event that funded through a 
supplemental appropriation.
    Clearly, the impacts of 9/11 continue to have an impact on 
small businesses. Today, the economy continues to operate at 
levels far below economic levels prior to 9/11. Lenders have 
tightened their conventional credit standards. Small businesses 
that used to qualify for conventional credit now find they must 
turn to the SBA programs.
    As a result, 7(a) loan volume has been increasing. During 
Fiscal Year 2002, $11.1 billion in 7(a) loans were made. For 
Fiscal Years 2003, 7(a) lending is slightly ahead of Fiscal 
Year 2002 pace event though there was a $500,000 7(a) loan cap 
in place for the first five months of this fiscal year.
    Without the loan cap, loan volume for this fiscal year 
would be farther ahead of last year's. The relevant history for 
borrowers who need access to long-term capital through the 7(a) 
program is post-9/11. Loan demand last fiscal year was $11.1 
billion, and we anticipate as much as $11.8 billion this year, 
and $12.5 billion in 2004.
    Mr. Chairman, as you know many small manufacturers turn to 
the SBA program for financial assistance. Through the 7(a) 
program, manufacturers can purchase capital assets like plant 
and equipment, or they can obtain much needed long-term working 
capitals. Companies have a cash flow benefit from the longer 
maturities offered by the SBA's 7(a) loan programs.
    Manufacturers need sizable loans for plant and equipment as 
well as working capital. The National Association of 
Manufacturers is already indicating its members are being faced 
with credit crunch and more manufactures are turning to the 
7(a) program. This would be the wrong time to limit SBA 7(a) 
financing.
    Inadequate budget request could cut off the borrowing 
capabilities of businesses like manufacturers who need larger 
7(a) loans. In order to preserve jobs and productions and to 
avoid loan caps next year, a $12.5 billion program level will 
be needed.
    As part of the reauthorization bill, the National 
Association of Government Guaranteed Lenders has recommended 
some changes to the 7(a) program. I would like to have these 
put into the record. There are nine items that are attached to 
my testimony.
    I would certainly be glad to answer any questions. And 
again, thank you very much for the time.
    [Mr. Bartram's statement may be found in the appendix.]
    Chairman Manzullo. Your requested exhibits will be placed 
into the record without objection.
    Our next witness is Raymond Moncrief; is that correct?
    Mr. Moncrief. Yes, sir.
    Chairman Manzullo. Executive Vice President and Chief 
Operating Officer of Kentucky Highlands Investment Corporation, 
and we look forward to your testimony.

  STATEMENT OF L. RAY MONCRIEF, EXECUTIVE VICE PRESIDENT AND 
    CHIEF OPERATING OFFICER, KENTUCKY HIGHLANDS INVESTMENT 
                          CORPORATION

    Mr. Moncrief. Thank you, sir.
    Chairman Manzullo, Ranking Member Velazquez and members of 
the Small Business Committee, I thank you for the opportunity 
to testify before you today on behalf of a very important 
investment program, and that is the New Market Venture Capital 
program.
    Again, my name is Ray Moncrief, and I am Chief Operating 
Officer of the Kentucky Highlands Investment Corporation. I am 
also Chairman of the General Partner of the Southern 
Appalachian Fund, one of seven conditionally approved new 
market venture capital companies.
    I am also here today to urge the reauthorization of the New 
Markets Venture Capital Program.
    First, let me begin by expressing deep appreciation on 
behalf of myself, the Community Development Venture Capital 
Alliance, and the six other conditionally approved new markets 
venture capital companies to Chairman Manzullo and Ranking 
Member Velazquez for your steadfast commitment to ensuring the 
successful implementation of the New Markets Venture Capital 
Program.
    Your support for technical legislative adjustments and your 
insistence that the conditionally approved New Markets Venture 
Capital Companies be given adequate time to raise the private 
regulatory capital required under the statute has been 
absolutely essential to the success of this program. I deeply 
appreciate your leadership and your staff's hard work on your 
behalf.
    Congress enacted the New Markets Venture Capital Program 
for three reasons:
    One, many low-wealth towns and cities across the country 
missed out on the infusion of equity capital and business 
wealth generated during the nineties economic boom;
    Two, 98 percent of traditional venture capital is invested 
in metropolitan areas, the majority of which are along either 
of the two coasts;
    And three, SBA does not operate a similar program targeted 
to equity investment in low-income communities; the majority of 
investments made by SBICs are made in middle to upper-income 
communities.
    My company has a great deal of experience in helping small 
businesses, primarily manufacturing business, succeed in low-
income area. We are based in London, Kentucky. Kentucky 
Highlands works in some of the poorest counties in the country 
where the unemployment rate stays consistently above the 
national average.
    Since 1968, Kentucky Highlands has invested more than $100 
million in over 200 business ventures, and helped create or 
maintain 8,000 jobs in our service area. We have accessed over 
$30 million of business investment capital at any time, of 
which $11 million is for equity investment.
    We have invested successfully in many manufacturing 
enterprises, including a houseboat manufacturer, a military 
tent manufacturer, and an electronics fabricator.
    The New Markets Venture Capital Program occupies a unique 
niche in promoting investments in small businesses in poor 
communities. The New Markets Venture Capital Program provides 
guaranteed financing to help capitalize venture capital funds 
and grant financing to provide operational assistance to 
portfolio companies.
    There are two key elements to the New Markets Venture 
Capital Program that distinguish it from conventional-like 
refunds and from other SBA programs.
    First, it is the only federal program targeted specifically 
towards leveraging equity capital for small business 
investments in low-income areas; and secondly, the program 
builds into it grants for operational assistance that fund 
managers can work with portfolio companies on a daily basis to 
help ensure their success.
    I am here to declare that the program thus far is a 
success, and it is meeting the expectations that Congress 
established for it under the statute. Two new markets venture 
capital companies have already begun investing, and there are 
five companies that expect to complete final approval and begin 
investing in the coming weeks.
    Of the five remaining, there are two that will close 
eminently, and there are three that really is on the marginal 
bubble by March 31st of closing. They have all raised their 
regulatory capital and operational assistance dollars, but they 
are on the bubble of being able to being able to get through 
the paperwork of getting that done.
    Despite not having two years to raise the regulatory 
capital allowed under the program, the conditionally approved 
companies succeeded in raising the required capital within 17 
months of designation. Collectively, the seven conditionally 
approved companies raised a total of $70 million of private 
investment capital in less than 18 months despite the poor 
economy.
    We did this in one of the most difficulty fund raising 
environments the venture capital industry has ever faced. In 
the year 2000, before the stock market crashed, the venture 
capital industry raised $106 billion in new capital. In 2001, 
it raised $26 billion. And the economic environment in which we 
were operating our ability to raise our full requirement for 
regulatory capital for venture funds targeted to some of the 
most economically distressed parts of our nation was truly 
extraordinary.
    Due to the New Markets Venture Capital Program 
approximately 175 million of venture capital will be available 
for small business development in targeted low-income 
communities in 16 states.
    Chairman Manzullo. How are you doing on time? I would like 
to try to get as many statements in before the bell goes off 
because we are having a security briefing, and I have got to do 
some juggling here.
    So we thank you for your testimony.
    Mr. Moncrief. Thank you, sir.
    [Mr. Moncrief's statement may be found in the appendix.]

    Chairman Manzullo. You end right in the middle of it, sorry 
about that.
    Our next guest, Zach Gast is a substitute guest here 
because the person originally designated to come here got 
caught in snowstorms in Colorado.
    Mr. Gast. That is right. She has reported she cannot even 
get out of the house.
    Chairman Manzullo. So if you can identify the group which 
you are representing today and a little bit about your personal 
background, go right ahead.

     STATEMENT OF ZACH GAST, POLICY AND RESEARCH MANAGER, 
             ASSOCIATION FOR ENTERPRISE OPPORTUNITY

    Mr. Gast. Sure. Thank you, Mr. Chairman, Ranking Member 
Velazquez, and members of the committee for the opportunity to 
testify before you today.
    My name is Zach Gast, and I serve as policy and research 
manager for the Association for Enterprise Opportunity. We 
represent more than 450 microenterprise programs across the 
country, and we are testifying for the MicroLoan Program today, 
which is the capital access program we work on.
    Unfortunately, Ceyl Prinster, who was scheduled to testify 
before you today, has been snowed in due to the blizzard in 
Colorado. I would like to submit her written testimony for the 
record, and then make a brief statement in support of those.
    [Ms. Prinster's statement may be found in the appendix.]
    Chairman Manzullo. All those statements will be submitted 
to the record without objection. Thank you.
    Mr. Gast. Okay. The SBA MicroLoan Program which was created 
as a demonstration project during the first Bush Administration 
is unique because it was created with the needs of specific 
target market in mind: entrepreneurs that need both access to 
capital and intensive management assistance. These are 
typically entrepreneurs that are just starting out. They have 
been in business for awhile, but they are looking to expand and 
need assistance to do so.
