[Senate Hearing 108-567]
[From the U.S. Government Publishing Office]



                                                        S. HRG. 108-567

               ACCESSING CAPITAL AND BUSINESS ASSISTANCE:
                    ARE CURRENT PROGRAMS MEETING THE
                     NEEDS OF RURAL SMALL BUSINESS?

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

                             FIELD HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 16, 2004

    Printed for the Committee on Small Business and Entrepreneurship


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


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                      ONE HUNDRED EIGHTH CONGRESS

                              ----------                              
                     OLYMPIA J. SNOWE, Maine, Chair
CHRISTOPHER S. BOND, Missouri        JOHN F. KERRY, Massachusetts
CONRAD BURNS, Montana                CARL LEVIN, Michigan
ROBERT F. BENNETT, Utah              TOM HARKIN, Iowa
MICHAEL ENZI, Wyoming                JOSEPH I. LIEBERMAN, Connecticut
PETER G. FITZGERALD, Illinois        MARY LANDRIEU, Louisiana
MIKE CRAPO, Idaho                    JOHN EDWARDS, North Carolina
GEORGE ALLEN, Virginia               MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada                  EVAN BAYH, Indiana
NORMAN COLEMAN, Minnesota            MARK PRYOR, Arkansas
                    Weston J. Coulam, Staff Director
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page
Crapo, The Honorable Mike, a United States Senator from Idaho....     1

                           Witness Testimony

Ferguson, Paul L., Commercial Loan Officer, Panhandle Area 
  Council, Inc., Hayden, Idaho...................................     3
Lynn, John, Director, Idaho Small Business Development Center, 
  Post Falls, Idaho..............................................     5
Deffenbaugh, Jim, Executive Director, Panhandle Area Council, 
  Inc., Hayden, Idaho............................................     6
Kindred, Douglas L., Retired Small Business Owner and Current 
  Volunteer with SCORE, the Service Corps of Retired Executive, 
  Hope, Idaho....................................................     7
Beck, Robert M., Vice President of SBA Lending, Mountain West 
  Bank, Coeur d'Alene, Idaho.....................................    18
Lawton, Debbie, Business Development Officer, U.S. Bank, Coeur 
  d'Alene, Idaho.................................................    19
Brown, Michael Business Development Officer, Borrego Springs 
  Bank, Coeur D'Alene, Idaho.....................................    20
Randall, Rob, President and CEO, Randall Contacting, Kellogg, 
  Idaho..........................................................    29
McGregor, Archie, President and CEO, Archie's IGA, St. Maries, 
  Idaho..........................................................    31
Gantar, Mark D., President, All Seasons Apparel, Inc., Post 
  Falls, Idaho...................................................    32
King, Bruce, Owner, Lakewood Animal Hospital, Coeur d'Alene, 
  Idaho..........................................................    38

          Alphabetical Listing and Appendix Material Submitted

Beck, Robert M.
    Opening statement............................................    18
    Prepared statement...........................................    44
Brown, Michael
    Opening statement............................................    20
    Prepared statement...........................................    48
Crapo, The Honorable Mike
    Opening statement............................................     1
Deffenbaugh, Jim
    Opening statement............................................     6
    Prepared statement...........................................    50
Ferguson, Paul L.
    Opening statement............................................     3
    Prepared statement...........................................    52
Gantar, Mark D.
    Opening statement............................................    32
    Prepared statement...........................................    54
Kindred, Douglas L.
    Opening statement............................................     7
    Prepared statement...........................................    57
King, Bruce
    Opening statement............................................    38
    Prepared statement...........................................    60
Lawton, Debbie
    Opening statement............................................    19
    Prepared statement...........................................    62
Lynn, John
    Opening statement............................................     5
    Prepared statement...........................................    64
McGregor, Archie
    Opening statement............................................    31
    Prepared statement...........................................    66
Randall, Rob
    Opening statement............................................    29
    Prepared statement...........................................    68
    Additional attachments.......................................    71

                        Comments for the Record

Barreto, The Honorable Hector V., Administrator, U.S. Small 
  Business Administration, Washington, D.C., statement...........    94
Busch, Dr. Chris W., Ronan, Montana, statement...................    98
Manning, Christopher, President, Manning Applied Technology, 
  Troy, Idaho, letter............................................   101

 
ACCESSING CAPITAL AND BUSINESS ASSISTANCE: ARE CURRENT PROGRAMS MEETING 
                   THE NEEDS OF RURAL SMALL BUSINESS?

                              ----------                              


                       MONDAY, FEBRUARY 16, 2004

                      United States Senate,
          Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 8:30 a.m., in 
Conference Room Bay 3 at the Coeur d'Alene Resort, Coeur 
d'Alene, Idaho, the Hon. Mike Crapo (Acting Chairman of the 
Committee) presiding.

OPENING STATEMENT OF THE HONORABLE MIKE CRAPO, ACTING CHAIRMAN, 
SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR 
                           FROM IDAHO

    Senator Crapo. Ladies and gentlemen, we welcome you here, 
and this will convene the hearing of the Small Business 
Committee in Coeur d'Alene, Idaho. I want to thank all of you 
for taking the time particularly on a holiday to attend this 
official hearing of the United States Senate Committee on Small 
Business and Entrepreneurship. I think that this is the first 
such official hearing to be held in Idaho, and I want to thank 
Senator Olympia J. Snowe of Maine, who is the Chair of the 
Committee, for allowing us to hold this hearing here in Idaho.
    Because Senator Snowe, who is the Chair, and Senator John 
Kerry, who is the Ranking Member, as the Chair and Ranking 
Member, respectively, have the prerogative over witnesses who 
are invited to testify at our hearings in Washington, I thought 
it was important that the Committee record also include the 
important testimony of leaders and businesses from the rural 
West. Therefore, I asked if we could hold this hearing in 
Idaho, and Senator Snowe graciously agreed.
    She's a very strong advocate of small business and she and 
I work very closely together on many of the critical issues, 
most of which, if not all of which, I expect will be brought up 
here today from the witnesses who will present testimony.
    A recent study by the SBA showed that 80 percent of all 
small business lending occurs in urban areas, although loans to 
rural businesses are increasing at a faster rate than loans to 
urban businesses. Unfortunately, the study also shows that a 
significant problem remains. Small businesses in rural areas 
nationwide, which are 20 percent of all small businesses, have 
less access to credit than those operating in urban areas.
    In addition, because of the tight budget conditions under 
which we're operating in Washington, D.C., and, frankly, 
throughout the rest of the country as well, our technical and 
developmental assistance agencies are being asked to do more 
and more with fewer and fewer resources. This all leads us to 
ask some important questions, and I'm going to posit a few 
here, and I expect, again, that we'll get some other questions, 
and answers I hope, from our witnesses today.
    Are the capital access programs in rural areas like Idaho 
sufficient enough to meet the needs of all qualified small 
businesses regardless of size or location or type of business? 
Are the current technical and developmental assistance programs 
meeting the needs of rural entrepreneurs? Do we have a 
situation where the necessary capital and assistance programs 
are in place but the people who need them aren't always aware 
of their existence or of how to access them? Or do we need to 
create new programs or modify the existing ones so that they 
can better meet the unique needs of small business in rural 
areas? These are just some of the questions that I have and 
I'll be looking for input and information from those who are 
before us today.
    Of course, recent events involving the capital access 
program I'm sure you all want to talk about, 7(a), have 
prompted a lot of other analysis of what's happening in the SBA 
programs and in the budget process in Washington, D.C. The 
SBA's recent decision to suspend, cap and restrict its flagship 
program has certainly caused a lot of problems and raised a lot 
of questions, some of which I hope we can address today.
    Why did the SBA reach the point where it felt these caps 
and restrictions were necessary? How have these events affected 
the Idaho small business community? What has the SBA proposed 
to remedy the situation? What should the SBA and Congress be 
doing to remedy the situation and restore long-term stability 
to that program?
    I'll have more to say on these issues during the question-
and-
answer period with our witnesses, but right now I want to get 
ahead and get on with the testimony. I want to let everybody 
know, the witnesses to know, that because we operate under time 
restraints, I will be very insistent on making sure that each 
of you follow the 5-minute rule for your oral presentation, and 
would ask you to pay attention to that.
    In fact, Mike here has got some little cards to help you 
realize how much time you have left. I've been in a lot of 
hearings, both on this side of the table and on that side of 
the table; and I'll tell you what, I've never had enough time 
to say everything I want to say, and I suspect that that will 
be the case for you today, too. It always seems to be that 
those minutes melt away faster once you start talking and 
that's why we've got a little reminder here as to what they 
are. If you go over, I'll kind of rap the gavel here to remind 
you. It's only to get you to let us get on to the question-and-
answer period as well so we have time for that dialogue.
    I assure you that I've read all of your testimony. If you 
can't get through everything in your written testimony, don't 
worry about it because your written testimony will not only be 
read by me and my staff, but by the staff of the Small Business 
Committee and other Senators as well. We'll also be able to get 
into a lot of the things that you may not get into in your 
allocated 5 minutes during the question-and-answer period. We 
will have other opportunities.
    If for any reason, when we get to the end of your panel, 
you feel like you really haven't had a chance to say what you 
wanted to say, we will keep the record open and let you submit 
some more written statements, if you'd like to, so you can get 
your information to us.
    With that, let us proceed. Let's move to our first witness 
panel. The first panel includes Paul Ferguson, who is a 
Commercial Loan Officer with the Panhandle Area Council; Mr. 
John Lynn, the Director of the Idaho Small Business Development 
Center in Post Falls; Mr. Jim Deffenbaugh--Did I pronounce that 
right? The Executive Director of the Panhandle Area Council; 
and Doug Kindred, a retired small business owner and current 
volunteer with SCORE, the Service Corps of Retired Executives.
    Gentlemen, we'll have you present in that order; and then 
at the conclusion of your presentations, we'll engage in some 
questions and answers and discussion on the issues.
    Mr. Ferguson.

    STATEMENT OF PAUL L. FERGUSON, COMMERCIAL LOAN OFFICER, 
          PANHANDLE AREA COUNCIL, INC., HAYDEN, IDAHO

    Mr. Ferguson. First of all, Senator Crapo, thank you for 
inviting us.
    Senator Crapo. You might want to pull that a little closer 
to you.
    Mr. Ferguson. Closer?
    Senator Crapo. Yes, turn it on. That works, too.
    Mr. Ferguson. Boy, there's a lot of protocol, isn't there?
    Once again, thank you for inviting us. I'm nervous enough 
that I'll probably go through my talk in much less than the 5 
minutes.
    Senator Crapo. You get extra credit for that.
    Mr. Ferguson. But I do appreciate the opportunity.
    The Panhandle Area Council is a non-profit development 
company working here in the Idaho panhandle. We have a business 
incubator for small manufacturers. We provide technical 
assistance for business owners and lending programs from a 
thousand to a million-three. One of our goals is to provide and 
retain a new job for every $35,000 that we lend to business.
    PAC provides loans through the SBA Micro program for 
projects under $35,000. Banks are often unwilling to do such 
small loans because of the modest return. Annually, we get 
about 300 inquiries with microloans. We provide assistance with 
business plans. We review their projections and make 
suggestions regarding the appropriate loan product. If it 
involves the SBA 7(a) program or other bank loans, we coach 
them about how to prepare the package and make their 
presentation.
    PAC projects over $35,000 must have a lending partner. The 
bank loans 50 percent of the amount and we allow the bank the 
first lien position. The bank, of course, is more willing to 
participate in projects that have the specialized collateral, 
smaller equity or short business history. Often these projects 
do not qualify for the SBA 7(a) lending.
    The 7(a) program is a huge asset for North Idaho and it's 
especially good for the small community banks that cannot 
afford the risk and also need the ability to sell loans to 
provide capital for their other borrowers. The 7(a) program 
also allows restructure and consolidation. These requests are 
not allowed in any of our other PAC programs.
    But there has been a trend in the last few years to 
emphasis obviously the populated urban areas. The Spokane 
district office of the SBA was made a branch of Seattle, and 
many of the portfolio and lending personnel have been 
transferred or eliminated.
    The SBA is changing the character of the Certified 
Development Companies, the CDCs, that originate and service the 
SBA 504 loans. The CDCs were established originally with a 
given geographical area, a local board, a local loan committee 
to address local needs. Recent changes are allowing CDCs to 
cover the entire State and also allow large CDCs to cross State 
lines.
    These changes do not require local boards, or at least 
local committees. We feel this change will enable the large 
CDCs to ``cream'' the loans and only go to the areas where 
they're going to see larger volume and tend to loan to more 
risk-free businesses. It's very hard for rural CDCs to meet 
production goals with their limited resources. Many more CDCs 
will disappear in the rural area.
    These smaller CDCs also rely on the servicing income from 
the large 504s to fund the staff that also administers the 
smaller micro and USBA loans. Competition for the USDA Rural 
Development Loan pool money is also difficult for smaller 
economic development groups. Performance points used to be 
adequate to obtain the money. Now, with the scoring system, 
there is substantial matching money required to achieve the 
necessary points to get that bid. The smaller lenders do not 
have the ability to provide this larger matching money.
    While the proposed budget says it will provide more funding 
for the 7(a) SBA program, the microloan program is being 
eliminated. Is this really a net gain for your prospective 
borrowers? The administration says the microloan can be 
replaced by use of the SBA Community Express. PAC has made 67 
microloans for a total of nearly $667,000, so you only have an 
average loan size of about $10,000. I do not know of any bank 
that will do a 7(a) loan with all of its paperwork just for a 
$10,000 loan.
    The Community Express program does not pay for technical 
assistance; however, the SBA web site states that they 
recognize that this is crucial to the success of a business. 
Borrowers must receive pre- and post-closing technical 
assistance from non-profit providers or the lender. This 
assistance is to be paid for by that Community Express lender. 
I'm curious how non-profits are going to carry this cost burden 
and if banks are willing to do so for such a modest-sized loan.
    PAC is just a small economic development corporation, but 
we have had an impact on the local economies. In just the loan 
programs, we've lent over 12 million on the 504; we've created 
576 jobs. With our USDA money, we've lent over a million and a 
half for 113 jobs. Our revolving loans, over 6 million creating 
over 1300 jobs. In the microloan, we created 67 jobs with 
$667,000 lent.
    I want to thank you for your genuine concern and your 
willingness to hear my story.
    Senator Crapo. Thank you very much.
    Mr. Lynn.