    The SBA MicroLoan Program provides two types of funding to 
nonprofit intermediaries around the country:
    Loan capital, repayable over 10 years to the SBA on 
slightly concessionary terms. This capital is then loaned out 
by the nonprofit intermediary to microenterprises in loans of 
$35,000 or less. To receive any loan capital, an intermediary 
must provide an up front cash match that the SBA holds a 
collateral along with an assignment of all the loans made with 
the funds.
    Second, operational grants to provide intensive marketing 
management and technical assistance to assist microloan 
borrowers. This assistance is the key to successful outcomes 
for the businesses that access the MicroLoan Program.
    While some have suggested that the MicroLoan Program be 
replaced with guaranteed bank loans, I would reiterate micro 
lending does not serve bankable clients, but works to build 
businesses, creating revenue, income and jobs with those 
individuals to which the banks cannot provide loans 
successfully. In a few cases the loan sizes may be the same but 
across the board the target market is very different. Most 
borrowers from the MicroLoan Program would fall under the 
bank's criteria even with a guarantee.
    With this program we are enable entrepreneurs to increase 
revenue, general personal income and create jobs. Recent 
estimates put the return on investment in microenterprise 
development at $2.06 to $2.72 per dollar invested. Is the 
federal government willing to invest $1 to receive more than $2 
in return?
    I would like to offer some additional statistics to detail 
the work of the program. In the last fiscal years, the SBA 
MicroLoan Program closed 2,580 loans with an average loan size 
of $14,238, which is remarkably similar to the a statistic we 
have seen earlier.
    Forty-four percent of these businesses were start-ups with 
less than six months of operation. More than half were 
minority-owned and more than half were women-owned.
    You heard at your budget hearing in February that this 
recent research has demonstrated that microloans are our most 
effective tool in creating jobs. In addition, I would emphasize 
to members that the microloan industry is more effective now 
than ever. Last year's loans account for nearly one-sixth of 
the program's historical loans, and that's a 12-year history, 
so we are making progress and getting better, and it's an 
indication of the demand for these products across the country.
    I would now like to address our suggested changes to the 
authorizing legislation. We continue to think about ways to 
improve the program but would offer the following thoughts 
today.
    As the microenterprise industry has become more advanced, 
many intermediaries have begun to see the need to develop more 
sophisticated loan instruments to match the need of our 
clients. Intermediaries are developing lines of credit and 
other loan terms that more closely match the cash flow and 
capital needs of micro entrepreneurs across the country. I 
would particular point to manufacturing businesses.
    Right now we are restricted to providing short-term loans, 
which means that investments in capital equipment are 
particularly difficult for these small enterprises that don't 
have the liquidity to support repayment in those first couple 
of years of the loan.
    Likewise, a similar evolution has occurred in the provision 
of technical assistance. Intermediaries and national technical 
assistant partners are increasingly being asked to provide more 
specialized assistance for entrepreneurs, moving beyond 
generalized technical assistance to sector-specific and 
technical issues for these businesses.
    We are meeting this challenge by remaining flexible. We are 
finding individuals in the community who have those abilities 
and matching them up with businesses. Two changes to the 
program would facilitate this process.
    First, the cap on pre-loan technical assistance should be 
lifted. It's currently at 25 percent. Second, the limit on 
outsourced technical assistance that uses these assets in the 
community should be increased from 25 to 35 percent.
    Like many SBA loan programs, the MicroLoan Program subsidy 
rate has received increase in tension over the past two years.
    Chairman Manzullo. Mr. Gast, could I cut you off a second? 
We are expecting a series of three votes that are going to come 
up.
    I would like to go to Mr. Finkel. I want your testimony 
before the bells go off and chaos starts around here. We will 
get back to you, Mr. Gast. Thank you.

 STATEMENT OF ROBERT FINKEL, PRESIDENT, PRISM OPPORTUNITY FUND

    Mr. Finkel. Certainly.
    Chairman Manzullo, Ranking Member Velazquez, and members of 
the committee.
    First of all, it is my honor to testify on SBIC program 
issues that the committee will work on this year.
    My name is Robert Finkel, founder and managing partner of 
Prism Opportunity Fund. We were licensed as a participating 
securities SBIC in 1999. We received a go-forward on a second 
SBIC license to focus in on manufacturing companies in the 
midwest.
    With that introduction, I am going to turn to issues 
related to the SBIC program. I will summarize my testimony but 
ask that the full version be included in the record.
    Consistent with what has been done in the past, we suggest 
a three-year reauthorization period. That is short enough to 
give Congress appropriate control over the program, yet sends 
the right signal to the marketplace that the program has strong 
congressional support. I would suggest the reauthorization 
levels are in my testimony.
    We support the very minor increase in prioritized payment 
rate for the participating security SBIC. That is required to 
keep the subsidy rate at zero.
    And turn to suggestions, to increase SBIC investments in 
manufacturing, SBIC provides significant support to U.S. 
manufacturer. To note, SBIC has invested $737 million in 434 
manufacturing companies in 41 states. That was 28 percent of 
the SBIC dollars invested supporting 68,000 jobs. However, we 
believe we can do more.
    To encourage and make more money available to invest in 
manufacturing companies, we suggest that SBICs investing in 
manufacturing companies be allowed to exceed the current 
maximum leverage cap; not to exceed the three-to-one leverage 
ratio set by the SBIA Act. However, investing in manufacturing 
is very capital-intensive, and by definition requires 
substantial capital resources.
    As it stands, the out limits, the amount, the maximum 
amount of leverage available to any one SBIC or a group of 
SBICs no matter how much private capital it has attracted from 
the outside. The cap is constraining. The SBICs would be able 
to invest more in manufacturing companies but for that limit.
    This exception to the limit would increase manufacturing 
investments by SBICs and lead to the formation of new SBICs 
with a manufacturing focus.
    Another area of improvement would be the elimination of the 
mandatory requirement for SBICs, for the very largest SBICs to 
invest a portion of those dollars in smaller enterprises. These 
smaller enterprises for these bigger SBICs may not fit their 
investment focus or expertise, and therefore potentially a 
force fit.
    What that leads us to is increased risk for the SBIC, and 
potentially SBA. It also provides less time for the SBIC to 
spend with the portfolio company. I am talking about SBICs that 
are large, $15 billion in private capital assets or more, and 
that represents four percent of the SBICs that are out there. 
We will all still be subject to investing in the small business 
concern, obviously.
    Another suggestion is to clarify the congressional intent 
with regard to capital impairment. While capital impairment may 
not be a permissible reason for rejecting a leverage request, 
we believe it was not the congressional intent to unilaterally 
shut down or liquidate in advance the due date or force draw 
down of funds to pay down leverage versus investing in private 
companies.
    If SBA becomes a judge to make a unilateral decision when 
to shut down a fund in advance of the due date of these 
outstanding securities, private investor support for the 
program will falter. If SBA is able to shutdown an SBIC in 
midstream simply because of the capital impairment ratios, SBA 
will not be viewed as a credible partner to sophisticated 
private investors.
    Thank you for consideration of our proposal. We believe 
these changes that we have changes that we have suggested will 
make the program stronger and will benefit U.S. small 
businesses, in particular, U.S. small manufacturers.
    I would be pleased to answer any questions you have about 
the program or proposals.
    [Mr. Finkel's statement may be found in the appendix.]
    Chairman Manzullo. Thank you.
    We have three votes. It is going to be about 40 minutes. 
When we come back, Mr. Gast, we will let you start off to give 
us your recommendations for change. Okay?
    We stand adjourned for about 40 minutes.
    [Recess.]
    Chairman Manzullo. The committee is called back to order.
    Mr. Gast, we cut you off at that point where you were in 
the process of making your recommendations; is that correct?
    Mr. Gast. I was actually just wrapping up, but I would be 
glad to----.
    Chairman Manzullo. Well, why do you not go ahead because 
you--go ahead, take the time to wrap up.
    Mr. Gast. Sure.
    Chairman Manzullo. Then we will get into the questions. 
Thank you.
    Mr. Gast. The only thing I would like to add is that both 
the House and Senate Small Business Committee reviewed most of 
the changes I am recommending, and passed all of those out of 
committee last year, so we hope that this process can go 
forward smoothly in the coming year.
    Chairman Manzullo. Thank you.
    I have a question of Mr. Bew. In fact, I handed him a copy 
of the question before so he had some opportunity to do some 
research on it.
    Mr. Bew. Thank you.
    Chairman Manzullo. And so I will read the script on it.
    Mr. Bew. Do you want me to read the question?
    Chairman Manzullo. Go ahead and read the question.