    STATEMENT OF JOHN LYNN, DIRECTOR, IDAHO SMALL BUSINESS 
             DEVELOPMENT CENTER, POST FALLS, IDAHO

    Mr. Lynn. Let me scoot up over here.
    Senator Crapo. Yes, I think you can pull that cord a little 
bit, too.
    Mr. Lynn. All right. Thank you, Senator. Again, I 
appreciate the opportunity to be here today. My name is John 
Lynn and I'm the Regional Director for the Idaho Small Business 
Development Center. I'm housed at North Idaho College and we 
cover the five northern counties of the panhandle of Idaho.
    Our office provides one-on-one business consulting services 
to start-up companies and small business owners. We also do 
market research for companies through our State office in Boise 
and the University of Texas. We also provide training services 
to small business owners and entrepreneurs throughout the five 
northern counties. Last year we provided 1,631 hours of one-on-
one consulting services to over 247 different businesses. We 
also delivered 3,185 hours of business training to 531 
individuals throughout the State.
    How we are funded is pretty unique. We are a combination of 
Federal, State and local funding. We get about one-third of our 
funding from a grant from the USBA every year that we 
negotiate; one-third of our funding comes from the Idaho 
legislature; and one-third of our funding comes from North 
Idaho College. My staff consists of myself as full-time 
Director and Business Consultant, a part-time Business 
Consultant that works about 19 hours a week, a full-time 
Training Director and QuickBooks Consultant, and then a half-
time Administrative Assistant. Basically two and a half people 
to cover all of North Idaho.
    Small business development in North Idaho presents many 
challenges. One of the things is Kootenai County and its 
accelerated economic growth doesn't really reflect the other 
areas in the Idaho Panhandle. Unemployment rates continue to be 
higher than the national average, and most areas have 
experienced significant job losses due to the downturn of the 
natural resource based economy up here.
    The biggest challenge facing our office is to try and meet 
the increasing demands for our services. Grant funding from the 
SBA has been flat since 1997. But they request more services 
every year and the number of people we see and the number of 
training hours that we deliver.
    Our rural outreach, being an important part of the SBDC 
mission, is becoming increasingly difficult to provide SBDC 
services to rural North Idaho that have an economic development 
impact. I mean we can go and see a lot of different people, but 
are we really making an impact in those rural areas without 
spending a lot more time and resources up there?
    Our challenge is to try to leverage our resources with 
other economic development organizations to provide business 
development services outside of Kootenai County. To be 
successful, I think what we need to do is change attitudes in 
the rural counties up here. We need infrastructure that needs 
to be developed, access to capital needs to be improved, and a 
concentrated and coordinated effort must be developed between 
the economic development service providers.
    Our office works very closely with the various banks and 
loan funds and economic development agencies in the Idaho 
Panhandle; and without the SBA loan programs, the 7(a) program 
in particular and the microloan program, access to capital for 
start-up for existing small businesses would be nonexistent. 
Well over 90 percent of our clients that receive loans have an 
SBA guarantee associated with it in some way or another.
    A qualified business in Kootenai County, if it applies for 
a business loan, has many choices of lending institutions. The 
same cannot be said for rural regions in North Idaho. Without 
the loan funds available through PAC, access to capital in 
rural Idaho is very, very difficult. In fact, even in Kootenai 
County, it's the small community banks that are doing the 
majority of the lending to the small business and business 
start-ups; loans less than $200,000.
    In conclusion, the SBDC program in Idaho is being required 
to meet ever-increasing milestones from the SBA without any 
increase in resources. If the only area we were required to 
serve is Kootenai County, then that would be great because we 
could keep busy right here in this county. But if we want to do 
some rural economic development and make an impact, we've got 
to spend some time and resources up there. Thank you.
    Senator Crapo. Thank you very much, Mr. Lynn.
    Mr. Deffenbaugh.

  STATEMENT OF JIM DEFFENBAUGH, EXECUTIVE DIRECTOR, PANHANDLE 
               AREA COUNCIL, INC., HAYDEN, IDAHO

    Mr. Deffenbaugh. Morning, Senator Crapo. Thank you for this 
opportunity to speak.
    Senator Crapo. It's working. Just pull it pretty close.
    Mr. Deffenbaugh. Okay. I would like to speak on the needs 
of rural businesses. I believe I've got a unique perspective on 
the subject since, during my career, I've both acted as 
Administrator of Small Business Services and operator of small 
businesses. I owned a chain of convenience stores and was a 
partner in a large CPA firm. In both of those rolls, I watched 
programs evolve and recognized through the efforts of hearings 
like this, these programs are improved, and it's unique that 
you're allowing practitioners to at least express their view.
    Rural businesses face challenges that simply aren't imposed 
on urban or suburban businesses. Many times, the cost or 
availability of transportation, for example, is an impediment 
to many businesses; and this is only one of many challenges 
faced by small rural businesses. However, when a rural business 
seeks capital for operating challenges or expansion, they're 
credit-scored against a standard established primarily by urban 
businesses. The financing standards therefore compound the 
challenges faced by rural businesses.
    Additionally, in a recent move by the SBA to eliminate the 
community aspect of 504 lending, this may cause a reduction of 
this program's availability to rural businesses. The new ruling 
simply has removed the requirement of local credit involvement; 
and, in fact, encourages large, multi-State certified 
development companies, without any local interest, to dominate 
the 504 markets. The multi-State development companies will 
have to concentrate on urbanized areas for efficiency and for 
the greater availability of deals. The result may be that the 
rural areas will be ignored or can't compete against the credit 
scoring of urban deals.
    The SBA has the responsibility to operate their programs as 
efficiently as possible; and with the idea of only having to 
deal with a few large multi-State certified development 
companies, that's an appealing prospect. However, the potential 
loss of service to rural communities can have a significant 
impact on the availability of rural businesses, availability of 
capital for rural businesses.
    The SBA may be testing the new program in the future; and I 
understand you, Senator Crapo, you were involved in seeing that 
the Small Business Intermediary Lending Pilot program was 
included in the reauthorization bill, Senate bill 1375. The 
pilot authorized the SBA to make 1-percent 20-year loans for up 
to $1 million on a competitive basis to up to 20 nonprofit 
lending intermediaries around the country. The funds loaned to 
the local intermediary will, in turn, be used to capitalize the 
revolving loan funds to make loans between $35,000 and $200,000 
to small businesses.
    There would be no technical assistance grant provided to 
the intermediary, and all the administrative costs for 
technical support provided to the business borrowers would be 
covered by the interest rate spread between the lending 
intermediaries one percent loan from the SBA and the loans made 
to the small business borrowers.
    The Small Business Intermediary Loan Pilot program 
addresses a capital gap that we see in our lending by filling a 
niche not currently served by the SBA microloan, 7(a) 
guarantee, Express, or 504 programs in terms of underwriting 
criteria. The pilot would enable community-based lenders like 
Panhandle Area Council to provide loans between $35,000 to 
$200,000 that would be more flexible in terms of collateral and 
general underwriting requirements. For example, those required 
for 7(a) and 504 and/or size limitations like we have in the 
microloan.
    Subordinated loans to starting or expanding businesses may 
play a vital role in spurring economic development in Idaho as 
they do in other States, both in rural and urban communities. 
The pilot program is not included in the House bill, and we are 
hopeful that it will be included in the final SBA 
reauthorization bill.
    I would like to thank you for the opportunity to express my 
opinions.
    Senator Crapo. Thank you very much.
    Mr. Kindred.

STATEMENT OF DOUGLAS L. KINDRED, RETIRED SMALL BUSINESS OWNER, 
AND CURRENT VOLUNTEER WITH SCORE, THE SERVICE CORPS OF RETIRED 
                     EXECUTIVE, HOPE, IDAHO

    Mr. Kindred. Morning.
    Senator Crapo. Good morning.
    My name is Doug Kindred. I'm a SCORE volunteer. I was born 
in Wallace, Idaho, and spent most of my business career in 
Southern California, and returned home to Idaho 10 years ago. 
I'm a retired small business owner whose career includes 
serving as a Chief Financial Officer and Chief Executive 
Officer for a subsidiary of a Fortune 500 Company. I've been a 
SCORE volunteer for 9 years serving as the Spokane Chapter 
Chair, District Director, and I presently serve as an Assistant 
District Director.
    I'm a member of the Spokane Chapter of SCORE. Our chapter 
serves 10 counties of Eastern Washington and the 10 counties of 
Northern Idaho. We're currently located at the Spokane Area 
Business Information Center, a joint venture of the Spokane 
Chamber of Commerce, the SBA branch office, and SCORE.
    SCORE-called volunteers are committed to do two things 
well: No. 1, quality, confidential, no-cost face-to-face or e-
mail counseling; and No. 2, low-cost business training 
workshops on various skills. There are seven of us with an 
estimated 38 years of counseling experience who live and 
counsel in North Idaho. We've got a good range of skills. Four 
of us were small business owners, one currently serves as the 
Chairman of the Board of a bank in North Idaho. We can call on 
more than 35 counselors in Spokane for added expertise.
    The Business Information Center is a valuable resource to 
our clients providing weekly SCORE training workshops, twice-
monthly free loan briefings, and a comprehensive business 
library of over 1,000 books, videos, and softwares focused on 
entrepreneurship. Our clients can also access SCORE through the 
SCORE association web site, www.score.org, for more than 1,000 
e-mail counselors coast to coast who possess 600 different 
skills.
    We conducted over 100 face-to-face counseling sessions and 
donated more than 475 hours of volunteer service in North Idaho 
in fiscal year 2003. The counseling locations include the Work 
Force Training Center in Post Falls, the PAC Business Center in 
Hayden, the Bonner Business Center in Sandpoint, and the Job 
Service office in Bonners Ferry. In addition to the people we 
counsel, more than another 100 people from North Idaho traveled 
to the Business Information Center to attend a training 
workshop, a loan briefing, or utilize the services of our 
business library.
    During the 9 years I have counseled in North Idaho, 
approximately 500 people have attended more than 25 all-day 
SCORE ``Starting and Managing Your Own Business'' workshops 
held in Lewiston, Moscow, Coeur d'Alene, Post Falls, Sandpoint, 
Bonners Ferry, and Kellogg. We partner with the small business 
development centers, local banks and local business men and 
women who sponsor and present at these workshops.
    Approximately 25 percent of our counseling sessions are 
with existing businesses discussing growth issues, strategic 
planning, financial issues and problems associated with running 
a business. Fifty percent of our clients are women. 
Approximately 70 percent of our clients are considering 
starting a business and they're looking for financing, 
generally less than $50,000 to finance start-up costs and 
working capital.
    We encourage our clients to prepare a business plan and we 
work with them to determine financing options. This past year 
we've assisted businesses in getting started, expanding, 
relocating, obtaining financing, and solving business problems. 
Three success stories involving companies SCORE has helped are 
attached to my testimony.
    The SCORE association is a line item in the SBA budget and 
is requesting a funding level of $7 million for fiscal year 
2005, a $2 million increase. Additional funds will directly 
benefit our counseling activities in North Idaho. As 
volunteers, we generously donate our time to help small 
businesses. We are pleased to participate with other business 
assistance organizations and I want to emphasize that we work 
with other business assistance organizations in our area to 
help businesses in our community start, grow, prosper and 
create jobs.
    SCORE is celebrating 40 years of volunteer service this 
year in 2004. On behalf of SCORE volunteers in North Idaho and 
the Spokane district, I want to thank the Senator and Committee 
Members for their support over the past 40 years. Thank you.
    Senator Crapo. Thank you very much, Mr. Kindred.
    I want to thank each of you. You all paid very close 
attention to the clock and I appreciate that, and we'll have an 
opportunity now to have some dialogue here and some give and 
take in discussing some of these things.
    Let me start first with you, Mr. Kindred, just to say I met 
with a SCORE group down in southwest Idaho that was just 
starting up a little while ago and kind of got a briefing from 
them on what SCORE does; and it seems to me to be a tremendous 
asset to those who are not only current small business owners 
but those who seek to start a small business.
    Is the $7 million figure, the line item in the budget, is 
that going to be adequate, do you think? You may not know how 
that plays out across the country, but I was just curious as to 
what you're hearing.
    Mr. Kindred. There would never be enough, speaking on 
behalf of Ken Yancey.
    Senator Crapo. That's an honest answer, I think.
    Mr. Kindred. But in having a chance to visit with Ken and 
talking about the budget for next year, I believe that that 
would be more than adequate for what we're trying to accomplish 
in the next fiscal year. The programs we'd like to expand have 
been pretty well established, we know what we want to do, and 
we understand the constraints that go on nationwide. I think 
we'd be very pleased to get an increase in our funding level.
    Senator Crapo. Well, I'm actually very pleased to hear that 
the current proposal is increasing the SCORE funding by $2 
million.
    Something I probably should have mentioned in my opening 
remarks is that I'm very concerned about the SBA budget 
overall. If you look at the budget, Mike, is it over the last 4 
years? Over the last 4 years, the SBA budget has gone down 
about 24 percent. It's reduced in size by about 24 percent. As 
you all, I assume, know, I'm a strong fiscal conservative 
fighting for limited budgets back there in Washington, D.C.; 
and we are in some pretty difficult budget times, and so I 
don't have a problem with telling our agencies that the 
economic times and the budget circumstances we are facing right 
now require some sacrifice.
    However, if you look at all of the Federal agencies, there 
are only four other Federal agencies in the entire Federal 
Government over that same 4-year period of time that have had 
their overall budgets reduced. The others have all continued to 
grow, although maybe at a lower rate than they would like to 
have grown. Of those five agencies, including the SBA, that 
have actually gone down in size, none of the other four have 
approached the 24-percent reduction that the SBA has seen.
    Given the fact that small business is the engine driving 
jobs in this country, I have a concern about that. Again, I 
don't have a concern about some sacrifice at the Federal 
Government level on budget issues, but I do have a concern 
about our priorities and who we are asking to share those 
sacrifices and how we are doing it in the budget.
    That's why I'm going to be asking a few questions about 
different aspects of the budget; and I'm glad, actually, you 
were testifying that there's actually a proposed increase for 
SCORE. One last question on SCORE. Among the counseling you 
described there, I would assume that a significant aspect of 
the questions that are brought to you or to the SCORE 
representatives have to do with access to capital. Is that 
correct?
    Mr. Kindred. That's correct.
    Senator Crapo. And you have the ability, either yourselves 
or through the system that you have, to find the expertise to 
help small business owners or those who are potential small 
business developers to understand and identify the best access 
to capital that they can get through the SBA programs.
    Mr. Kindred. That would be correct.
    Senator Crapo. Go ahead.
    Mr. Kindred. Well, I was going to just comment that we try 
to work with them in preparing the business plan, but as a part 
of that process we're trying to identify what's the best source 
for them as well. We do know the banks, we do know John Lynn in 
the Small Business Development Center, we know Jim and what 
they do at PAC, so we can direct them to some of these people 
when they're going through this process.
    Senator Crapo. Okay. Good. Do you have any experience or 
could you give me, if you have, an opinion on the question that 
has been raised by several of the others on the panel about the 
availability of capital for small business in rural areas as 
opposed to urban areas? Is it easier or harder to get access to 
SBA capital in those rural areas?
    Mr. Kindred. I would prefer to let the lenders probably 
talk about that.
    Senator Crapo. Sure.
    Mr. Kindred. The sense that I have--again, I'm talking 
about the people that we counsel--the majority of these people, 
when it comes right down to it, family, friends, savings is 
going to be the best avenue for them.
    I would say to you that we invite local banks to speak at 
our workshops, and I've had a number of the local banks 
basically say, in front of our attendees, that, ``We don't 
finance small businesses unless we have 2 years' worth of 
history.'' That's sort of closing the door on a lot of people 
that are sitting in the rooms attending our workshops.
    Senator Crapo. Well, you know, that's an issue that has 
been raised to me by small business owners; and I was going to 
go somewhere else, but let me go there right now and expand 
this to the rest of the panel. Any of you, please feel free to 
jump in. How does a person who wants to start a small business 
do so if they have to have a 2-year history before they can get 
access to capital?
    Mr. Lynn. Well, again, like we do a lot of clients in rural 
North Idaho and the microloan program is essential because most 
of these people that are going to start up are going to start 
up on a smaller scale basis and they need $20-$25,000 of start-
up capital; and the banks are not going to lend that money, 
especially in rural North Idaho.
    As I mentioned previously, even the community banks in 
Kootenai County that are doing most of the lending--it's not 
the larger banks--they're cherry-picking the good deals and the 
community banks are picking up all the slack. That's the way I 
see it.
    Senator Crapo. Any others?
    Mr. Ferguson.
    Mr. Ferguson. If I could just make a comment there. John's 
exactly right. Of the 300 people or so that call us, 200 or 
more have already been to the bank. The problem is the banks 
have changed dramatically, too. Most of the people that had 
discretionary loan limits that were in the local branches are 
gone and now everything's in a different center. Now, a lot of 
the lending is still being done by the banks, but a lot of 
times we needed to help them find the right person maybe in 
another city to get that loan because they aren't going to find 
it in their local branch; so that's where part of our coaching 
comes into play there. But so many of these loans are very 
modest, and I don't see anybody else out there with us except 
for the microloan program.
    But in answer to your question about how do you start if 
you have less than 2 years' history, it's basically because of 
a very good business plan and the projections that primarily 
the Small Business Development Center does. If we buy into it, 
we'll go ahead and fund as best we can.
    Senator Crapo. All right. Let me ask you just generally, as 
a panel, to help me be sure that I understand sort of the 
waterfront, if you will, of loans as you all testified. I heard 
reference to the 7(a) program, the microloan program, the 
Community Express loans, the 504 loans, and the intermediary 
lending pilot program that Mr. Deffenbaugh talked about. Are 
there other loan programs, if I were to just want to establish 
the list of programs out there that are available to deal with?
    Mr. Ferguson. The Department of Agriculture has their 
intermediary lending program, I think it is similar to what 
you've proposed here for SBA. It's an excellent program. It 
fits that niche between $50,000 to $150,000 that we need. It's 
a very borrower and lender-friendly program. In fact, the 
department even does the environmental studies, which are kind 
of a pain for the lender and other things of this nature, and 
we're able to do it at a very low rate.
    Most of our programs right now are at 6-percent fixed rate 
for the full term, which can be up to 20 years, because we're 
able to borrow at 1 percent on a longer amortization. It's been 
very effective, but the money's hard to get if you don't have 
the big matching pool to get the points.
    Mr. Deffenbaugh. There's also two other sources in Idaho. 
One is a Federal program, and that's a revolving loan program 
established by EDA, the Economic Development Administration; 
and the other is a State rural block grant that was granted to, 
in our case, ourselves, and that is Panhandle Area Council, to 
establish a revolving loan fund, also. The resolving loan 
funds, again in this case, the State money matched the Federal 
so that we could capitalize that at a reasonably high rate.
    One thing to understand in all these loan programs that we 
have and we administer, we're never the sole source lender. We 
partner with banks. That makes both the capital go a little bit 
further plus it also introduces the banks to the businesses. 
There's an opportunity where possibly a bank would not do a 
deal except for the fact that there's a revolving loan fund or 
microloan money in the deal that gives the bank a better 
opportunity to participate in the programs.
    Senator Crapo. All right. Thank you.
    Mr. Ferguson, didn't you say that the microloans were being 
eliminated in the current budget proposal?
    Mr. Ferguson. That's what I've read from information I got 
from the SBA web site. They're proposing that it be replaced 
with the Community Express Program.
    Senator Crapo. Can you explain to me the difference between 
the microloan program and the Community Express program?
    Mr. Ferguson. I'm not a 7(a) lender, so I'm not sure of all 
the aspects of the Community Express. I understand it's 
supposed to be a little more borrower-friendly and banker-
friendly in that it uses the bank's documents, and other things 
like that, as opposed to all of the SBA documents. Other than 
that, I don't see that there's a big difference between that 
and the SBA 7(a) program.
    Now, with the micro, we borrow the money in a pool from the 
SBA, we lend it out, we're the underwriter, we're the 
originator, we're everything, and the documents are very user-
friendly in this case. It's done primarily with John at the 
SBDC and the borrower and we help them put it together, but 
it's just for very modest loan amounts. It's from a thousand to 
35,000. The rates, unfortunately, are slightly higher; but they 
aren't bad, they're in the high nine range. The SBA does charge 
us a little higher rate, too.
    Senator Crapo. The Community Express, is it targeted to 
that $1,000 to $35,000 range?
    Mr. Ferguson. I really don't know for sure. I doubt that it 
goes down to a thousand. I'm inclined to think it's more like 
maybe $10,000 to $35,000 but it's a new program and I'm not a 
7(a) lender.
    Senator Crapo. Okay. It just seems to me, getting back to 
the question of those who don't have that 2-year track record 
and may need to be getting some early access to capital, that 
if we eliminate the microloan program, we may be creating more 
problems than we are solving in terms of budget problems.
    Now, you indicated that you borrow the money from the SBA. 
I assume that means you repay the money to the SBA.
    Mr. Ferguson. That is correct. We have to repay the loan. 
We have loan loss reserve, and all those other issues. So PAC 
is at risk.
    Senator Crapo. Do you know if, for the country, whether 
there is a track record on the microloans in terms of whether 
the SBA faces a credit risk there? You see what I'm asking? In 
other words, does the SBA get its money back under the 
microloan program nationally?
    Mr. Ferguson. I guess I wouldn't want to comment on that. I 
know that they do consider it to be an expensive program in 
terms of a dollar lent and dollar of cost. I know that's a 
consideration. Whether or not their default ratios have created 
an issue, I'm not sure.
    Senator Crapo. I'm going to see if I can answer my own 
question here. Well, according to some information I've got 
right here, an analysis that we have of the microloan by the 
SBA, revealed that--am I reading this right?--every dollar lent 
cost the taxpayers 97 cents? Does that mean they only got 3 
cents back on the dollar? That doesn't make sense to me. I'm 
going to have to check that out.
    We're going to have to look into this to find out because 
it seems to me that there has to be a reason that they were 
going away from the microloan program, especially if it fits 
this initial niche. If any of you, either in the audience or 
here, have some information about that, I'd be glad to receive 
that information as a supplement to our record today.
    My intention here is to go back to the SBA, through my 
service on the Small Business Committee. I also, by the way, 
sit on the Budget Committee; so we're going to write the budget 
that these guys all get to use, too. In both of those contexts, 
I want to be able to make sure we put the right line items in 
place and maintain the programs that may need to be maintained.
    I just cannot understand that. Unless there's a 97-percent 
loan default rate, I can't understand that figure. I don't 
think there's going to be a--you don't have a 97-percent 
default rate, do you?
    Mr. Ferguson. No.
    Senator Crapo. All right. Thank you.
    Mr. Deffenbaugh. One other thing, just in answer to that, 
that I'm aware of, when the program was initiated, traditional 
lenders, like Panhandle Area Council, were not allowed to 
participate in the program. It was focused more on social 
service agencies that really had not been traditional lenders. 
It evolved over the years and it allowed traditional lenders to 
participate in the program.
    Senator Crapo. Maybe some of that early circumstance may be 
generating some of the statistics. Well, I can assure you I'm 
going to check into that because that number really surprises 
me.
    What about the 504 program? Tell me exactly how it works 
and what niche is it supposed to address?
    Mr. Deffenbaugh. 504 is a long-term, fixed-asset financing 
program designed to help businesses either acquire new real 
estate and build buildings or manufacturing equipment 
processing equipment. When the program was established, the 
idea was that a local community would create a board. The board 
would then look at the deals and determine whether there was a 
job creation requirement and whether it fit within the 
community.
    In fact, there were cases where our board, Panhandle Area 
Council's board, has turned down loans because either the loan 
was going to be--the building, for example, was going to be put 
into a place that just simply didn't work within the community, 
or it was a replication of some of the businesses that we had 
and it was a new one and we didn't want to see it be 
competitive or uncompetitive, in a sense, of other businesses.
    What has changed is the SBA will allow now that the 
community aspect is no longer a requirement and a certified 
development company no longer has an area that they're required 
to operate in. In our case, we can operate anywhere within 
Idaho, instead of just the five northern counties, which we'd 
previously done. If we operate--we can request to operate in an 
adjacent State. Ultimately, that will mean that larger 
certified development companies can literally leapfrog across 
the United States and do deals anywhere. From SBA's point of 
view, quite honestly, they're going to have to only deal with a 
few large multi-State lenders in this case. But that's what 
happens.
    However, the multi-State lenders are going to look where 
the big markets are and they're going to ignore the rural areas 
or they're going to hope that banks will bring them to them. 
They're not really going to go out and market them and be a 
part of that community, and that's what we see as a fault in 
this change.
    Senator Crapo. How can we correct that? What would be the 
best thing for me to do to go back to Washington, D.C., to make 
something to happen? Would we put a statutory requirement in of 
some sort? If so, what would it be?
    Mr. Deffenbaugh. I guess from my point of view, probably 
the biggest thing is to--maybe not to allow the multi-State 
ones or limit the number of States that they can operate in and 
not have the SBA eliminate the rural 504 development companies.
    Right now we are under the pressure that if we don't 
basically compete, we feel eventually we will be scored against 
the larger multi-State certified development companies, that 
they may cause us to be eliminated. One of our certified 
development companies in Idaho has already been decertified in 
the Lewiston area. The other four that exist, I met with them 
last week, we are all concerned that we may not have the 
opportunity to compete.
    Senator Crapo. Tell me how the scoring works. You have a 
series of loans that you work on.
    Mr. Deffenbaugh. Correct.
    Senator Crapo. If you focus on rural areas, those loans 
will have a different dynamic than a packet of loans from an 
urban area. Give me a little bit of a feeling. How does that 
then translate into a bad score?
    Mr. Deffenbaugh. Right now the score is the total number of 
dollars in loan and the number of deals that you do. We are 
required, at a minimum, to do two deals a year; and I don't 
believe there's a capital amount. But when the SBA sends out 
the performance criteria, it's done by actually dollars not 
number of deals. That certainly is one of their considerations. 
You can see that the pressure in the future is going to 
continue to do that.
    Evergreen, out of Seattle, is a large certified development 
company. As you might imagine, in Seattle there are a lot of 
deals to do. They have been expanding and looking into this 
area wanting to do things. Quite honestly, they came over here 
and we worked with them to see if they could do things here and 
to help our process a little bit. Since they're so good at it, 
we thought we could learn from them. They couldn't find a deal 
in a year.
    They were only concentrating on the Coeur d'Alene area. 
They really didn't look at St. Maries or Bonners Ferry or 
Sandpoint. That's where we look a lot to try to find our deals.
    Senator Crapo. The thinking would be that the large 
companies would just come in and basically pick the easy deals.
    Mr. Deffenbaugh. Exactly.
    Senator Crapo. And get a higher score because they are able 
to do the easier, larger deals presumably.
    Mr. Deffenbaugh. Ultimately, yes.
    Senator Crapo. Then those who are out there servicing the 
rural areas are going to be scored lower; but the service, as I 
see it, is the more needed service.
    Mr. Deffenbaugh. Exactly. We obviously receive a service 
fee to continue our operations on these. If we are no longer 
allowed to do the deals, if we can't compete, and if we are 
seeing a lot of pressure doing the deals in Coeur d'Alene, for 
example, eventually the ability for us to continue to operate 
is diminished.
    Senator Crapo. Okay. Mr. Lynn, this is primarily directed 
at you because I focused on this during your testimony. But any 
of you who want to jump in on any of these questions, please 
feel free to do so.
    You were talking about what we need to do, and one of the 
first things on your list was to build out the infrastructure 
in our rural areas, which has been one of my big focuses. This 
doesn't get directly at access to capital, although it is, I 
think, what would make a lot of these potential start-ups more 
qualified for access to capital. But I just wanted to get on 
the record a short discussion about this issue because it seems 
to me that for our rural areas in terms of economic 
development, that perhaps the most significant thing we in a 
policy position can do is to make sure that they have the 
infrastructure in place in order to participate in a global 
economy. Would you agree? Could you expand on that a little 
bit?
    Mr. Lynn. I would definitely agree with that. I mean access 
to broadband, internet fiber I think is a very important 
development in the business community right now. I mean you can 
do business globally if you can have the capacity to do that. 
Other issues I think that need to be expanded are our 
transportation issues. If you're manufacturing a product in St. 
Maries, it's very difficult to get it to the market. I don't 
have an easy answer for that one. But the broadband is 
something that I think could be addressed at a national level.
    Senator Crapo. Thank you. The second point that you made, 
that we need to increase the access to capital, if we could get 
the infrastructure built out and in place, increase the access 
to capital, and coordinate between the various providers of 
capital so that we have an efficient system in place; is that 
an outline, on a broad scale, of how we should approach 
economic development?
    Mr. Lynn. Well, I think there's a lot of agencies out there 
saying we're economic development agencies.
    Senator Crapo. Yes.
    Mr. Lynn. I don't think the lines of communication are 
always coordinated between the economic development agency in 
that particular county, through us, through the various 
community banks, through the Department of Commerce, and the 
Department of Labor. Everyone kind of goes in and does their 
own little thing, and I think to make a real impact, everyone 
needs to be coordinated on this and maybe a master plan put 
together or something that says, ``This is how we can make this 
work and here's your role in it.''
    I mean I think everyone's--it's the turf issue. ``Well, 
this is what we do,'' ``This is what we do.'' Well, you know, 
let's all get together and do it better.
    Senator Crapo. That wouldn't just be Federal agencies.
    Mr. Lynn. I think that local, Federal and State agencies 
need to have a little better communication so we're not 
duplicating services and we're working together to actually do 
something.
    Senator Crapo. As you're describing this, I think that's a 
very cogent thought. I'm trying to figure out how we would make 
it happen. Have you got a suggestion we could pass along here?
    Mr. Lynn. Yes. I guess it comes down to why doesn't Kellogg 
work with Wallace? It's one of those issues that has always 
been there.
    Senator Crapo. I'm not sure I want to create a superagency 
that would manage all of this, because we might just have more 
bureaucracy. I really believe you're onto something, but I'm 
not quite sure how to make it happen.
    Mr. Lynn. I don't think I have the answer to that. I don't 
know. But I think there could be a better effort made in the 
rural areas of North Idaho.
    Senator Crapo. Thank you. I agree, and I'm going to be 
trying to give that some thought. One of the problems we have 
is there are a lot of great ideas. We try to make laws out of 
them and put some enforcer in place to make these good ideas 
happen. However, sometimes we get something worse than we 
started out with.
    But I really believe that coordination idea is important 
because one of the things that I've found as a Member of 
Congress is my constituents come to me often with questions 
about--kind of probably the same kind of questions they go to 
the SCORE folks with--How do we do this? What resources are 
available and what can I do? I would have thought, you know, I 
could ask somebody on my staff to call up the ``How Do You Do 
It Agency'' and say, ``Where's the list? Where's the checklist 
of what you should do here and how you do it?'' There isn't 
such a thing. Although there are--we are getting there. We've 
got--in certain categories in certain areas, we can do it. But 
if we had a more cohesive approach to coordination among the 
various services that are provided, then that might work. 
Perhaps the folks at SCORE are putting that together. There 
might be an expert at SCORE who could be the one that I'd get 
my staff connected to who could answer us.
    Well, a lot of ideas and suggestions I think have come 
forward to me, and I just wanted to kind of wrap this panel up 
by giving you some of my thoughts right now and then asking if 
any of you have any further comments on them. But it seems to 
me that, clearly, we have the overall budget issue in terms of 
resources at the SBA, which is going to--frankly, be kind of a 
broad part of the overall budget battle, just to be sure we 
have the amount of resources in the SBA to do the job.
    But I can tell you that I believe that of all the functions 
that the Federal Government performs, right now our economy 
needs jobs and we need that engine that drives jobs to be 
operating as efficiently as possible, and I believe that's the 
small business community in our nation. I believe that in terms 
of where we put our focus as to the resources that we do have 
in the Federal budget, this should be one of the higher 
priorities. That's kind of a first step.
    Secondly, I do believe that rural America faces a much more 
significant problem in terms of getting access to capital and 
having the infrastructure that promotes strong business 
development and economic growth. As a result of that, we've got 
to pay attention to things like the infrastructure and making 
sure that, in the SBA context, the programs that we operate are 
operated in such a way that they facilitate reaching out to and 
promoting the right kind of business opportunities in the rural 
areas rather than, as some of you have testified, creating a 
scoring system that's going to focus on urban areas or the 
like.
    As I'm looking at it, I'm going to go back--we clearly have 
to fix the 7(a) loan program. We all know that. That's going to 
be mostly a budget issue, I think. Secondly, I'm going to go 
back and look very carefully into the microloan issue to 
determine just what is going on there and why and whether we 
need to make sure that that tool remains available. From what 
I've heard today, it sounds like it should.
    The 504 loan programs and the developments there, 
particularly with the larger companies and the multi-State 
lending companies dominating, which will then pull away from 
the rural communities, is an issue I think we need to look at 
very carefully, and I promise you we will do that.
    I'm pleased to hear that this pilot program that I've been 
involved with sounds like a good idea and it looks like it's 
filling a good niche. We'll try to make sure that it not only 
survives but that it could possibly become more than a pilot 
program, become more than another one of the aspects, on a 
permanent basis, that we operate through.
    With regard to SCORE, I guess I'm just going to make sure 
that you get your budget.
    Mr. Kindred. We certainly would appreciate that.
    Senator Crapo. That kind of, to me, sounds like where I'm 
headed from what I've heard from this panel. Any further 
comments from any of you?
    Mr. Lynn. Thank you.
    Senator Crapo. All right. Well, I thank you very much. We 
will excuse you and move on to our second panel.
    Senator Crapo. Those who have been invited to be with our 
second panel are Mr. Bob Beck, the Vice President of SBA 
Lending at Mountain West Bank; Ms. Debbie Lawton, Business 
Development Officer at U.S. Bank; and Mike Brown, the Business 
Development Officer at Borrego Springs Bank. We'll put some 
name tags up here for you. You can sit at the designated spot 
and we will have you testify in the order that I read your 
names. Same instructions apply to you. Please try to pay a 
little bit of attention to Mike over here or I'll have to tap 
the gavel.
    Mr. Beck.