    Mr. Bew. Okay. This in regards to the STAR program. Will 
you count the defaults under the STAR program in calculating 
the subsidy rate for the disaster loan program rather than the 
7(a) loan program?
    The experts tell me no, that this is a separate program and 
re-estimates will be done separately from 7(a), so it will have 
no impact on 7(a) or the disaster program.
    Ms. Velazquez. Mr. Chairman.
    Chairman Manzullo. Why do you not go ahead?
    Ms. Velazquez. No. I just--it was not that I was not paying 
attention, but can you please answer the question again?
    Chairman Manzullo. Let me conclude my questions. I will 
have some a little bit later on. Then why you not go ahead, 
Mrs. Velazquez.
    Mr. Bew. Do you want me to repeat it?
    Ms. Velazquez. What was your answer to the question?
    Mr. Bew. I think the question was will the defaults be 
counted for the STAR program. And we feel that this is a 
separate program. Re-estimates will have no impact on the 7(a) 
or the disaster program.
    Ms. Velazquez. Okay, thank you.
    Mr. Bew, I am going to ask you the same question of you 
that I asked the Administrator during last month's budget 
hearing. In the omnibus appropriation bill, the appropriators 
admonish you to stop using risky schemes to fund the 7(a) 
program. Given those statements, how can the agency come before 
the committee and state that your $9.4 billion is sufficient 
when everything I am seeing is that your budget is $3 billion 
short?
    Mr. Bew. We went back and looked at the historic usages and 
has averaged 9.3-9.4 for the last three years, and the 
assumption is that the STAR was a one-time situation; that it 
was a historic event, and we pray that it will not happen 
again.
    And as far as the numbers themselves, we looked at last 
year, when we looked at the 2002 numbers, we looked at--12.2 
was the gross. I think people referred to 12.2 a lot, even 
myself.
    Ms. Velazquez. So you are saying----.
    Mr. Bew. But the 11--excuse me. The 11, if you take the net 
loans, it is about 11.2, and subtract the 1.8 from the STAR, 
you get it down to about the 9.3 level.
    Ms. Velazquez. So let me ask you. The Administrator was 
sitting right there in the center of that table. He told me 
when I asked him about the $12 billion that I was wrong, that 
he did not know where those figures were coming at, and he said 
that it was 9.4.
    So what is it, 9.4 or 12 billion dollars?
    Mr. Bew. If you follow the math, it's 12.2.
    Ms. Velazquez. Can you give me a simple answer?
    Mr. Bew. Gross----.
    Ms. Velazquez. Is it 9.4 or just 12 billion dollars?
    Mr. Bew. It is 9.4.
    Ms. Velazquez. Okay. So I want to direct you, sir, to a 
recent ad that SBA took out in the New York Times that says, 
``Last year the agency did in excess of $12 billion in 7(a) 
lending.''
    So what is it? The Administrator come before this 
committee, and when asked to justify the inadequate funding, he 
starts that $12 billion is wrong. You say that it is not $12 
billion, but in the ad, when you want to brag about everything 
that the Bush Administration is doing for small businesses, you 
talk about $12 billion.
    Mr. Bew. Well, I think about everyone is happy to use the 
larger number probably to emphasize the----.
    Ms. Velazquez. So you come here and you mislead this 
committee because in fact it is 9.4, or is it 12 billion?
    Mr. Bew. 9.4 net.
    Ms. Velazquez. And then you take an ad. So were you 
including the STAR program in that $12 billion?
    Mr. Bew. It all hinges--I think the whole argument on was 
STAR a one-time event or not.
    Ms. Velazquez. Okay. If we were to agree to your supposed 
program level of $9.4 billion, can I get a commitment from you 
that if it comes up short, that you will not impose a cap or 
any other limitation from loans, and that you will seek a 
supplement appropriation so that we can meet the Chairman's 
goal of helping manufacturers?
    Mr. Bew. We anticipate that 9.3 will be sufficient in 2004, 
and definitely in 2003. We certainly look at any proposal. We 
entertain anybody's proposal and solicit ideas of what we can 
do to serve small business.
    Ms. Velazquez. But how could you achieve the goal of the 
Chairman of lending more loans to manufacturers with 9.4 is 
adequate?
    So I am willing to make a commitment, why cannot you not 
put your money where your mouth is?
    Mr. Bew. I think manufacturing can be also served not just 
by looking at the 7(a) program, but it also can encompass the 
504 program.
    Ms. Velazquez. Okay, let us move to the next question.
    Mr. Bew. Well, as the chart shows----.
    Chairman Manzullo. If you could let the witness finish his 
answer.
    Mr. Bew. As the chart showed, there has been a decrease in 
504 lending in manufacturing when both the SBIC and the 7(a) 
numbers have gone up over the five years, and I think there is 
great opportunity there for manufacturing to be served by the 
504 program.
    Ms. Velazquez. Okay.
    Mr. Bew. Of course, there is a lot of authority there also 
that is not used.
    Ms. Velazquez. Mr. Bew, why did you not mention in your ad 
in the New York Times when you were bragging about the $12 
billion, why did you not mention the 504 program in the ad?
    I know the administration has said that the 504 program is 
ineffective, but why ignore it? What kind of message do you 
think that that sends to the 504 lenders in New York like 
Empire Development that, by the way, was one of the largest 
504, about how the agency regards the work that you will not 
even take a great opportunity to market the 504 program in the 
ad that you paid for in the New York Times?
    Mr. Bew. Yes. Yes. That is a good question. Someone else 
asked me that, and that is one of four, four ads.
    Actually, I thought I did mention the 504. I was talking to 
my senior advisor who was in the interview. He said you did 
mention the 504, and apparently the reporter did not mention 
it.
    But in some of the speeches I have made this year, we 
called this the year of the 504, and we really look--we just 
finished an ANPR process to solicit comments. We see great 
potential to change and expand the reach of the 504 program. So 
even though it was not mentioned in that particular ad, it is 
definitely a focus and a high priority of us----
    Ms. Velazquez. I can see that.
    Mr. Bew [continuing]. For us to streamline that.
    Ms. Velazquez. Mr. Bew, in answering the budget question, 
SBA stated that they were not going to apply the new model to 
STAR funds because the legislation was signed after the STAR 
program had expired.
    Is that a correct characterization of the agency's 
position?
    Mr. Bew. I am not sure. Please repeat that question?
    Ms. Velazquez. When the administration, SBA stated that 
they were not going to apply the new model to STAR funds 
because the legislation was signed after the STAR program had 
expired.
    Mr. Bew. I do not believe we have the authority at the SBA 
to rescore that program since the program was ended on January 
10, but I will be happy to look into that.
    Ms. Velazquez. Why do you think you do not have the 
authority?
    Mr. Bew. Because the program legally ended January 10.
    Ms. Velazquez. I have got to tell you that the day the bill 
was signed it does not matter, it is irrelevant. So the law 
says that STAR loans made after October 1, 2002, are to have 
the econometric model apply to them. And the day when S. 141 
became law is immaterial.
    Mr. Bew. I will be happy to look into that.
    Ms. Velazquez. Okay. I want to direct you back to the New 
York Times ad. Clearly, to get the $12 billion number for the 
7(a) touted here, SBA included STAR, and you just said that, 
right?
    Mr. Bew. Yes.
    Ms. Velazquez. So once again, when the administration wants 
to brag about the great work it is doing you use one set of 
numbers. But when it comes to doing the right thing by small 
business you do another.
    Explain for the committee why for the purpose of this ad 
STAR loans are a part of 7(a), but when it comes to applying 
the new model that will provide more capital for small business 
the agency refuses to do so.
    Mr. Bew. I look at that as STAR as a historic event one 
time. It was a supplemental program authorized by Congress, and 
as I said earlier, I pray to God we never have to go that 
route.
    Ms. Velazquez. I would invite you to go back and read the 
law because that is not what the law says.
    By refusing to apply the econometric model to the 7(a) STAR 
program loans originated after October 1, the administration is 
trying to precipitate another shortfall in the 7(a) loan 
availability and trying to impose another loan cap, is it not?
    Mr. Bew. I am not sure I understand where you are going 
with the question.
    Ms. Velazquez. If you do not apply the econometric model, 
you are going to be short in terms of money, and what you are 
going to do is you are going to impose a cap.
    Mr. Bew. Okay, I see.
    Our projections for this year are--we were running behind 
with the amount of money we have on a daily basis. We track the 
loan volumes we are making on the 7(a) program daily, and we 
have adequate money to meet the needs of small business this 
year.
    Ms. Velazquez. Mr. Bartram, would you comment about the 
fact that they are not applying the econometric model to the 
7(a) STAR program? And do you see, as I see it, that if they 
are going to run short of money, then they will impose a cap?
    Mr. Bartram. Well, the figures that we have seen is that we 
are running ahead of last year's pace, not behind.