  STATEMENT OF ROBERT M. BECK, VICE PRESIDENT OF SBA LENDING, 
            MOUNTAIN WEST BANK, COEUR D'ALENE, IDAHO

    Mr. Beck. Morning, Senator Crapo.
    Senator Crapo. Morning.
    Mr. Beck. I'm Bob Beck with Mountain West Bank and I'm the 
Vice President and Manager of the Small Business Lending 
Department. Thank you for allowing me to address you today.
    We are very concerned about the SBA programs as we know 
them today. They may be putting small business lending here in 
rural America, and elsewhere, in jeopardy of obtaining access 
to capital necessary for the beginning and expanding of their 
business. We are especially concerned in the following four 
areas: funding, restructuring of existing rules and procedures, 
centralization of loan processing, and the possible elimination 
of SBA-supported consulting services.
    I'll first address the funding issues. The funding of the 
SBA loan program seems to be an issue almost every year. I 
believe the funding crisis could be avoided if the SBA would 
form a dialogue with their lending partners and other experts 
in the field such as NAGGL. The current budget of $9.5 billion 
will probably not be sufficient and will, in all likelihood, be 
$3 billion short for the fiscal year 2004.
    Caps of $500,000 and $750,000 have been put in place in 
recent years and, in addition, the elimination of the piggyback 
loans most recently, which are causing problems. We would 
request that both the piggyback loan structure be put back in 
place immediately and the maximum of the $2 million loan be 
reinstated as quickly as possible.
    The SBA is beginning to get a reputation of on again and 
off again. Consistency and integrity is a must. We need to 
immediately reestablish what the SBA loan guarantee program is 
all about, particularly by providing capital to small 
businesses that would otherwise not be able to get funding and 
business assistance without the SBA loan--the SBA's 
participation.
    In a recent announcement by the SBA, they have proposed to 
fully fund the program but only by providing much less of a 
guarantee and charging less than guarantee fees. This will have 
a dramatic effect of reducing capital to small businesses. 
Lending partners will be unwilling to lend with less of a 
guarantee due to lack of collateral especially with start-up 
businesses or expanding businesses that have less than adequate 
liquidation values to support the loan. Larger loans do create 
more employment opportunities.
    Larger loans do create more employment opportunities. 
Larger loans provide more guarantee fee income to the SBA, up 
to 3.5 percent on larger loans as opposed to 1 percent on loans 
less than $150,000. The piggyback loan has been stopped, which 
again limits access to needed capital. Lending partners must be 
willing to explain to small business owners clearly and 
precisely the rules and regulations with consistency.
    Centralization: It is our understanding the agency is 
planning to centralize all the loan processing by eliminating 
138 loan officers in favor of 36 centralized loan 
decisionmakers. Even though our bank participates in the 
Preferred Lending program, we constantly rely on the district 
office to provide guidance and answer questions. We are 
desperate to preserve our SBA loan office in Spokane, 
Washington so they can continue to provide service to small 
businesses as well as lending partners. We need to learn from 
larger banks as to the benefits they may have gained from 
centralization.
    The SBA plays a crucial role in providing services for 
small businesses through organizations such as SCORE, and Small 
Business Development Centers. In addition, Business Information 
Centers play a vital role as a resource for start-up and 
existing businesses. Local loan officers are very active in 
presenting loan applications with guidance on how to apply for 
the loan with their lending partners. These services also 
include assistance with export trade loans, HubZone 
classifications, 8(a) contracting statuses and many more.
    In light of these pending closures, we are somewhat 
perplexed how the SBA could justify the recent announcement of 
two new offices in Alaska. We don't understand how these new 
offices are opening when the SBA office is a proven area that 
needs to remain open and continue to provide the services 
already in this existing, proven rural market.
    Thank you for allowing us the opportunity to present these 
matters to you.
    Senator Crapo. Thank you very much, Mr. Beck.
    Ms. Lawton.

STATEMENT OF DEBBIE LAWTON, BUSINESS DEVELOPMENT OFFICER, U.S. 
                   BANK, COEUR D'ALENE, IDAHO

    Ms. Lawton. Senator Crapo, as a lender under the SBA loan 
program and a small business owner myself, I'd like to thank 
you for letting me testify here at this hearing this morning.
    I'm an employee of U.S. Bank in our Small Business 
Administration, and I have spent the last 14 years of my career 
helping small businesses access funding through the Small 
Business programs, to help them grow their businesses and start 
their businesses. During my career, I've approved loan funds as 
small as $5,000 up to multi-million dollar loans, and I've 
helped assist numerous businesses under virtually every 
industry out there.
    This has been a very gratifying career for me as without 
the SBA program, I am the last resort lender here under most 
banks. The Small Business Administration lending programs are 
indispensable for this country's economic health. It is common 
knowledge that the majority of all jobs are created from the 
small businesses. It's also common knowledge that the majority 
of small businesses do fail within the first few years; and as 
a lender, I can recognize the bank's risks in lending to these 
small businesses.
    Many bank policies preclude lending to small businesses 
without that 2-year historic debt service. Without the aide of 
the U.S. Small Business Administration loan programs, many of 
these small businesses would not be able to obtain their 
financing that they would need to create these jobs that are so 
needed in our economy. According to a recent article in the 
Chicago Tribune, the SBA program backs 40 percent of all long-
term lending to the country's small businesses.
    In most years, the SBA loan program has been able to meet 
the needs of both the lenders and the businesses. I know that 
through recent things that are going on right now, some of my 
testimony is being resolved at this point, and that's a good 
thing. However, the recent shutdown of the SBA's 7(a) loan 
program, many banks--and that's estimated--many businesses, 
estimated at about 200, have been caught in the middle with no 
place to go. This shutdown and this subsequent capping of the 
loans at $750,000, along with the first-time ever prohibiting 
the piggyback loans, has caused the SBA to slam the door on at 
least $1.3 million loan requests as of 12/30 alone.
    Many of these small business owners do not qualify for 
other loan programs, and they do not have time to switch those 
programs. I was personally handling two business acquisitions 
with purchase prices over $1.2 million. With the capping of the 
$750,000, they had to come up with a large sum of money; and in 
today's economy, that's almost impossible. Some of these people 
do not qualify to--these two people, they were business 
acquisitions--they did not qualify for the 504 program. 
Although they called your office to complain, they were told to 
find a 504 lender. These guys did not qualify for 504. It's a 
business acquisition.
    I'm also dealing with a $2 million refinance for a car 
dealership. It is a balloon payment and, since it's a 
refinance, it's not eligible under the 504 program. Once again, 
because of job creation, it doesn't qualify for 504, so I can't 
help this guy. I don't know what he's going to do with his 
employees. I don't know what he's going to do with his 
business.
    The fact of the matter is that the SBA did shut down this 
program; it's limited us to caps, it's limited to--prohibiting 
us to doing piggyback loans. Basically we need to find the 
budgeting. I think that's being worked on at this point. 
They're asking to lower the subsidy rate, which I have fears 
will increase our fees. They have come out with solutions. 
They've not really come out with plans for these solutions, so 
we don't really know how they're going to meet these goals. 
They sound like a good fix, but let's just hope that it does 
get there.
    Senator Crapo, we need your help in appropriating 
sufficient funds to the program with future budgets without 
raising the fees that will be associated with the programs so 
that both lenders and borrowers can utilize the program and to 
their best ability.
    Thank you for your opportunity to present my story.
    Senator Crapo. Thank you very much.
    Mr. Brown.

   STATEMENT OF MICHAEL BROWN, BUSINESS DEVELOPMENT OFFICER, 
           BORREGO SPRINGS BANK, COEUR D'ALENE, IDAHO

    Mr. Brown. Is this on? Hello.
    Senator Crapo. Yes, now it works.
    Mr. Brown. All right. Thank you very much for the 
opportunity to present my opinion of what's going on with 
access to capital in the smaller markets. I've been involved in 
finance for almost 30 years. The majority of it has been 
dealing with small business finance both in economic 
development and SBA-guaranteed products. Rather than reiterate 
what Bob and Debbie have said, I will go to the points that I 
think are specifically important in what's going on right now.
    The SBA program, whether the bank is big, large, small, in 
between, there is somewhat of a network within the banks, 
regardless of the size, if a loan officer within the bank can't 
get it done, they want to get that loan done, so they'll call 
one of our--we're all associates, we all know one another--and 
describe the project in general terms to see if there's an 
interest in financing that program.
    I hear the larger banks getting beat up upon to some degree 
in economic development finance when, in fact, a large 
percentage of the referrals that come to me, because I do 
regional lending through Montana, Idaho and Washington, come to 
me. If they can't get it done for one reason or another, I get 
the opportunity to do that. On the other hand, the small banks 
that have lower loan limits or a more constructive loan policy 
will also call me to see if I can come in and get involved and 
assist with the financing. I don't know. I think that the 
criticism of the larger banks is a little bit overplayed in 
that what goes on is not widely known in the finance community 
or the economic development community.
    One of the big concerns and problems with doing SBA 
financing is the inconsistency with the funding programs. We 
don't know how to plan. We're all profit-making entities and we 
need to plan our budget, annually at least; ideally, longer. 
When the program continues to fluctuate on again, off again, 
the guaranteed percentage changes, it disables us from doing 
that effectively.
    There's recent talk of reducing the guaranteed percentage 
downward, which I think would have a devastating effect on the 
program itself. The original program to have an SBA guarantee 
with a conventional commercial loan, was to supplement a 
collateral deficiency or one other weakness in the credit. With 
the 75-percent guarantee, that provides the strength of the 
credit that maybe all the other criteria is there for a loan so 
that the lender's more apt to go forward to it. To reduce that 
is going to have a measurable effect on non-real estate or non-
heavily-collateralled projects, which was the very reason I 
think that--one of the reasons that I think it became there.
    I think that reducing the guaranteed percentage will reduce 
radically the number of lenders in the arena and significantly 
reduce the access to capital by the rural businesses because in 
the urban areas, the collateral values of property appreciation 
and value of collateral available is oftentimes a lot stronger.
    The centralization that is being talked about with the SBA 
draws the local input of the loan officers into two regions of 
the United States rather than 80-some offices. Those local 
lenders--or the local loan officers that I've worked with in 
Portland, Seattle, and Spokane--know the local business, they 
know specific borrower over time, and they know the local 
dynamics and are able to make considerations that might not 
otherwise be made in a checklist-type approval process if 
centralized. I guess that's a pretty general summary of 
everything that I have. Thank you very much.
    Senator Crapo. All right. Thank you very much.
    Before we get into some of the questions that I have on the 
specifics that you have raised, I wanted to get into an issue, 
Mr. Brown, that you raised in your testimony--it's the question 
of the impact of bank consolidation on access to capital in 
rural areas.
    One of the things that the small business community or the 
SBA has found in some of their findings--in fact, there was a 
report issued just last week by the SBA's Office of Advocacy 
titled ``The Impact of Bank Consolidation on Small Business 
Credit Availability.''
    First of all, have any of you seen or heard of that report?
    Mr. Beck. Yes, I read it.
    Senator Crapo. Okay. One of the findings of the report is 
that, ``Credit access for small businesses has been 
significantly reduced by banking consolidation and that, as a 
result, small businesses have increasingly turned to nonbank 
sources for financing to provide credit access.''
    I'm not sure how much of that impact is expressing itself 
in Idaho. In fact, Mr. Brown you indicated that the larger 
banks do work very well with you, if I understood your 
testimony right.
    Mr. Brown. Yes, right.
    Senator Crapo. I am interested in your views as a panel on 
these findings and particularly what kind of impacts we are 
seeing in Idaho as a result of bank consolidation.
    Mr. Brown. What I think is the most important to any lender 
is to have continuity in the program. Private sector financing 
will adapt to whatever they have as long as it remains in 
place. The large bank consolidation has taken a lot of the 
local lending out of the local smaller branches and they 
concentrate in the more urban areas, which is a logical 
financial decision. A lot of the talent that was in the little 
branches that get purchased by the larger banks gets drawn out 
into the areas of more demand. But, nonetheless, they do still 
maintain a presence and they do refer the loans to their head 
office. Oftentimes, unfortunately, those are declined.
    But as you see the consolidations, it creates a void where 
a smaller community bank does pop up and begin to replace that 
local input. Over time, it begins to happen. The nonbank 
lenders--I happen to work for an actual bank, but I am a 
Regional Lender acting much like a nonbank lender in that we--I 
do financing anywhere over a three-State area. If the local 
businesses have knowledge that us regional lenders exist and/or 
the bankers that can't get the project done once they get 
centralized and their focus is more urban, if they will refer 
out to the regional lenders, then I think it would be helpful 
to the rural community.
    Senator Crapo. All right. Mr. Beck, did you want to 
comment?
    Mr. Beck. Yes, I would. As larger banks get larger and 
these consolidations move about, those bankers will typically 
want to do the larger loans in urban areas and so on like that. 
They don't supply enough personnel to operate in these smaller 
communities where their entire budget is a minute part of their 
overall goals for making loans; whereas in community banks, our 
sole survival is to provide loans to small businesses in our 
area where we are headquartered and operate. This is part of 
the community development, and I think it's crucial to keep the 
hands where they need to be especially in the small business 
lending unit.
    Senator Crapo. Thank you.
    Ms. Lawton, did you have an opinion on that?
    Ms. Lawton. As a larger bank myself, I know that some of 
what they're saying is true; we are in there for a profit and 
we can make the profit in the urban areas and with the larger 
loans. But as a Business Development Officer for U.S. Bank, 
which I believe is the third largest bank, I am servicing those 
smaller urban areas as well and I am--a lot of my loans are 
coming out of there. I am not as profitable as some of my other 
counterparts in the urban areas, but we're out there, we have a 
presence. I can't speak for the other large banks, though.
    Senator Crapo. All right. Thank you.
    I want to go back to what I think is a common theme among 
the three of you, which is that the problems we've had at the 
SBA, particularly with regard to funding, are creating an 
inconsistency that makes it difficult to do business; not just 
for you but for those who want to gain access to capital in the 
country.
    With regard to the 7(a) loans, I think we can stipulate, I 
agree with you, that the financing for those loans, which ran 
short last year, has created a serious problem; and we are now 
looking at a solution. The SBA has proposed a solution with a 
number of parameters that you've already identified that are 
raising concerns, and I just wanted to go over each of those 
concerns and then go back to the overall funding objective to 
see what we need to do to avoid; and then I'll take that back 
to Washington and see if we can actually get it done in the 
budget.
    But the first point is that there is an effort to reduce 
the guaranteed percentage. Can you each just give me a little 
more input as to what impact will it have on your lending 
practices and on the access to capital particularly--I'm 
talking across the board, but, as you know, I'm very interested 
in rural Idaho. But what impact would it have on access to 
capital and on your business practices if the SBA's proposal 
reducing the guarantee percentage were to become enacted?
    Mr. Beck. Well, I'll start. The way I look at it, the 
guaranteed percentages, they're pushing more and more for the 
Express programs and reducing the guarantee to 50 percent. When 
you get into that 50-percent arena, you're going to have to be 
very well collateralized. You're going to have to be very well 
documented on the cash flow issues, length of time in business, 
all of those traditional lending things that the regulators and 
auditors require of us banks, which is the basics of a lot of 
SBA loans, is the lack of collateral. We're not going to be 
willing to take ``riskier loan'' unless we're protected better. 
At the 50-percent level, does that really give us any 
protection? I would question that.
    Also, when we get into the areas of smaller percentage 
guarantees, don't kid yourself. We, as a community bank, are in 
there for the premiums offered by the secondary market to help 
sustain us, to also give us the ability to make larger loans 
because that guaranteed percentage is pulled away from our 
legal lending limit. With that lesser of a percentage, again, 
it affects two areas: directly our income and then also our 
regulatory lending limits.
    Senator Crapo. All right.
    Ms. Lawton.
    Ms. Lawton. Well, I would just feel that in the rural 
areas, we look at that property as more specific, not as a 
multi-purpose property, because the amount of people out there 
to purchase that business or purchase that property out there 
is very limited in the rural areas. If you were to start 
cutting our guarantees, we will back right out. A 50-percent 
guarantee is not going to be enough for us to go out to the 
rural areas. In the metropolitan areas and the urban areas, 
yes, we would still have enough to go out there to be 
purchasing and making up for some of these shortfalls for the 
collateral purposes. But in a rural area with a 50-percent 
guarantee, I would have to say that the bigger bank's probably 
going to pull out.
    Senator Crapo. Which obviously reduces the access to 
capital in rural areas more.
    Ms. Lawton. Absolutely.
    Senator Crapo. Mr. Brown.
    Mr. Brown. I agree with everything they both said and I'd 
like to reiterate the point about the smaller banks. There are 
lending limit issues with the 75-percent guarantee. 25-percent 
goes against their legal lending limit. If you cut that to 50, 
it has a dramatic effect on their lending ability.
    Also, in the rural areas of North Idaho, the real estate 
values, as a percentage of an entire project, is measurably 
lower than in the rural--or in the more urban areas. The need 
for capital for equipment working capital and inventory is the 
same. When you break that down to a collateral available to 
secure the loan in a rural area, you have a lot less collateral 
available in the way of real estate versus what it is in the 
urban areas.
    When the guaranteed percentage drops to 50 percent, when 
you're doing a discounted collateral value on the non-real 
estate portion of the project, it is anywhere from 50- to 90-
percent discount to see what you're going to net out, that risk 
translates to everybody including the SBA. I do agree that if 
the percentage of guarantee is dropped to 50 percent, that most 
all lenders will constrict their 7(a) lending probably to real 
estate and probably to the more urban areas.
    Senator Crapo. In addition to the restriction from rural to 
urban which would result from this, it would push the loans 
more into collateralized businesses.
    Mr. Brown. Yes.
    Mr. Beck. Absolutely.
    Mr. Brown. Yes. A 50-percent guarantee is probably close to 
a zero-percent guarantee when you're actually considering a net 
loss.
    Senator Crapo. Right.
    Mr. Brown. Is there a net there? No, it takes the net away.
    Senator Crapo. All right. That's very helpful.
    Then the next part of the proposal is an increase in fees. 
Tell me what that's going to do other than cost money. I mean I 
know that, but--
    Mr. Brown. Well, I'll start on that one. As far as fees go, 
the fees are relatively high with the SBA program by its 
nature; but the fees are always an issue when anybody's looking 
at net profit of any program, from the lender's side. But the 
access to the capital that's provided by the SBA programs can't 
be replaced anywhere else. There's just nowhere else to get it. 
The amount of down payment or equity required going in is 
relatively small compared to what is conventionally required.
    If the fees sustain the program, let the fees remain. We 
would all like to see a reduction in fees, but compared to the 
availability and the value of the program, I don't think 
they're a significant issue.
    Senator Crapo. Ms. Lawton.
    Ms. Lawton. Well, I think in a lot of instances that the 
capital is coming into the business; the down payment is the 
driving force of why they're coming to an SBA loan. A lot of 
businesses out there have the cash flow, they have the 
experience, they just lack the down payment. If we raise the 
fees too much higher, they're going to be just as qualified to 
go into a conventional type lending, and won't be able to meet 
their capital requirements to get into it because we ask for 
those fees up front.
    I think a lot of times that might preclude people from 
actually finding the financing because the fees are a lot 
higher if we continue to raise the fees.
    Senator Crapo. Mr. Beck.
    Mr. Beck. Personally, I like the way the fee structure is 
right today. It's based on a mathematical formula to determine 
the subsidy rate necessary to fund the program. I support it. I 
think it's very important that the SBA realizes that they can 
generate their own fees to sustain this program.
    Just as a ``for instance,'' I did some quick calculations 
here. On a $750,000 guarantee at 3.5 percent, it generates 
$26,250 in fees. If they reduce that fees and reduce the size 
of loans to 1 percent, and if you do seven $150,000 loans and 
get that 1-percent fee, you're going to only generate $9,625. 
Now, to me that doesn't make sense in a profit mode or to fund 
losses that the SBA is going to have. Why would you want to 
eliminate that fee income? Granted, the small business does pay 
those fees and I understand that; but they always seem to be 
able to work through that especially with the longer terms that 
SBA has allowed.
    If you break that down into the number of months that this 
loan is going forth, it doesn't seem like that much of a cost. 
I think we've also got to realize that it's the bank's 
responsibility to pay those fees. It's not necessarily always 
the borrower. Yes, the rules and regulations allow for us to be 
reimbursed for that, but I think we need to keep the fee 
structure where it's at.
    Senator Crapo. All right. The last thing I wanted to talk 
about in terms of these impacts of the proposals is the 
elimination of the piggyback opportunities. Again, I have 
listened to your testimony on that but would like you to 
explain just a little better to me just what is that going to 
do if this proposal is implemented?
    Mr. Beck. Go ahead, Mike.
    Mr. Brown. Well, in the organizations that I've worked 
through in regional lending over the past 10 years, we used it 
a lot with the 7(a) program, and the reason being that the 504 
program is excellent for real estate or for heavy fixed asset 
financing; but with the price of everything going up nowadays, 
there's a lot of parts of the project costs that are not 
eligible under the 504 program and there's some instances where 
the 504 program is not--or the financing project is not 
eligible for 504.
    In those instances, we used very frequently the piggyback 
program to, you know, put in a conventional first and then have 
the SBA in a supportive position. A big percentage of the 
projects we used the 504 whenever it's feasible because that's 
the best for the borrower with that low fixed-rate debenture 
loan, and it puts the lender in a good first lien position on 
the other 50 percent.
    But where that's not possible, just in the short time that 
the program was suspended, and now since that 750,000 cap with 
no piggyback, personally, in the relatively few number of 
projects that I finance, I've run into several that I could not 
do anything for and I didn't know where to refer them to 
because there's just nowhere to go.
    Senator Crapo. There are no other options.
    Mr. Brown. No.
    Senator Crapo. Do you have any kind of a percentage idea 
yet, have you got enough of a track record with this new 
proposal that--could you tell me what percentage of the loans 
you're not able to do because of this?
    Mr. Brown. Well, it's been a relatively short period of 
time.
    Senator Crapo. Yes.
    Mr. Brown. But I'd say probably 20 percent of the inquiries 
I've had I've said that, ``I can't do them now. Hopefully, it 
will change; and please hold on and maybe in a month or two,'' 
or whenever, and I keep them, their name and number, so that I 
can call them back. But I'd say roughly 20 percent at this 
moment that did not qualify for 504 and were too large for the 
$750,000 cap and did not qualify for conventional.
    Senator Crapo. Okay.
    Ms. Lawton. I'd say probably about 30 percent.
    Senator Crapo. About 30 percent for you? All right.
    Did you have anything on this, Mr. Beck?
    Mr. Beck. I'd just like to add that, you know, I've used 
the piggyback program several times, and what the piggyback 
really allows me to do is to take an ineligible company and 
make it eligible, especially for the use of proceeds. Also, it 
does directly supply more money and access to capital. If we 
can do a piggyback loan, I don't necessarily have to charge the 
guaranteed fee. Lastly, as far as I go, I was actually planning 
on the piggyback to remain in place, especially in light of 
what they did with the $500,000 cap. I was counting on that 
because I couldn't get my loans completely approved that were 
over the $750,000 mark, and I knew that cap was coming in 
place. That has resulted in three of the loans I have pending 
right now, three of the total 35 I've done are sitting there in 
limbo, and I'm hoping this piggyback loan structure gets back 
in place immediately.
    Senator Crapo. All right. I think that discussion has been 
helpful, and I believe it helps to just make very clear that we 
need a different solution than the one that is being proposed. 
Mr. Beck, in your testimony you indicated that you think that 
we're looking at about a $3 billion shortfall in the funding 
proposal for 7(a) loans. Is that correct?
    Mr. Beck. Yes.
    Senator Crapo. Which will be somewhere in the neighborhood 
of a need of around $12.5 to $13 billion.
    Mr. Beck. Absolutely.
    Senator Crapo. Do you think that that would allow us to get 
the maximum back up to 2 million and keep the fees where they 
are and proceed as we were?
    Mr. Beck. I believe so. If you get a combination of the 
piggyback loan structure and the $2 million limit, it all 
helps. I'm not saying that all of those large loans are 
absolutely necessary. I believe only five percent of the total 
monies available have been in that category of between $750 and 
$2 million. But I think it's crucial that these larger 
companies get their money in order to provide more jobs. That's 
the bottom line. I think the more job placement with the larger 
companies, it filters down to the lower ones. It's the ripple 
effect.
    I think it's very important that that $12.5 billion level 
be obtained; and I think we know historically, and the demands 
that have been placed since the beginning of the year are at 
that level.
    Senator Crapo. That's what our track record so far looks 
like.
    Ms. Lawton.
    Ms. Lawton. I'd have to agree with Bob.
    Senator Crapo. Mr. Brown, did you have anything?
    Mr. Brown. Yes, I'd agree as well. That amount has proven 
to be about where it nets out. Having a reliable known figure 
to work with, the financing industry can deal with it if they 
just know what it's going to be.
    Senator Crapo. All right. I'm going to ask another question 
here that I'm not sure any of you will have the answer to. In 
fact, we probably have it right here. The question is the same 
one I asked on the microloans. Do you know whether the SBA has 
a high level of cost to the 7(a) program that it administers?
    Mr. Beck. I wish I knew, and I've asked that question 
several times. I think it's been an issue that has plagued the 
SBA program for years. We need to know specifically what the 
loss ratio is. Even in this centralization of loan collections 
and all that have just occurred, we still don't know. That 
amazes me. It also amazes me that the number of files, and the 
way they're going to be handling these, it doesn't appear to be 
organized or planned; and this was announced several months 
ago.
    Senator Crapo. That's right.
    Mr. Beck. Yet we know for a fact that the offices aren't 
even set up, the facility isn't set up. I mean it's in process, 
I understand that; but to imagine to take 14,000 customers, 
collection accounts, whatever you call them, and put them in 
boxes and ship them to a place they don't even have shelves to 
put them on, I'm shocked.
    Senator Crapo. Any other comments?
    Ms. Lawton. The centralization, what Bob's saying is 
without knowing the areas they're dealing with, how can they 
make prudent decisions?
    Senator Crapo. I think that's a very good point. The 
centralization question to me gets back again--I'm assuming 
that the SBA, particularly with Congress restricting its 
funding by 24 percent over 4 years, is facing some pretty 
significant downsizing pressures. I understand the 
centralization pressure may actually have been generated by 
Congress.
    That having been said, I'm concerned to hear the stories 
that you're talking about in terms of the loss of people in the 
field, so to speak, outside of the Washington bureaucracy and 
the loss of expertise and access that that is going to present 
to you. Again, I am assuming--and I may be wrong, but I'm 
assuming that this is a budget-driven issue as well and that we 
may need to address it in that context. Am I correct?
    Mr. Beck. Yes.
    Mr. Brown. I believe so. I think that the centralization 
issues seems like a train that's coming down the track and 
that's going to happen in some form or another regardless of 
what we all say. Hopefully, there will be some local loan 
officer or local presence available that has a lending history 
that can be used in the case of appeals. If we send something 
in, an application in its abbreviated form, to a centralized 
approval process and it's declined for one reason or another, 
that there would be some kind of an appeal process to a local 
district office loan officer that knows the dynamics of that 
rural community, or that local community, that could pitch in 
and maybe not approve it but add the credibility to it to have 
a resubmission.
    Senator Crapo. If this centralization occurs the way it 
looks like it's heading, where will you end up having to deal 
with these?
    Mr. Brown. Sacramento.
    Senator Crapo. Sacramento? And today you deal with?
    Mr. Brown. Spokane.
    Senator Crapo. Spokane. All right. First of all, let me say 
I agree with the points that have been made here. Again, 
although we are fighting a very difficult budget climate back 
in Washington, and I'm sure I'm telling you something you 
already know, but with the entitlement programs basically 
running uncontrolled, because they are mandatory spending that 
we don't have the votes in Congress to adjust right now; and 
with the war on terror and our national security and Homeland 
Security driving so much spending right now, the rest of the 
budget outside of the entitlement programs and national and 
homeland security is--in the President's proposal, the rest of 
the budget is held to less--well, to an average of one-half of 
one percent increase. That doesn't mean that everybody gets one 
half. Some are going to get cut, some are going to get more. 
But the bottom line is we're working in a tight fiscal climate.
    That having been said, it seems to me that it is very 
shortsighted, in terms of the issues we've been talking about 
today with the primary focus on trying to restore the strength 
and increase the stability and growth in our economy, that we 
are making some of these decisions that, particularly for rural 
America, are going to drive access to capital away and are 
going to, even in urban America, make it much more restricted 
and probably focus it on certain types of more collateralized 
business.
    Mr. Brown. Yes.
    Senator Crapo. To me, that is a mistake that is going to be 
much more costly than the $3 billion we were talking about as 
far as the investment. I wish I had the numbers and the study 
on this, but I'm confident that if we were able to analyze what 
would happen dynamically in our economy if we make this program 
work the way it can, and if we can do so for another $3 
billion, that we would probably generate a lot more than $3 
billion of tax revenue to the Federal treasury and that this is 
going to pay for itself.
    As I go back and try to work through both the Budget 
Committee and the Small Business Committee, I think the 
solutions you talked about here are the ones we need to 
implement; and I appreciate your helping to educate me in more 
detail as to what the problem is and what the consequences are 
of the proposed solution, and I'll work to see if we can't try 
to find a solution to fix it.
    Mr. Brown. Thank you.
    Senator Crapo. Thank you very much.
    Senator Crapo. We will excuse this panel now then and move 
on to our third panel. Our third panel consists of Mr. Rob 
Randall, the President and CEO of Randall Contracting in 
Kellogg, Idaho; Mr. Archie McGregor, President and CEO of 
Archie's IGA in St. Maries; Mr. Bruce King, the Owner of 
Lakewood Animal Hospital in Coeur d'Alene; and Mr. Mark Gantar, 
President of All Seasons Apparel in Post Falls. Please come 
forward. Apparently Mr. King has not arrived yet. If he gets 
here before we finish, we will invite him up to the panel.
    I welcome all of you here and again remind you to try to 
keep an eye on Mike while you're making your comments, and then 
we'll be able to get into a good discussion. We will go in the 
order that we just identified you, so, Mr. Randall, please 
proceed.