    Secondly, lenders were encouraged last year to use the STAR 
program. In fact, representatives from central office told us 
if we cannot figure out a way to make a loan into STAR, call us 
and we will help you. So the rules were extremely loose and we 
were encouraged to use STAR program to save funding.
    So I am not sure that we believe that these loans are 
something that will not happen again in the future. And if we 
do not apply the new econometric model, we lose about 1.1 
billion in possible funds that could be used this fiscal year, 
which we are estimating around $11.8 billion, not the 9.4.
    Ms. Velazquez. Thank you, Mr. Bartram.
    Mr. Bew, is it the committee's understanding that SBA is 
considering a credit card program? Can you please describe how 
do you envision that program?
    Mr. Bew. We do not per se have a credit card program. As 
you are aware, the 7(a) programs traditionally had revolving 
lines of credit where companies can go up and down and borrow, 
and normally it is an unsecured working capital line of credit. 
Many of the banks--I do not know the exact number--have used a 
credit card as a medium to administer that working capital line 
of credit. So per se, we do not have one.
    Ms. Velazquez. Are you thinking of creating one?
    Mr. Bew. I would look at any avenue that we can get out and 
touch more small businesses.
    Ms. Velazquez. So is that a yes?
    Mr. Bew. We would look at that, yes.
    Ms. Velazquez. I have one more question, Mr. Chairman, and 
that will be it.
    Chairman Manzullo. Okay.
    Ms. Velazquez. So you are thinking about it, and will you--
you are going to look at how that credit program will affect 
the 7(a) subsidy rate?
    Mr. Bew. We are looking at--we would look at credit cards. 
The banks have asked us to do that. There are a whole lot of 
platform problems in delivering that product.
    But let me make one point clear. The revolving lines of 
credit can be administered in many ways. If a small business 
wants $5,000 on its, for example, $50,000 line of credit, they 
might call in, and say, okay, put $5,000 into my checking 
account. Some banks will just give that person a credit card, 
and that will be the way they can go purchase an item. It is 
just a more efficient way of administering the revolving line 
of credit.
    Ms. Velazquez. Well, all I can tell you is that from where 
I sit the agency has not authority to create such a program, 
and my guess is that you will have to seek legislation to do 
so.
    Chairman Manzullo. Mr. Ballance.
    Mr. Ballance. Thank you, Mr. Chairman. I do have a couple 
of question, I guess, Mr. Bew.
    What extra steps do you take to make loans to minority 
applicants, if any?
    Mr. Bew. We have outreach programs. It is definitely a high 
priority for us. We design the programs and seen a correlation 
between the smaller loan and minorities, African Americans, 
Hispanics, Asians, in their need because many of the minorities 
are starting businesses from scratch, and they need the smaller 
loan, which is one of the most difficult to get.
    So we redesigned that SBA Express to emphasize the smaller 
loan, and you can see by the original--the chart there. Those 
changes took effect this year. In the first five months of this 
year we were up 42 percent overall, 42-43 percent overall in 
minority lending just through that SBA Express item. But in 
African Americans, I think it is 69 percent, and that is an 
actual five months comparison of last year versus this year.
    We have also in addition we have some banks who are lending 
in that market.
    Mr. Ballance. Just a couple of follow ups. There are a lot 
of people--I am from a rural area in North Carolina, eastern 
North Carolina.
    Mr. Bew. Know it well. You can tell by my accent I am not 
far away.
    Mr. Ballance. And there are a lot of people who need to 
have their credit adjusted. Do you get involved in, your 
agency, any of that?
    Mr. Bew. On the----.
    Mr. Ballance. I mean to look at their record, they could 
not go to a bank and get a loan, but they are solid business 
people.
    Mr. Bew. Right.
    Mr. Ballance. They just had a hard time. And I am wondering 
if the SBA makes any additional steps toward people in those 
categories.
    Mr. Bew. Well, I think on the other side of the house, on 
the capital access side, we have the SBDCs, the SCORE, 12,000 
SCORE counselors, some BICs that they can go and get advice on 
how to deal with a bank or a lender, or really how to adjust 
that credit report.
    Mr. Ballance. And a bank is going to turn them out right 
quick.
    One other question I have, Mr. Chairman, I saw your figures 
on Chart No. 2 that you just referred to, a 69 percent, and 
1254 loans.
    Do you have the number of applicants that it took to get 
those 1254 loans?
    Mr. Bew. I do not, and I will be happy to try to go back 
and get that for you.
    Mr. Ballance. All right.
    Mr. Bew. Just one additional, it is a high priority of the 
Administrator to reach out to minorities, low to moderate 
income, and we are calling it emerging markets now, and we are 
doing what we can to design the programs to do that, and we are 
still not satisfied. We are very pleased with that percentage 
growth, but not the overall numbers, and we will do what it 
takes to get them up.
    Mr. Ballance. Thank you, Mr. Chairman.
    Chairman Manzullo. Congresswoman Napolitano.
    Ms. Napolitano. Thank you, Mr. Chair.
    Mr. Bew, there is a couple of questions that, and you and I 
have talked about certain issues dealing with credit units. 
That is another subject. But I was looking at your chart with 
the minority loan programs, that you were 42 percent ahead----.
    Chairman Manzullo. If you could suspend for a second. Could 
you put the chart back up again?
    Ms. Napolitano. Yes, that would help.
    Chairman Manzullo. Go ahead.
    Ms. Napolitano. Yes, the increase of 2002 and all the 
minorities, you have a total increase of 43 percent, and then 
you break it down by ethnicity, including veterans and women.
    Could you tell me what your goal is, sir, for this year, 
for the Hispanics specifically, the national goal?
    Mr. Bew. For Hispanics, the national goal is--if my memory 
serves me correctly--7,500.
    Ms. Napolitano. And that percentage is what?
    Mr. Bew. I do not know what the exact percentage is.
    Ms. Napolitano. And what about African Americans?
    Mr. Bew. It was--it was substantial. But these are, of 
course, not goals; these are just actual numbers.
    Ms. Napolitano. That's what I am banking it on is you had 
an increase. What are you--what is going to be the goal that 
the SBA is going to have to reach out and help those special 
interests, the minority interests?
    Mr. Bew. Yes, I will be happy to give you the goals that 
have been set for the districts. I do not have them here with 
me. I happened to have remembered that particular one.
    Ms. Napolitano. Okay, could you do that for us? You know, I 
would like to see that, because some of the businesses that I 
deal with, they are all kinds of minorities, and also do the 
same for the African American businesses, and the women-owned 
business.
    Mr. Bew. Okay.
    Ms. Napolitano. Because those are the figures in my area 
that are growing, and if we cannot help them, if we do not know 
what your goal is, we cannot be able to project to them what 
kind of help they may be able to get from SBA.
    Mr. Bew. Okay.
    Ms. Napolitano. Now, the other question would be----.
    Ms. Velazquez. Would the gentlewoman yield?
    Ms. Napolitano. I would be delighted.
    Ms. Velazquez. Are you going to tell us what the national 
goal of your agency is going to be in each of those categories 
in writing, national goal?
    1Mr. Bew. We have set some internal goals. We have an 
overall emerging markets goal just to encourage the district 
directors to market and do outreach programs.
    Ms. Velazquez. So you do not have a national goal right now 
for Hispanics, minorities, blacks and women?
    Mr. Bew. We have emerging markets goal, yes.
    Ms. Velazquez. Is that the same?
    Mr. Bew. Yes. I mean, we have it broken down, yes.
    Ms. Velazquez. You have it broken down.
    Mr. Bew. Yes.
    Ms. Velazquez. But in answering to Ms. Napolitano, will you 
be able to have time to break to down?
    Mr. Bew. Yes.
    Ms. Velazquez. And establish a national goal?
    Mr. Bew. We can look at that, yes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Ms. Napolitano. Thank you.
    And I guess maybe along the same line, Mr. Bew, and I am 
not trying to be hard, I want to be sure that I understand. 
Will the agency be able to commit to setting a goal then? Can 
we count on that for minority business, for Hispanics, for 
women owned, or the other one would be African Americans, 
because those are the categories you have, Native American, 
veterans, woman owned and minorities?
    Mr. Bew. From the internal goals, yes, we can set it.
    Ms. Napolitano. Would you be committing to setting a goal 
of 20 percent to all the categories?
    Mr. Bew. I do not recall what the internal goals were.
    Ms. Napolitano. No, but I am asking you. Would you be 
willing to commit to trying to achieve a goal of 20 percent for 
those categories?
    Mr. Bew. Twenty percent growth?
    Ms. Napolitano. Increase, yes.
    Mr. Bew. I would like to look at the figures again to see 
what we have. I cannot recall offhand.
    Ms. Napolitano. Okay. But you will look at them?
    Mr. Bew. Certainly.
    Ms. Napolitano. Thank you.
    Chairman Manzullo. Congresswoman Majette.
    Ms. Majette. Thank you, Mr. Chairman. Good morning, 
gentlemen.
    I share the concern of the gentlewoman from New York 
regarding the 7(a) loan program, and it is one that is critical 
to the small businesses, I believe, throughout this country, 
but certainly in my district because these are small 
businesses, these small businesses are able to secure loans for 
a wide variety of purposes for which the regular lenders would 
not provide loans, and that obviously includes working capital, 
acquisition of furniture, machinery, equipment and inventory.
    In fact, this year alone small businesses in my district 
have secured over 60 loans under the 7(a) program. That is a 
total of about $15 million so far. And from my point view this 
is critical to turning the economy around, being able to help 
to create these small businesses.
    But I am concerned, as my colleague is, that the proposed 
2004 budget underfunds this program, and it leaves very 
important--this very important program billions of dollars 
short.
    Now, with respect to the issue, I guess more specifically 
of using credit cards as a way of funding these loans or making 
the funds available, I guess you would agree with me that often 
credit cards are a high cost funding alternative, and I am 
interested in hearing your view, Mr.--how is it pronounced?
    Mr. Bew. Bew.
    Ms. Majette. Bew, yes. I'm interested in hearing your view 
about how a credit card program would really provide small 
business with an affordable source of capital. Can you go into 
more detail about that, please?
    Mr. Bew. I would be happy to. The statistics, if I recall, 
is that 40 percent of start-ups use credit cards anyway to 
start their businesses, and they put maybe three or four 
personal credit cards together, paying up to 18 percent 
interest to start a business.
    We could have a program with--of course, we would have caps 
on that, on our interest rates and they are nowhere near there, 
if we could develop anything like that. But it definitely used 
by business. I think I read where 80 percent of small 
businesses use a credit card anyway.
    Ms. Majette. But what is the anticipated total return to 
the credit card company as you would envision it being part of 
the 7(a) program?
    Mr. Bew. Again, there are caps on it, so it is 
traditionally not--if we had one, if they are using it, they 
are adhering to the 7(a) caps.
    Ms. Majette. So you are saying you would see this as being 
a substantial benefit rather than providing the loans in a more 
conventional way?
    Mr. Bew. I would say traditionally if a company were to use 
a credit card, a personal type credit card, the rates would be 
substantially higher.
    Ms. Majette. Well, but I guess my--and I am have been a 
small business owner, and I know lots of small business owners, 
and usually what happens is that they we will use a credit card 
because they are not able to secure a loan through some other 
traditional means. It is not--it may be a matter of 
convenience. It is a matter of that financial access to the 
finances. I mean, the preference would be to get a loan at a 
lower interest rate going through the traditional route rather 
than using their own personal funds or accessing their own 
personal lines of credit at a higher interest rate.
    So that really does not alleviate my concern of what you 
are saying, well, they would use a credit card anyway.
    Mr. Bew. Yes.
    Ms. Majette. Is not the purpose of the loan and the program 
to provide funding at a lower rate than typically an individual 
would go out and have access to?
    Mr. Bew. Yes, it is a mainstay of the 7(a) program. In 
2002, I think the working capital lines, regardless of how the 
bank would deliver the program, whether it is a plastic card or 
just call in and get a draw on a working capital line of 
credit, it is--you know, that is what the 7(a) program is 
about. It is being done.
    Ms. Majette. So you are saying there is no difference in 
the interest rate whether you use a credit card or the 
traditional means. Is that what you are saying?
    Mr. Bew. I am saying the 7(a) caps are generally prime plus 
2, 2\1/4\, 2\3/4\ on working capital lines.
    Ms. Majette. Well, I understand that you are saying that 
that is what the cap is.
    Mr. Bew. Yes.
    Ms. Majette. But my question is, is there a difference 
between the actual rate of using a credit card versus the 
traditional loan regardless of what the cap is?
    I mean, the cap may--let me try and make it a little more 
clearer what my concern is. The total cap may be--let us just 
say for purposes of this discussion the cap is 10 percent.
    My question is, is the interest rate on the credit card 
nine percent and the interest rate on the traditional loan five 
percent? Is there a difference between using one vehicle or the 
other even though both may be below the cap? Or are you saying 
that using the credit card would give you the same interest 
rate, the same interest rate would apply as if you had a 
traditional loan?
    Mr. Bew. If you had a 7(a) loan with a revolving line of 
credit, there is a cap that the SBA sets that is traditionally 
lower than out in the private markets for a credit card.
    Does that answer your question?
    Ms. Majette. No, it does not.
    Mr. Bew. Okay.
    Ms. Majette. My question is----
    Mr. Bew. Let me give you an example then.
    Ms. Majette [coninuing]. If the vehicle--if you are using a 
credit card, and it is under the 7(a) program, is the interest 
rate going to be the same as if you get a traditional loan, 
non-credit card loan under the 7(a) program? Is it the same 
interest rate, and so it is just a matter of convenience that 
they use plastic versus paper, or is there a difference--is 
there an additional difference in cost between using paper 
versus plastic, as they say in the grocery store?
    Mr. Bew. The traditional 7(a) rate on a revolving line of 
credit would be, I think, max, we cap it at prime plus two and 
three-quarters. If prime is four and a quarter, so whatever 
tune--my brain is failing me, but it is seven percent. If they 
happen to use SBA Express, and put a working capital line of 
credit through the SBA Express, it would be prime plus six and 
a half. So that would be what, six and a half plus four and a 
quarter. What is that? Ten and three-quarters.
    Ms. Majette. So there is a----.
    Mr. Bew. If they went out on the regular market and you 
know what you would pay on a personal credit card, it could be 
prime plus 10 or more; maybe 18 percent. So that kind of gives 
you the relative difference of them.
    Ms. Majette. So the answer to the question is paper versus 
plastic under 7(a), there is a cost difference between paper 
versus plastic under 7(a)?
    Mr. Bew. Well, the plastic--I think people are getting hung 
up on the plastic. The plastic is just a medium to deliver, to 
deliver a 7(a) product.
    Ms. Majette. I understand, I understand that. I am trying 
to get--I am sorry. I am trying to find out whether the 
difference in the medium used creates an additional expense to 
the small business owner even though both medium are covered 
under or within the 7(a) guidelines.
    Mr. Bew. That is a difference----.
    Ms. Majette. Well, I want to hear you tell me that that is 
what is the difference. It is four percent? Is that what you 
are saying?
    Mr. Bew. Whatever the numbers were, yes.
    Ms. Majette. Okay. So it does cost four percent more if you 
use one versus the other?
    Mr. Bew. If you go under the SBA Express versus the regular 
7(a).
    Ms. Majette. So it is four percent more under SBA Express 
versus 7(a)?
    Mr. Bew. If that is what the difference is, yes.
    Ms. Majette. And that is the difference in the use of the 
two mediums, is that----.
    Mr. Bew. Yes, if the bank under an SBA Express would choose 
to use a credit card, a piece of plastic, or they may just have 
a regular working capital line of credit, and the bank would 
call in, the customer would call in and ask for a draw, and 
they would put it in their checking account.

    Ms. Majette. Well, that is why I am concerned about the 
uses of the option because it seems to me that that would 
reduce the access to those loans.
    Am I misunderstanding something?
    Mr. Bew. No, I am not following.
    Chairman Manzullo. If I could ask?
    Ms. Majette. Yes. Yes.
    Chairman Manzullo. Let me make this very simple for the 
SBA. We are writing into the reauthorization language a 
complete prohibition on the use of credit cards for any 
programs at the SBA. And I would like for you to instruct the 
people working there now to go down different avenues as soon 
as you get back.
    Under no circumstances whatsoever. I as Chairman of the 
Small Business Committee, and see the disgrace that has taken 
place at the Department of Energy where people are taking 
credit cards and buying jewelry, using it for gambling debts, 
for any type of thing like that.
    I mean, I just--maybe I am reading it wrong, but credit 
cards is how people get in trouble. These two members are small 
town lawyers, and I know exactly the background in which they 
are involved, and I come from the same background too.
    But I am just telling you right now.
    Ms. Velazquez. Mr. Chairman.
    Chairman Manzullo. Yes, go ahead.
    Ms. Velazquez. But in answering my question Mr. Bew said 
they were not working on a credit card.
    Chairman Manzullo. Well, they were thinking about it.
    Mr. Bew. We do not have a specific credit program. I think 
many banks, and I would have to research the numbers, actually 
use the piece of plastic to administer the 7(a) working capital 
line of credit. But I would be happy to research it and get 
back with you.
    Chairman Manzullo. Does anybody here know about any plastic 
being used by any programs?
    Mr. Bartram. Well, if I could, Mr. Chairman, go ahead and--
--.
    Chairman Manzullo. Sure.