     STATEMENT OF ROB RANDALL, PRESIDENT AND CEO, RANDALL 
                  CONTRACTING, KELLOGG, IDAHO

    Mr. Randall. Thank you. To begin with, I would like to 
thank the Senator----
    Senator Crapo. If you would pull that mic just a little 
closer to you. Thank you.
    Mr. Randall. Is that a little better?
    Senator Crapo. Yes.
    Mr. Randall. Okay. To begin with, I would like to thank 
Senator Crapo and his staff for the opportunity to present the 
history and success of Randall Contracting. Our accomplishments 
would not have been completely successful without the capital 
and business assistance provided by the 7(a) SBA loan program 
and the local lender partnership of Mountain West Bank.
    Randall Contracting is an excavation company specializing 
in site work projects involving reclamation and utilities. Our 
clients are mining companies, private developers, governments 
that are State, local and Federal. Randall Contracting began 
business in February 2001 as a sole proprietorship. We had an 
SBA-backed loan of $100,000. At the time of our opening, we 
were basically two employees, a shovel, and a lot of 
persistence.
    By the end of the first 12 months, we had managed to land 
three projects with a gross revenue of over $750,000. Randall 
Contracting became a corporation. We'd employed seven people on 
a seasonal basis and still two full time. During our first 
year, the guidance and confidence given by Bob Beck and his 
staff at Mountain West Bank, along with John Lynn from the 
Small Business Learning Center, created an even greater desire 
for Randall Contracting to succeed.
    By the end of our first year, we accomplished paying off 
our first SBA loan and established ourselves as a reputable and 
dependable company. Since the first day of business, I've had 
the attitude that a customer will always get a completed first 
class project on time and under budget. I also studied existing 
successful businesses and modeled Randall Contracting after 
their success.
    Year two of Randall Contracting began by searching new 
ideas of expanding on our previous year's success. Through 
contacts we had established the previous year, I found a 
reputable company going through a downsize and eliminating 
their construction division. I approached the company and 
offered rather than eliminating these jobs and auctioning off 
the equipment the idea that Randall Contracting purchase the 
company and continue their current contracts. After a couple 
months of negotiations, we came to a purchase agreement.
    Meanwhile, I had weekly meetings with Bob Beck at Mountain 
West Bank. By previously establishing the relationship with Bob 
Beck, another SBA loan was quickly processed. Suddenly Randall 
Contracting had construction offices in Idaho and Montana with 
12 full-time employees and full benefits. We quickly drew on 
our employees' expertise and created opportunities with every 
contact.
    I do have to add at this point I was wondering for the 
first few months: Can I take on the responsibility of running 
and creating a multi-million-dollar-a-year company given the 
present economic situation? I had a lot of sleepless nights and 
came to the conclusion that I would succeed simply because of 
all the families involved.
    By the height of the construction season in 2002, Randall 
Contracting had created 58 jobs for seasonal employees and had 
14 full-time positions. We finished the year with $4,800,000 in 
gross revenue, a growth rate of over 500 percent in 1 year. I 
will say that by mid-summer it felt really good to be able to 
know that I'd help put food on the tables of over 70 people.
    We began 2003 with around $2 million in carry-over work 
from contracts. With carrying over our exceptional reputation 
of quality job performance, we were able to retain most of our 
seasonal workforce from the previous work year and added where 
needed. We purchased additional equipment and added to our 
fleet of 50 other pieces purchased in 2002.
    At the height of the construction season in 2003, Randall 
Contracting had a workforce of 77 people and 31 subcontractors. 
Based on our past performance, we were successfully awarded 
several multi-year contracts and finished with another record 
year. In 2003, we had gross receivables over $6,400,000.
    We're now starting our fourth year in business. Our current 
backlog of work for 2004 is $8,250,000. With this, it will 
complete another record year without even bidding any other 
projects for Randall Contracting.
    The real clincher to this is that it has taken place in 
rural Shoshone County, in Kellogg, Idaho, one of the highest 
unemployment counties in the State. To date, over the last 3 
years, because of the 7(a) SBA program, Randall Contracting has 
been able to contribute over $8,000,000 towards rebuilding the 
Silver Valley. We now have had 21 employees buy homes in 
Shoshone County, and these are all young, hard-working people 
who believe in growing a building community. None of this would 
have been possible without the rural 7(a) SBA program.
    In closing, I would like to thank you again for the 
opportunities presented to Randall Contracting; but most of 
all, the credit for our success goes to my employees and 
family, clients, the SBA, Mountain West Bank and Bob Beck for 
their confidence in Rob Randall. I'd also like to extend a 
sincere thanks to Senator Marti Calabretta who awarded our 
first large project, the Success Mine clean-up.
    Senator Crapo. Thank you very much, Mr. Randall. It's a 
great success story.
    Mr. McGregor.

STATEMENT OF ARCHIE McGREGOR, PRESIDENT AND CEO, ARCHIE'S IGA, 
                       ST. MARIES, IDAHO

    Mr. McGregor. Senator Crapo, as the Owner of a small 
business in a rural area of Idaho, I would like to express my 
appreciation to you for giving me the opportunity to testify on 
the questions of assessing capital and business assistance in 
the rural area of Idaho.
    After working with a national chain store for many years, I 
looked for an opportunity to own my own business. The normal 
risk and challenges of owning your own business intrigued me. I 
felt that I had learned the skills to operate my own business 
and succeed. Finally, I took the risk by investing my own 
savings and secured a bank loan and purchased the first IGA 
store in St. Maries, Idaho.
    Five years ago, after successfully operating the store, I 
recognized the need to modernize it and looked for value-added 
services to offer my customers. To achieve this plan, I 
qualified for an economic development loan from the area 
Certified Development Corporation. This was my first time to 
use loan programs available to small businesses. Although the 
paperwork seemed insurmountable, the program provided the loan 
I needed, and today my store has expanded my customer and 
employment base.
    With the success of my first store and an understanding of 
operating a grocery facility in a rural setting, I purchased a 
second store in Orofino, Idaho. The successes I achieved in St. 
Maries are now being applied to my second store. I will be 
modernizing the facility, expanding services and creating more 
jobs.
    I have found that rural businesses face challenges not 
imposed on urban or suburban businesses. A good example is the 
availability of transportation of goods. Because of our 
location, both of my stores are not on typical delivery routes. 
To get services that keeps me competitive with urban areas, I 
must find creative ways to keep my stores supplied with goods 
and fresh consumables.
    This very question has been pressing my evaluation process 
in the past few weeks because I lost my established delivery 
system and therefore need to determine a new cost-effective way 
to supply my stores. An urban store owner would simply bid out 
for a new transportation supplier and usually have many 
choices. I have to create the solution myself.
    It is my understanding that in Idaho over 80 percent of the 
workforce is employed by small businesses. Since most of Idaho 
is rural, the type of challenges that I face in the operation 
of my business must be a concern to most of the small 
businesses throughout the State. Taking this logic further, 80 
percent of the workforce is directly challenged by the same 
concerns that face small business.
    If small businesses are to remain effective, competitive 
and growing, we need assurance that the programs offered by the 
SBA are available, valuable and designed to address the needs 
of small businesses. For rural areas, there needs to be some 
consideration for the unique challenges faced by small 
businesses operating in those areas. They can't be compared 
with urban businesses.
    For example, the creation of one job in a rural setting may 
have a significant effect on an economy, while the creation of 
one job in an urban setting may have little, if any, effect on 
the local economy. It seems that there should be some 
evaluation of merit when offering services to small businesses 
in rural areas.
    I don't have all the answers for rural businesses, but 
rural businesses are a valuable part of the Nation's economy 
and they should be offered services that account for the unique 
circumstances that they face.
    Senator Crapo, thank you for this opportunity to discuss 
this situation faced by rural small businesses in America.
    Senator Crapo. Thank you, Mr. McGregor.
    Mr. Gantar, go ahead, please.

 STATEMENT OF MARK D. GANTAR, PRESIDENT, ALL SEASONS APPAREL, 
                    INC., POST FALLS, IDAHO

    Mr. Gantar. Thank you, Senator.
    Senator Crapo, as a small business owner in North Idaho, I 
would like to thank you for inviting me to testify before you 
for assessing capital.
    Senator Crapo. Can you pull that mic just a little closer?
    Mr. Gantar. Sure.
    Senator Crapo. Thanks.
    Mr. Gantar. I think I have quite an interesting story to 
tell you. I am the Owner of an apparel manufacturing business 
located in Post Falls, Idaho. We have been in business for 20 
years and recently moved to Post Falls from Spokane, 
Washington, where we had been for those 20 years. Prior to 
1984, we were owned by a company named Pacific Trail Sportswear 
and I was their general manager and vice president of 
Production for Pacific Trail, managing eight large factories in 
Washington and Utah.
    In 1984, Pacific Trail decided that they wanted to 
outsource their manufacturing to a cheaper labor force in 
mostly Korea, and I purchased the manufacturing assets from 
them and started All Seasons Apparel. We began as a down 
outerwear manufacturer and were at one time the largest down 
manufacturer in the country of jackets, vests, pants, quilts--
you name it.
    That business was abruptly taken from us by China, both as 
a cheaper labor source and our ability to get down for our 
products because of the environmental lobby. From there, we 
changed into a large athletic wear manufacturer mainly for 
Nike. We produced their running suits, shorts, Lycra at a rate 
of near 500 dozen per day employing over 300 people in the 
process. That work was also abruptly taken from us as Nike took 
all their production to China again.
    Then we started in the fleece business producing fleece 
jackets, vests, pants, hats for mainly Union Bay at first; and 
then over the years with companies like Patagonia, L.L. Bean, 
Lands' End, REI, Helly Hansen, Columbia Sportswear and others. 
Recently, this business was also taken from us and is now made 
in Mexico and China, Vietnam, and some African countries.
    In addition to these apparel items, we have been a large 
manufacturer of denim jeans and jean jackets for mainly Levi 
Strauss & Company. As you probably have read from recent press 
coverage, Levi is going to Mexico and parts unknown to 
manufacture their uniquely American items. I would like to 
personally congratulate Levi Strauss. They were the last to go 
and have held out the longest. Just last year we produced their 
Levi-branded jeans and jackets, and I have the highest respect 
for this fine company. Lee, Wrangler, The Gap and others went 
outside the United States long ago while Levi tried to stay, 
but they had no choice as I see it. These trade laws forced 
them all out.
    To get to the point, currently it appears that we have 
excellent access to funds through the SBA and other State 
organizations to help finance our business, both in growth and 
in start-up situations. But we can have all the financing in 
the world, but if we can't access the business, it doesn't do 
us any good. Quite frankly, the only apparel manufacturing that 
is really flourishing, other than a few companies, are those 
that are working for the Government.
    We are in the process of trying to convert to a Government 
contractor and have been for nearly 2\1/2\ years. We have bid 
on nearly 12 separate contracts and some over a year and a half 
old. One we are waiting on now is a HubZone set-aside and a 
disabled veteran preference on a pant we have done in the past. 
This particular bid closed on the March 28, 2003, and it still 
hasn't been awarded.
    I am hoping and am willing to negotiate price further with 
the Government, but I am not optimistic, and most of the bids 
seem to go to the east coast from the DSEP. I was told that 
this bid would probably be awarded to prisons back east, 
Federal prisons. In any event, they had the first priority on 
these bids.
    I am almost in a state of shock as I look down on my 
factory with nearly 800 machines and barely 15 people working 
in a plant that has traditionally had over 200 people working 
very hard to help support their families. I have not taken a 
paycheck in over a year and I'm watching my personal assets 
dwindle, but I will not give up.
    My father once told me that we had been very foolish prior 
to World War II, when our industries were allowed to go to 
Japan and China, specifically the tool and die business; and it 
took us 2 years to gear up to be able to beat Hitler and the 
Japanese during World War II. Well, it appears that we might be 
doing it again.
    I am a well-educated person with a degree in economics, 
among others. As a country, we need to keep a strong 
manufacturing base in steel, wood products, farming, aerospace, 
textiles and apparel. Manufacturing brings new money into a 
community as opposed to retail and restaurants that just 
recycle the same money. An apparel factory is something to 
behold when it is full and running properly.
    We historically employed all age groups, sexes, 
nationalities, sexual orientations, and all of us getting along 
to get the products to our customers on time with the best 
quality. Over the last couple of weeks, through the Job 
Service, we have gotten in the mail nearly 100 applications for 
power sewing machine operators, but I cannot act upon them. 
That one Government contract mentioned earlier would put all 
100 of these applicants to work in this one factory.
    Senator Crapo, I would like to respectfully submit that our 
elected officials need to reassess the trade agreements that 
have been passed, specifically NAFTA and the WTO agreements. 
The Congress of the United States has effectively eliminated 
the jobs from the very people that have elected them. I think 
our Senators and Congressmen have underestimated the impact of 
NAFTA and other trade policies and should now make the changes 
necessary to restart all manufacturing in this country.
    I again want to thank you for giving me this time to 
present my story to you and I look forward to a continuing 
relationship with you and your fine staff.
    Senator Crapo. Thank you very much, Mr. Gantar, and I want 
to come back to the outsourcing and the trade issues that you 
have raised there; but first I want to go through these SBA 
issues.
    We have a real range of different experiences here in the 
businesses. Each of you have been involved with SBA financing. 
My first question is: How important to you was access to SBA 
loan programs, and how did you find out about them? Did you 
find it easy to access them? You can start with anybody.
    Mr. Randall.
    Mr. Randall. I actually had found out about it through an 
advertisement of Mountain West Bank. The access to it with Bob 
Beck was relatively easy. The use of it was a little more 
difficult than I had anticipated. The whole process went fairly 
smooth, however, it took a little longer than I anticipated.
    Senator Crapo. How many SBA loans have you been involved 
with in your company now?
    Mr. Randall. Two.
    Senator Crapo. Two. You gave me the statistics, but how 
many people are employed?
    Mr. Randall. At this time I have 14 full employees. I have 
an office in Idaho and in Montana. This summer, I will have 
well over 100 seasonal employees that will work basically from 
April until weather shutdown--Thanksgiving.
    Senator Crapo. All right.
    Mr. McGregor.
    Mr. McGregor. Yes. I was familiar with the Panhandle Area 
Council here in North Idaho and while visiting with them I 
found that I would be able to get some funds, matching funds to 
expand the store. The store that I purchased in St. Maries had 
gone bankrupt and was closed when I took it over. We were able 
to overcome that hurdle.
    Then when we found that in order to meet the need of the 
resident area in the area of groceries, we had to expand the 
store; and that was when the real challenge came for monies to 
expand the store in a rural community. Had we not done that, I 
don't think that St. Maries would be as far forward as it is 
today. I feel that we somewhat set a stage to the opportunities 
for rural communities to develop.
    Today we employ about 60 employees in that store. We still 
have competition in town, and we have reduced the escape factor 
from the community. It has been a great experience for me and I 
would like to thank PAC for what they did in making it possible 
with SBA.
    Senator Crapo. How many employees do you have?
    Mr. McGregor. In St. Maries, we have about 55; and in 
Orofino, we have about 40.
    Senator Crapo. All right. What kind of SBA loan? Do you 
know? Were you in the 7(a) program? Did you know what programs 
you were working with?
    Mr. McGregor. I don't remember which programs I was on. I'm 
sorry.
    Senator Crapo. Mr. Randall, do you know whether you were on 
a microloan to start with and then your second loan was a 
different one?
    Mr. Randall. The second one was a 7(a) loan. I believe the 
first one was a 504, but I could be wrong.
    Senator Crapo. Okay. Mr. Gantar, on the SBA issues, what 
was your experience?
    Mr. Gantar. Well, to be honest, we would have been out of 
business a couple of years ago without the SBA. I was with a 
larger bank for many, many years. The relationship had 
deteriorated over the years with that bank as they kept buying 
and gobbling each other up.
    Senator Crapo. The consolidations?
    Mr. Gantar. Yes, and to the point where we had probably had 
five different loan officers over the years, eventually getting 
to the point where they weren't interested at all in us.
    Then Jobs Plus here in Idaho referred me to Bob Beck. 
Things turned around for me immediately. Bob has just done a 
great job with me in accessing capital so I can keep going. I 
need capital. I need loans because I'm financing payroll. Most 
of the companies I deal with--like Levi Strauss or like Lands' 
End--want 30- or 60-day terms; and you cannot operate unless 
you have money to meet payroll and taxes in order to keep 
going. You'll drop dead. The SBA has made it so that I can 
exist now, and hopefully it will continue to be that way.
    Senator Crapo. All right. It's just remarkable to me the 
small business, side of these stories. Each confirms my belief 
that if we continue to have the right kind of effective small 
business support through the SBA that the cost to the 
government is virtually not there when you look at the dynamic 
economy.
    When we score things in Washington, D.C., we're not able to 
score on a dynamic basis. If we put money out, even if that 
money is returned, with interest, we have to calculate it as a 
hundred percent expenditure and cost to the budget. We don't 
take into consideration the fact that an investment is 
different than a consumption expenditure, and that's part of 
the reason we have these problems in fighting over the budget 
issues with the SBA programs.
    That having been said, it seems to me that the stories that 
your businesses and your circumstances tell, with regard to the 
discussion that we had in the previous two panels about these 
programs, and the need to make sure that they are operated in 
the right way and not changed because of budget pressures to do 
things that would take them away, is proof of the fact that 
these investments that we are making through the small business 
programs are meaningful and are making a difference.
    A question just came to my mind, Mr. Gantar. In your 
circumstance, I assume you have a significant amount of 
equipment, and so forth, that could be used as capital for the 
investments. You may not know the answer to this, but if they 
changed the capital requirements for the loans or the 
collateralization requirements for the loans to require more 
collateral, would that cause a difficulty in you being able to 
continue with SBA loans?
    Mr. Gantar. Well, you'd have to ask my banker. However, 
today it was brought up that the value of property in urban 
areas, I mean in rural areas like ours, is less than in urban 
areas. I think that would affect things more than anything.
    Senator Crapo. That's a good point.
    Mr. Gantar. I, of course, own my property in Post Falls; 
and if they reduce that, it's going to be just a--probably a 
trickle-down effect against me immediately, and I think that's 
more of an issue than my machinery. My machinery isn't worth as 
much to the bank as my property is because of the export of 
jobs. The machinery becomes less and less valuable. But the 
property values are still there and that's what you loan 
against.
    Senator Crapo. That's a good point.
    Mr. Randall, in your business--I know some of these are 
sort of softball questions, but I really want to flesh this 
out. Could you have had the expansion of your business and the 
success story you're telling us about without the SBA loan 
program?
    Mr. Randall. I don't believe it would have been possible at 
all. I think John Lynn and Bob Beck went out of their way to 
help us succeed. Both of those are strong members and 
proponents of the SBA program.
    Senator Crapo. Mr. McGregor, same question to you. When you 
faced that point where you realized you had to expand in order 
to be competitive--
    Mr. McGregor. It would have been the difference between an 
expansion that would have really met the total community needs 
or just upgrading the store so that you were operating a class 
store. With that loan, I was able to double the size of the 
store, provide services that were not being provided in the 
community before, and it has proven to be a successful part of 
our business.
    Senator Crapo. All right. Well, Mr. Gantar, let's go to the 
trade issues that you raised, the outsourcing issues. First of 
all, let me tell you that I agree with you. I'm a big believer 
that we need to aggressively develop trade relations with other 
nations in such a fashion that we have true free trade. I 
believe that we need to be eliminating the tariffs and other 
trade barriers that the United States and other nations engage 
in, and ultimately moving to a free market.
    I don't know how that would play out in the outsourcing 
issue, but I do believe that if we had harmony among our 
nations on issues, not just like tariffs and trade barriers but 
also on some of the requirements that we impose on our 
producers through our bureaucracy, that we would have a much 
more level playing field. Ultimately, I voted against NAFTA 
when it came up, notwithstanding the fact that there was 
intense pressure from many communities, not the least of which 
was the agriculture community, because of the belief at the 
time that it was going to expand markets and open up 
opportunities for our producers.
    I felt that we didn't have the protections in place and 
that, as a result, we were not only yielding up our 
sovereignty, but that we were getting ourselves into 
circumstances in which we would ultimately see the loss of 
jobs; and now we are starting to see that.
    We welcome Mr. King here and we'll let you make a statement 
here in just a moment, but we're in the middle of a discussion 
I want to continue. I feel that this issue of outsourcing is 
going to be an incredibly big issue in this year's election. 
It's a big issue before Congress today, and I'd welcome not 
just Mr. Gantar's comments, but the comments of any of you on 
this. What do you think we need to do? What policy do we need 
to change, and how should we address this problem at the policy 
level in the United States?
    Mr. Gantar. Well, that's a very complex question. You have 
to look at it from the point of view of labor. The elimination 
of tariffs and what that does to our money source. We have a 
supply of money. It redistributes the money then to the top 
companies, so that the companies make a lot more money and a 
few make money in these foreign countries. Labor doesn't do any 
good. We have not helped the people of Mexico. Obviously 
they're still immigrating here like crazy.
    What tariffs does is it redistributes back to labor and it 
gives labor some leverage. What's happened in our country? 
Labor has no leverage. I've seen it. I've managed factories for 
35 years. I remember back 30 years ago, when I was negotiating 
with labor, they had leverage with me because the company was 
making money; and I had leverage with my customers on price. 
Now it's gone.
    Big companies like Nike and Levi, don't manufacture their 
own goods. They are merchandisers. They use others to 
manufacture for them; people like me, people in Mexico, people 
in Europe, wherever. Now they're able to just chase the lowest 
denominator. It may be a free market economy, but it's not free 
for small businesses in the United States. It's free for the 
big companies like Nike.
    If I was not able to access SBA loans, right now I would 
probably be in China or Vietnam or someplace like that, 
engineering factories for Nike or Levi. I would not be 
employing people here in Idaho.
    Now, tariffs are just a bad word with everybody it seems 
like except labor. Maybe we should give incentives to these 
companies to manufacture some portion of their goods in the 
United States, to a big business; some kind of an incentive, 
like tax breaks or something to level the playing field a 
little bit more, to motivate them then to go to a company in 
Post Falls, Idaho to produce their jackets.
    I don't have the answer and it's swung way beyond where it 
should have gone. I think that we need to give leverage back to 
labor somehow. Of course, the only way to do it is tariffs or 
incentives to business to produce in the United States.
    Senator Crapo. All right. I appreciate that. Any other 
comments from any of the others here?
    Mr. Randall.
    Mr. Randall. I just have one small comment. I know 
everything that we've gone through here today has been 
evaluated on the risk. I actually do believe that as a 
requirement for one of the larger SBA loans, that as a company 
becomes successful, they need to compete--they need to be able 
to work with the smaller upstart companies on a mentor/protege-
type program. I think that will alleviate some of the risk for 
the SBA, some of the default risk for the banks, and it gives 
you an outlook on a successful company to help you build a 
small company.
    I've been very fortunate in the success of my business, and 
I would think that it would only be appropriate for me to help 
mentor some of the smaller companies that are trying to start 
up. I think that should be a requirement of that program. It 
creates a win-win situation for everybody involved with 
virtually no cost either to the government, to the bank or even 
to the mentor.
    Senator Crapo. All right. Thank you. That's a good 
suggestion. Mr. McGregor, anything else?
    Mr. McGregor. No.
    Senator Crapo. Well, Mr. King, we appreciate--King, right?
    Mr. King. Yes.
    Senator Crapo. We appreciate you making it here, and you 
were not here for my previous instructions. I've instructed 
everybody to keep their comments to 5 minutes. We do welcome 
you here and would love to hear your input, and we've got a 
little time clock keeper here to help you keep an eye on the 
clock.