    Mr. Bartram. The SBA Express program allows you to disperse 
a loan through the use of a credit card, but it is nothing more 
than a debit card at that point.
    Chairman Manzullo. It is a debit card.
    Mr. Bartram. So it is not a credit card per se.
    Chairman Manzullo. Then how does the bank determine that 
the money is being spent for the expressed purpose? Is there an 
internal audit that goes on with the bank?
    Mr. Bartram. This is just for ease to disperse. It would be 
akin to giving somebody a check or putting funds in their 
account. It makes it easier on the clientele to have access to 
those funds. The client has to basically attest that those 
funds are being used for business purposes.
    Chairman Manzullo. Attest.
    Mr. Bartram. Which is typical with a conventional loan as 
well.
    Chairman Manzullo. What is the accounting procedure that 
goes on in the banks or the different development corporation 
to make sure that money is spent for the intended purpose?
    Mr. Bartram. Is that a question?
    Chairman Manzullo. Anybody. John, did you want to take a 
stab at that.
    Mr. Phelps. It is a little bit easier for development 
companies because we are take-out permanent financing, and so 
the bank will make certifications that the construction loan 
was advanced according to the authorization. We come in and 
then we take out the bank. We refinance that interim loan on a 
permanent basis. So it is very easy to monitor.
    Chairman Manzullo. Anybody else want to take a stab at 
that? Well, okay.
    What we should do is meet some other time, but I just--just 
the thought of somebody getting a bank loan, I mean obviously 
the SBA rate on the credit card would be less than conventional 
credit cards which are about 24 percent. And you know, is it 
the Express loan where you have to have the guidance along with 
the money? Which program is that? That is the microloan where 
the guidance of professional counselors is coupled with the 
distribution of the money on it.
    But I just do not--I would be very careful where you a 
going with this thing, and I would not waste a lot of time at 
the SBA because if it gets anything near making it easier to 
spend money for unintended purposes, in fact, I have instructed 
counsel to put it right into the reauthorization that this will 
be strictly prohibited.
    Mr. Bew. David may be able to address that better than I 
since he is working in a bank now. But I think the blocks on 
some of these credit cards--I assume your bank has an active 
credit card program to small business?
    Mr. Bartram. Yes. Yes. We are a very large. But we do not 
through the SBA program, we do not utilize credit cards for 
first loans.
    Chairman Manzullo. No, that is just a conventional credit 
card.
    Mr. Bartram. Right. Ours is a conventional product.
    Chairman Manzullo. Okay. All right.
    Let me ask this question. On the manufacturing issue, well, 
it is not to manufacture credit cards, but that is not what we 
are talking about. But on the manufacturing issue, anybody here 
will be welcome to join in, when somebody wants to enlarge his 
or her factory or to take over an existing facility, and says, 
you know, I need X amount of dollars.
    How do they know which loan to use? John, why do you not 
start because of the recent--what happened with Kaiser Westrand 
and Byron, and then I would like to see how these programs 
weave in and out with each other, and how the experts would 
advise which way to go.
    Mr. Phelps. Thank you, Chairman.
    I think most of the activity we see is referred to us by a 
bank, and the bank will, I think, generally and structure it 
conventionally without assistance because it is the past of 
least resistance, and they are there to serve their client. And 
in those situations where there may be inadequate collateral or 
some other reason that they are looking for some credit 
enhancement they may call us for a 504 if it fits the project, 
it is a long-term fixed asset, or they may structure it as a 
7(a), and there are advantages certainly to banks structuring 
some of these loans as 7(a).
    As Mr. Bew has referred to, under the 504 we see that 7(a) 
has increase for manufacturers. I think a lot of that is a 
result of the type of credit needs those companies need that 
are not 504 eligible, but also the interests of the bank to 
structure it in a way that may be serving their interest better 
than the clients for structuring a 7(a), giving their credit 
enhancement but not necessarily the terms that 504 offers.
    Chairman Manzullo. Anybody else?
    Mr. Finkel. Yes, I would like to comment about working 
capital. When a manufacturing facility is looking at expanding, 
acquiring working capital needs, they are looking to a senior 
facility, but in the lower, middle markets in small 
manufacturing businesses, you know, the amount of senior debt 
is, you know, inadequate in a lot of transactions in expansion, 
and they will seek capital to the cost of capital in contrast.
    So equity being the most expensive capital, they may look 
to--in fact, John and I were talking off-line about the company 
he is looking at, and potentially having us refer a 
subordinated debt source that can fill the gap of that 
structure. But you know, an owner will look at what are the 
alternatives and look for the cheapest capital available. But 
given the state of banking right now, the capital that will 
allow for the most flexibility is the most desirable capital.
    Mr. Bartram. Yes, I would like to comment if I could, Mr. 
Chairman.
    We would look at both the 504 and 7(a) loan programs and 
see what best fits the need of the--what best fits the need of 
the customer. Some of the uses are not going to be something 
that could be put within the 504 program. There might be some 
equipment that is not long term, might be some working capital 
needs, but it is one that you really needs to be hands-on with, 
and these are typically larger types of transactions so they 
would not fit into like an SBA Express product. You would need 
to basically learn the story, learn what you could really do 
for that client, and perhaps both programs need to be utilized.
    Or as John mentioned, it might be in the bank's best 
interest and the customer's best interest to put it into one 
loan package, but these are typically larger types of 
transactions.
    Chairman Manzullo. Have any members on the panel here, 
including Mr. Bew, because you obviously hear from the field, 
an indication that the people involved in manufacturing, that 
there is just not enough money available at the SBA?
    I am sure you hear that all the time, Mr. Bew, but you 
know, the complaint is there is not enough money, right?
    Mr. Bew. Most people want more.
    Chairman Manzullo. Right. That is correct. That is correct.
    Mr. Finkel, do you have a comment on that?
    Mr. Finkel. Yes. Well, there is clearly a shortage of 
capital. You know, I would argue there is a shortage of people 
who can lend that capital, especially in our markets. It takes 
10 years of mentorship to get good enough to allocate the 
dollars properly in the risk allocation model.
    So regionally, and I would argue the midwest, there is a 
significant shortage of that capital that is necessary to go 
under the banks.
    So, yes, I hear manufacturing companies all the time, that 
is why, you know, in the private markets the supply/demand is 
so off right now.
    Mr. Bartram. Mr. Chairman, we just went through a time when 
we had a loan cap, and we are also in a time where conventional 
credit is very difficult to obtain. And with the trend we are 
seeing in the 2004 budget, I think we will see a cap again.
    So I just think that runs in conflict with the goals that 
we are trying to obtain here.
    Chairman Manzullo. Mr. Phelps.
    Mr. Phelps. Mr. Chairman, what I am seeing in Rockford is 
the companies that now are seeing some new contracts 
materialize are in such poor financial condition, and they are 
burdened with so much debt that the banks do not want to lend 
them the money.
    And one of our proposals under 504 is if we are going to 
help these companies expand we need to deal with restructuring 
that existing debt on affordable terms, perhaps stretching it 
out as allowed under 504 to match the debenture term, to 
position them for additional debt, and those new contracts that 
are out there, because if you do not work with the existing 
debt, I do not blame banks for not wanting to put new debt in. 
The companies cannot support it based on historical or even--
--.
    Chairman Manzullo. So what would your suggestion be then?
    Mr. Phelps. Our suggestion?
    Chairman Manzullo. Right.
    Mr. Phelps. Would be under a 504 allow for us to 
restructure a certain amount of existing debt along with new 
debt to help stretch out those amortization schedules; put it 
on more affordable terms, and mitigate some of the bank's risk 
by putting that on a subordinated basis.
    So it is really a win/win for everybody, the borrower, the 
bank, and the economy.
    Chairman Manzullo. Now, you are here in March. Are you 
meeting with some of the folks at SBA to go over those plans?
    Mr. Phelps. It is in our legislative agenda, and certainly 
are discussions with----
    Chairman Manzullo. Okay.
    Mr. Phelps [continuing]. SBA on the proposal.
    Chairman Manzullo. With your organization. All right.
    They would handle--well, let us get back to the situation 
with W.A. Whitney. Esterline wants to spin it off, and it is 
125 jobs in Rockford. It is state of the art.
    Is there any idea as to what the asking price is, at least 
something that could be disclosed publicly?
    Mr. Phelps. I am not at liberty to disclose those details.
    Chairman Manzullo. Okay, fine.
    Mr. Phelps. We would be happy to in private. But the rest 
of your question?
    Chairman Manzullo. Well, I guess my point is if they need X 
amount, and apparently none of the resources that you have can 
come up to that level. I think you stated that in your--what 
would you do by restructuring any of the loan programs working 
with SBA to be able to allow either an employee buy-out or a 
new company or another company acquiring it in the best of the 
worlds of John Phelps?