STATEMENT OF BRUCE KING, OWNER, LAKEWOOD ANIMAL HOSPITAL, COEUR 
                         D'ALENE, IDAHO

    Mr. King. Well, thank you. I'm sorry.
    Senator Crapo. You have to pull that kind of close.
    Mr. King. Can you hear me better now?
    Senator Crapo. Yes.
    Mr. King. Sorry for the delay this morning.
    Senator Crapo. That's all right.
    Mr. King. Thank you for looking for input on small business 
funding. I'm a recent small business loan borrower, and I hope 
that telling you briefly just my story may give your Committee 
just some good information. My name is Bruce King. I am a 
private practice Veterinarian and I recently constructed a 
6,500-square-foot small animal veterinary hospital in Coeur 
d'Alene. The hospital employs five full-time staff members. The 
staff members earn an average of $8.50 an hour and receive 
comprehensive health and dental insurance coverage after an 
initial evaluation period. Provided that my hospital meets the 
projections that I have for it, within 3 years I should have 15 
full-time staff members employed.
    Besides providing a valuable service to the community 
that's needed, it created a lot of good jobs having this 
hospital built; and without the SBA loan programs in existence, 
I would not have been able to do it.
    I graduated from the Washington State University College of 
Vet Med in 1995. I was originally from Coeur d'Alene, so I'm a 
native person here. I did what was most common of new 
graduates, and that is I went out and I got a job working for 
another existing practice to get experience. After 3 years of 
working there and getting experience, I felt that I was ready 
for me to go out on my own; and with a partner, I went and 
purchased a foreclosed building in Post Falls, just nearby 
here. It had previously been a restaurant and had been on the 
market for a long time. We were able to get a good deal on 
purchasing the building.
    Due to my business partner's good relationship with the 
bank around here, it was very easy to get a loan. We pretty 
much got 100-percent financing, got a conventional-type loan 
with a fixed interest rate, very favorable terms; and so things 
were very easy on that first go-around and the hospital did 
very well. After 4 years of ownership, I sold it to my partner. 
That was last fall.
    Then at that time I had about $275,000 in cash, 8 years of 
experience of being a Veterinarian, good credit, and I had the 
experience of starting up a new business. I thought when I was 
going to turn around and go and do the same thing again, I 
would find it very easy to obtain a loan like I had before. I 
went and did my business plan and took it to the banks around 
here. There was quite a bit of interest, everyone was 
interested in loaning on it; but I was in a real Catch 22 
position because I did not have a 2-year set of financials to 
give them to get a conventional loan for the business that I 
was proposing to start.
    I did fit within the SBA loan guidelines, though. Initially 
I was pretty hesitant to go with the SBA just mainly because, 
in my mind, it had the reputation of being just a costly kind 
of slow, burdensome, paperwork-filled type of a process. I went 
and investigated getting financing with some of the veterinary-
specific lenders that they advertise in the back of vet 
magazines. They either were unwilling to lend for a large 
construction project, or they would gladly lend you the money 
but then they would charge you tons of high fees and they'd 
give you a really short balloon payment, like 5 years, to pay 
the loan off; and just totally unacceptable.
    Due to a lack of other good options then, I went ahead with 
the SBA, and I have been very pleasantly surprised with the 
experience. It did take a little bit longer to do an SBA loan 
than my previous conventional loan experience, but I didn't 
consider it to be excessive. I went to three lenders in this 
area. I felt comfortable with all of them. I chose to go with 
Mountain West Bank mainly because Bob Beck was very familiar 
with the CAPE program and getting my fees paid for for the 
loan. That ended up saving me about $20,000 in the process. 
I've had good experience with it and I would recommend it to 
any other small business.
    In the process of doing my business plan for this last 
hospital and the one I currently have, I did also use the 
services of the Idaho Small Business Development Center. John 
Lynn helped me do all my spreadsheets, gave me a lot of really 
good advice on doing my business plan. If I start another 
business, I'm going to use that again as well.
    The only regret I have in the whole project is I did end up 
with a variable rate loan. I really would have liked to have 
gotten a fixed rate just for kind of security in the future, 
and I would have been even willing to pay some fees or points 
to get it, but it didn't turn out to be available in my 
situation.
    I've heard that the CAPE program is not going to be 
available necessarily to future borrowers, and that would be 
one thing I would encourage if there's a way to do it; either 
to continue funding for that or just to reduce the loan fees in 
general, because that made a big difference for me. In my case, 
the money that Bob saved me went to pay for the dirt to build 
the lot on my land. It was about the same amount of cost.
    In general, I think that the thing that could be done to 
really help small business out and just improve conditions for 
everyone is to encourage through some mechanism some 
significant financial reward for if a business is going to give 
good wages and offer good medical insurance, not just really 
skimpy where the employer pays just a portion but if you pay 
all of it, there should be some way they're rewarded back for 
it because ultimately I think everyone will benefit.
    Thank you for taking the time to listen to me and again I 
apologize for being a little behind.
    Senator Crapo. No trouble. Let me just ask you quickly--as 
I've asked the others here. In your circumstance then, without 
the SBA loan programs, you would not have been able to get 
financing?
    Mr. King. Well, I would have had to do a smaller project; 
and at the stage of practice that I am in right now, I didn't 
want to go backward. I could have put a hospital in a strip 
mall and had no equipment and I would have been able to get 
financing. But to build the type of facility and do the quality 
work that I needed to, the only place that would give me a loan 
to do it was the SBA. There wouldn't be five people employed 
right now; there might only be two. There's no bazillion people 
that have spent the last 7 months working on my building, none 
of those people would have been employed either, creating it.
    So, yes, I could have had something, but it wouldn't have 
been nearly what I ended up with.
    Senator Crapo. All right. Well, thank you. That concludes 
the questions that I have for this panel. Unless any of you 
want to make another comment, anything you haven't had a chance 
to bring forward, we will conclude this panel.
    All right. Thank you all very much for your time today. 
That also concludes the panels for this hearing.
    I have found the information that has been presented today 
to be very helpful. As I said at the outset, one of the 
problems that we see is that as we--as the economy is now 
starting to grow back, we know that the engine of jobs in this 
country is small business but we don't yet see the job growth 
following this economic recovery. That is not unusual, and so 
we're not, on a global scale, yet seeing a high degree of alarm 
because of that; but we want to be sure that the job growth 
does follow the economic recovery that appears to be 
stabilizing for our country.
    In that context, as I've indicated, I sit on the Budget 
Committee as well as on the Small Business Committee; and 
representing a state like Idaho, rural small business 
development and economic development in general becomes a very 
significant issue, not only for the Nation but for a state like 
Idaho; and that's one of the reasons I wanted to be sure that 
this kind of information got in the record for the Small 
Business Committee as we deliberate on how to work with the SBA 
on its budget and on its program implementation.
    I'm pleased that a number of other issues have been raised 
here, such as the broader question of outsourcing that Mr. 
Gantar raised, the question of the infrastructure for rural 
communities which was raised in one of the earlier panels, and 
a number of the other issues that relate to the broader issue 
of what needs to be in place for economic development in rural 
communities.
    One of the things that I'm committed to doing is to 
identify what we need to do in our rural communities and those 
areas where our Federal Government can properly play a role. 
Then make certain we are playing the role and filling the needs 
there as effectively as possible. It does seem to me that we 
start with the infrastructure to make certain that we have 
everything in place, from roads and bridges to broadband access 
to good health care to good education and the like, and I put 
all that in the infrastructure category in my own mind.
    Then we work on development of adequate access to capital 
and the kinds of collaboration that need to take place between 
the various providers of access to capital and support for 
development of small business. If we can do so effectively, 
then we'll have a number of success stories like those that 
we've just heard from those here and we can start seeing that 
growth back in our rural communities.
    Again, this has been very helpful to me. I've got myself a 
good checklist of things that need to be accomplished, and I 
think the direction that we need to take has been clearly 
identified by this panel. I know this is going to be very 
helpful to Senator Snowe and other members of the Committee as 
we further deliberate in Washington, D.C. I appreciate everyone 
here who has come to participate; and those of you who came to 
listen. I hope it has been beneficial for you as well. Without 
anything further, this hearing will be adjourned. Thank you.
    [Whereupon, at 10:53 a.m., the Committee was adjourned.]
      

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