    Mr. Phelps. Our legislative proposal asks for a higher 
ceiling for 504 for manufacturers in particular, and it is a 
result of the need to modernize and buy very expensive 
equipment, must of this specialized equipment. It is a little 
risky, and when the banks look at they go through an 
underwriting process that says what is his collateral worth in 
a worst case scenario, what can his business support based on 
their historical cash flow and projected cash flow. And if it 
does not meet those tests, they are not likely to lend on a 
conventional basis.
    Where we can help in a case like this or where companies 
need to buy very expensive large pieces of equipment, by 
increasing the amount of subordinated debt we reduce the bank's 
risk because they do not need the collateral protection as much 
anymore. They are not advancing as much money. We are 
stretching out the terms with long-term fixed rate debt, and we 
are making it more affordable for those companies to modernize.
    So we would be looking for a higher dollar amount under 504 
as a special exemption for manufacturers.
    Chairman Manzullo. Yes, when banks take a look at the value 
of that machinery, we have seen the auction sales where it goes 
for 5 and 10 percent on the dollar.
    One of the folks who testified here today talked about 
putting some emphasis on character loans. Was that on--had you 
testified to that on microloan? There is a new emphasis on 
that, or there is proposed change, or are character loans are 
already part of the microloan system?
    Mr. Gast. That is part of what we do. One of the conditions 
we have through the legislation is for a loan of $20,000 or 
more, we have to have a letter in hand in saying a bank will 
not make a loan. Typically, that is for lack of collateral.
    Our primary considerations are cash flow and 
characterization.
    Chairman Manzullo. Let me ask this question. I appreciate 
that. What we are seeing in the manufacturing sectors are 
companies that may not really have a lot of debt, but business 
has been bad in the past year. The equipment is--you cannot 
rely upon equipment as sufficient collateral. I mean, machine 
equipment is--you know, there is an abundance of machinery 
equipment.
    But somebody comes along and says, look it, I have got this 
contract, and it is guaranteed an X amount of money. Is there 
any way to take a look at the contract and factor it and enter 
into an agreement with the person on the other side of the 
contract, the procuring person, to have the money come directly 
to the lender, to work that way in a three-way partnership so 
that the contract becomes the main source of collateral?
    Mr. Bartram. The answer to that is yes. I mean, you can do 
that basically on a conventional basis, or even the SBA program 
there is a program within the SBA and the 7(a) cap program 
where you can go ahead and take assignment of that contract. It 
comes into a lock box basically.
    Chairman Manzullo. Okay.
    Mr. Bartram. And you fund a certain percentage back to the 
consumer.
    Chairman Manzullo. And that is at the conventional 7(a) 
limits, up to that amount?
    Mr. Bartram. I believe so.
    Chairman Manzullo. Okay, is that being frequently--
obviously there appears to be more risk to it because you do 
not know the solvency of the third party.
    Mr. Bartram. It takes an awful lot of servicing both from a 
conventional and also the SBA to protect the SBA guarantee back 
to the bank. It is a highly intensified servicing.
    Chairman Manzullo. Okay. Mr. Bew, did you have a comment on 
that because I know that continuously you are kicking around 
different ways to make more money available?
    Mr. Bew. Right. I think these working capital lines that we 
have talked about earlier under this cap program, and one 
particular one is an asset-based lending where you do file, for 
example, a monthly borrowing base. You list your level of 
inventories. You advance against the inventory level. You lend 
against the accounts receivable level, and it is a lot--as 
David said, it is very paper-intensive, and I do not think it 
is that popular, quite frankly.
    Chairman Manzullo. Okay.
    Mr. Finkel. Mr. Chairman?
    Chairman Manzullo. Yes.
    Mr. Finkel. If I may make a comment, because one of the 
things that you are describing is lending to assets and not to 
businesses, and that is the shortfall that specifically 
debenture SBICs fill, and there are painfully few in the 
midwest.
    In Illinois, for instance, there are two or three, and 
those are the lenders that, you know, after the asset lenders 
you are talking about are a necessary component of some of that 
expansion that you are describing.
    Chairman Manzullo. Okay.
    Mr. Phelps. Mr. Chairman, one other comment too, I think, 
that addresses your concerns. One of our proposals from the 504 
industry is to allow a separate borrowing cap under 7(a) and 
504. Our Austin Western Case and Byron, they maxed out their 
borrowing ability under the 504 program. They now have bought 
another company, consolidating those to make it more efficient, 
and they have no ability to borrow, and these are largely 
working capital assets, inventory, supporting accounts 
receivable, but they have no more borrowing ability under SBA 
lending authority.
    If they had a companion piece that allowed them to borrow 
up to 1.3 or even a million under 7(a), this would help that 
particular company.
    We see that as a real gap because as these companies expand 
and utilize their borrowing authority for hard assets, there is 
not a supporting mechanism to support the working capital 
assets if they exhaust their borrowing authority with 504 
financing.
    Chairman Manzullo. Okay. Anybody else have any more 
questions?
    Ms. Velazquez. Mr. Chairman.
    Chairman Manzullo. Go ahead.
    Ms. Velazquez. Thank you.
    Mr. Bartram or Mr. Phelps, when you make a loan to 
manufacturers, are these generally small loans or large loans?
    Mr. Bartram. They are typically larger transactions.
    Ms. Velazquez. Yes?
    Mr. Phelps. I would say these are larger than--when Mr. Bew 
when talking about the average size loans, the smaller loans he 
was talking about would not generally be manufacturing loans 
because of the need for equipment.
    Ms. Velazquez. So I want for the Chairman to listen to this 
answer. I just asked him to please tell me whenever they make 
loans to manufacturing firms are they large or small, and they 
are telling me that they are large.
    Chairman Manzullo. You mean large.
    Ms. Velazquez. Large loans.
    Mr. Phelps. Dollar size.
    Mr. Bartram. Dollar size.
    Ms. Velazquez. If the committee in the reauthorization 
works to improve the loan programs to help manufacturers, how 
do you think that will fit with the agency's big push for 
smaller loans?
    Mr. Bartram. Larger loans and manufacturer loans are going 
to be a much high touch. There is much more of a story behind 
what the needs are especially for companies that have feel in 
some hard times.
    Smaller loans, especially SBA Express, are very low touch. 
They are credit scored in most cases. So you would not be able 
to really help a company that is having harder times because 
they would not score out. And typically again, these are larger 
transactions.
    Ms. Velazquez. So we have here two different priorities.
    Mr. Bartram. There is a confliction there, yes.
    Ms. Velazquez. Okay. Mr. Bew, in your testimony you cite 
BLS statistic that smaller loans, loans less than $50,000, 
create more jobs dollar to dollar than larger loans. That is 
what you said in your testimony.
    So I am going to ask the agency again, given these figures 
that the agency is touting about small loan creating more jobs, 
why have you left the MicroLoan Program so underfunded?
    Mr. Bew. I think the microloan funding is in line with what 
it was last year.
    Ms. Velazquez. Mr. Gast, would you comment on that?
    Mr. Gast. Over the past four years, microloan technical 
assistance funding has fallen more than 30 percent.
    Ms. Velazquez. So we have a discrepancy here.
    Mr. Bew. I believe last year we did $16 million in direct 
loans in the MicroLoan Program, and that is what we expect this 
year. We have done a couple of enhancements, and you will see 
in the legislative package that we are proposing reallocation 
of the technical assistance. And we have also set some 
standards for some of the micro lenders, and feel that some of 
them are leaving the program, which will allow us to have more 
money to lend. It will be adequate.
    Ms. Velazquez. What we have here is that the funding for 
the MicroLoan Program is inadequate. And my question to you is, 
what kind of message are you sending to the 7(a) lenders?
    You are constantly asking them to provide and to make more 
smaller loans when you are cutting the MicroLoan Program in 
half.
    Mr. Bew. There are many programs in the 7(a) program in 
addition to the micro lending that make small loans.
    Ms. Velazquez. Well, the mission of the 7(a) loan program 
was to provide for long-term loans, not microloan, was it not?
    Mr. Bew. I thought the mission was to make as much capital 
available or as many loans as available to small businesses, 
whether it is long term or short term.
    Ms. Velazquez. Long-term loans. On 40 percent of all long-
term loans have been provided through the 7(a) loan program. 
That is the statistic that you provided to us.
    This is my--and I am sorry that we are running out of time, 
and I know, Mr. Moncrief, that you have been dealing with your 
own situation here, about the fact that there is no 
coordination between the new market venture capital, ability to 
raise capital. There has been a lack of coordination between 
the New Market Venture Capital Program and the new market tax 
credit, right?
    Mr. Moncrief. That is correct. There has been a huge out of 
synchronization methodology. For example, the new markets tax 
credits were not announced until just this past week whereas 
the New Markets Future Capital Program has been, the companies 
now have been conditionally approved since July 9 of 2001. And 
the whole purpose of the tax credit was to help the new markets 
companies raise the funds. So consequently it has been a very 
difficult program. Even the different mechanisms within the two 
are not harmonized.
    Ms. Velazquez. Do you think that you have been getting the 
kind of support that you need from the administration to make 
this program work?
    Mr. Moncrief. It has been challenging. It is a new program 
that has been very challenging.
    Ms. Velazquez. I applaud the agency's effort and move to 
make smaller loans, but to tell us that you want to make more 
smaller loans, and offer short-term capital line, and even a 
credit card is inconsistent to me. And to say all that, and 
then we hear from the Chairman that he wants the programs to do 
more lending to manufacturers, to cut the MicroLoan Program 
that makes the very loans that you claim is a priority for the 
agency is ridiculous.
    And to be honest, it makes the work of this committee very 
hard and very difficult, and it makes it difficult for me to 
take it seriously.
    So I will say that if you are going to say that small loan 
is a priority, then put the funding in the MicroLoan Program. 
So do not try to make the 7(a) program something that it is 
not, because it is not for just providing smaller loans. You 
have a specific program for that and that is the MicroLoan 
Program.
    Chairman Manzullo. All right, I would join in that. You 
know, coming from our end, I guess coming from your end perhaps 
it looks good to show that you are servicing larger numbers of 
people, and I am not critical of that because everybody wants 
to get involved in the business, but there is mission creep 
whereby the programs start to blend one into the other on it, 
and the people that get caught on that are the people that have 
high capitalization needs, such as restaurants and 
manufacturing as opposed to service.
    I mean, if you wanted to start a law firm, if somebody came 
to you for a loan, which probably would not happen, you could 
start a law firm, a one-person law firm for $5,000. Well, no, I 
am serious. I am serious.
    I mean, you know, you could buy a printer and a word 
processor, and everything there for about a grand; some filing 
cabinets, and you know, some used furniture, and end up making 
a pretty good living at that.
    But it does not involve--I have got to watch what I say 
here because we are both attorney, but it does not involve 
something such as manufacturing where you dig stuff out of the 
ground and you create more jobs on both ends of it, and you 
need that increased amount of capitalization.
    And I guess the point is that the reason we are spending so 
much time on manufacturing is--and we are to have probably 
about seven or eight hearings--is that I do not believe that 
this economy will ever recover until manufacturing is 
reestablished in this country period.
    I can, you know, in the time that I have been here, and my 
dad has worked at Roper. John, you recall that. No, you do not, 
I am older than you, but it was during World War II. Dad 
started out as a machinist, then he became a master carpenter, 
and then he went into the grocery store business, and into the 
restaurant business. He was not a good SBA model because he 
never believed in debt.
    And I mean, he borrowed very little. Once in awhile he 
would--I think in his entire lifetime he bought maybe three or 
four pieces of equipment. But he was always in that--because he 
was a master machinist and a master carpenter, he could always 
fix something for himself, and be able to do that.
    But what we are seeing now, it is good to start service 
industries. I mean, that is fine, it is important. But the key 
here to recovery is in the manufacturing.
    And, Bob, you are shaking your head. If you could----.
    Mr. Finkel. I could not agree more, and you know, in many 
of these loans to manufacturing companies the senior debt that 
we have been discussing, you know, while very important, a 
critical layer, will only take it so far. You have got to have 
a risk layer of capital underneath to get those loans.
    In fact, both debenture and equity are enabling capital for 
that senior debt. And if you are looking for other constructive 
ideas, I know that the Small Business Capital Access Act was 
also--you know, I think will come before the committee, I 
assume. It is H.R. 739, which will remove the disincentives for 
UBTI for some of these debenture licenses and create more 
capital flow from the private markets. I would encourage its 
support as well.
    Chairman Manzullo. We are working on it.
    Anybody else? Yes.
    Mr. Phelps. Mr. Chairman, it is not just businesses being 
touched by SBA either. It is the job creation aspect that 
really affects manufacturers. As we see in our metal working 
community, companies will have to buy a machine center and 
maybe spend hundreds of thousands of dollars that actually 
cause jobs to be displaced. And it is the only way you can 
retain the existing jobs, the base that is there, and remain 
competitive. Because if they are burdened with hiring with more 
people long term, all of those jobs will be at risk.
    Chairman Manzullo. Okay. Mr. Moncrief?
    Mr. Moncrief. Mr. Chairman, I would like to just support 
Bob's comment about that risk layer that is so important in 
leveraging manufacturing.
    In our business the majority of what we do, the vast 
majority of what we do is indeed manufacturing, small 
manufacturers. These people are not located urbanized areas, 
high-growth areas. They are in very desolate, off-the-road 
sorts of places.
    The whole testimony regarding--I had prepared for the New 
Markets Venture Capital Program--is that all the 7-8 programs, 
the 504 program, traditional band debt, et cetera, is fine and 
well unless there is an underlying layer of risk money that 
supports that first lane money that is sitting out there.
    Consequently, the traditional SBIC programs, the 
traditional venture capital does not go into these low income 
impoverished areas and invest. That is why this New Markets 
Venture Capital Program is so important to push traditional 
sorts of equity financing into low income area, and it is 
targeted to do low income census tracts.
    So consequently I agree with Bob that all these debt 
programs that we are talking about are totally essential to the 
growth of manufacturing, but it does not happen without a layer 
of equity. No matter what you are doing it has to have a layer 
of equity in there.
    Chairman Manzullo. Mr. Moncrief, is it your company that 
financed the military tend manufacturing company?
    Mr. Moncrief. Yes, sir.
    Chairman Manzullo. Would you take a note back to them to 
make sure that nobody slaps a Berry waiver upon them?
    Do you know what the Berry waiver is?
    Mr. Moncrief. I do indeed, sir.
    Chairman Manzullo. It is whenever you have any material 
that involves cloth or canvas or specialty metals, this is what 
happened to the manufacturers when DLA decided to buy 2.5 
million berets offshore, and we stopped that cold. But it also 
applies to canvas materials which is in tents.
    But if you hear of anybody involved in the defense 
department that is buying tents offshore, would you contact me 
immediately?
    Mr. Moncrief. I would, Mr. Chairman. I will tell you that 
there are issue around that. For example, there are certain 
cloth items that are being purchased Mexico in defiance of the 
Berry Amendment.
    Chairman Manzullo. We would like to pursue that with you. 
Is this from the company in Kentucky?
    Ms. Jones. It is, sir.
    Chairman Manzullo. And whose congressional district is 
that?
    Mr. Moncrief. Mr. Rogers.
    Chairman Manzullo. Mr. Rogers?
    Mr. Moncrief. Hal Rogers.
    Chairman Manzullo. Well, great.
    [Laughter.]
    Chairman Manzullo. You have got it. He is the other Mr. 
Rogers here to us.
    Mr. Moncrief. Indeed.
    Chairman Manzullo. We would like work with you very 
closely. You are evidently very close to these people?
    Mr. Moncrief. I am, sir.
    Chairman Manzullo. And if you could--do you know if they 
have been able to work with Mr. Rogers or contact him on this 
yet?
    Mr. Moncrief. They have. They have spoken to his chief of 
staff.
    Chairman Manzullo. Okay. Is that something recent that has 
gone on?
    Mr. Moncrief. It is. It is very recent. As a matter of 
fact----.
    Chairman Manzullo. Could you get us involved in that fray, 
please?
    Mr. Moncrief. I would be delighted, Mr. Chairman.
    Chairman Manzullo. Okay, who would it be on--Nelson? Nelson 
Crouther from our staff. Anytime, anywhere, if you could 
organize that meeting with Mr. Rogers, and actually myself and 
your constituent, I guarantee you we can help, otherwise they 
will be up here in a month for a hearing.
    If there is anybody out there in the defense department 
that is thinking about getting a Berry waiver on this, you will 
be here in 30 days also.
    Ms. Velazquez. Mr. Chairman, and also I would to recommend 
to Mr. Moncrief to talk to the Chairman because he realizes 
today the kind of help and assistance in terms of venture 
capital that you are providing for manufacturing.
    Chairman Manzullo. That is correct.
    Ms. Velazquez. So maybe you can help him get more 
cooperation from the administration so that we could help this 
type of venture capital to become more successful.
    Chairman Manzullo. Appreciate that.
    Listen, thank you all for coming. You are very kind. All of 
the written statements will be made a permanent part of the 
record.
    And Mr. Bew if you and T. could meet with--I guess it would 
be Phil from the staff, who is the policy director, and see if 
we are talking plastic/plastic or something else. I think 
somewhere something got lost in the definitions, and we may 
been on different tracks on that, but I certainly want to come 
to the meeting of the minds before we do something that we 
should not do.
    And thank you again for coming. Appreciate it.
    [Whereupon, at 12:18 p.m., the committee was adjourned.]

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