    [Senate Hearing 108-565]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-565

                      SMALL BUSINESS AND ENTREPRENEURSHIP
                       IN ARKANSAS: ACCESS TO CAPITAL AND
                                SERVICE DELIVERY

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

                                 FIELD HEARING

                                   BEFORE THE

                COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                   __________

                               FEBRUARY 19, 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, Chairman
    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

    Pryor, The Honorable Mark, a United States Senator from Arkansas.     1

                               Witness Testimony

    Watts, Joe David, Former Liquidation Officer, Small Business
      Administration, Conway, Arkansas...............................     4
    Grimes, Keith, Commercial Loan Officer, Pine Bluff National Bank,
      Pine Bluffs, Arkansas..........................................     6
    Roderick, Janet, State Director, Arkansas Small Business
      Development Center, Little Rock, Arkansas......................     6
    Gomez, Eduardo, Owner, Andina Cafe & Coffee Roastery, LLC, Little
      Rock, Arkansas.................................................     8
    Blair, Daniel, General Manager, Daniel Utility Construction,
      Inc., Little Rock, Arkansas....................................    14
    Walls, C. Sam, Executive Vice President, Arkansas Capital
      Corporation, Little Rock, Arkansas.............................    15
    Knight, Philip, Executive Vice President, Small Business Lending,
      Arkansas National Bank (ANB), Fayetteville, Arkansas...........    16
    Hester, Kevin, Executive Vice President, First State Bank and
      Director, National Association of Government Guarantee Lenders,
      Conway, Arkansas...............................................    18
    Hinton, Samuel W., Small Business Executive, Metropolitan
      National Bank, Little Rock, Arkansas...........................    19
    Wilson, III, Odies, Intergovernmental Relations Manager, City of
      Little Rock, Little Rock, Arkansas.............................    20
    Harris, III, Samuel L., Executive Vice President, Arkansas
      National Bank, Springdale, Arkansas............................    22
    Davis, Tyronne, Owner, Davis Oil and Petroleum, Little Rock,
      Arkansas.......................................................    23
    King, Charles, Executive Director, Arkansas Regional Minorities
      Supply and Development Council (ARMSDC), Little Rock, Arkansas.    31

              Alphabetical Listing and Appendix Material Submitted

    Blair, Daniel
        Testimony....................................................    14
        Prepared statement...........................................    40
    Davis, Tyronne
        Testimony....................................................    23
        Prepared statement...........................................    42
    Gomez, Eduardo
        Testimony....................................................     8
        Prepared statement...........................................    44
    Grimes, Keith
        Testimony....................................................     6
        Prepared statement...........................................    46
    Harris, III, Samuel L.
        Testimony....................................................    22
        Prepared statement...........................................    47
    Hester, Kevin
        Testimony....................................................    18
        Prepared statement...........................................    48
    Hinton, Samuel W.
        Testimony....................................................    19
        Prepared statement...........................................    50
    King, Charles
        Testimony....................................................    31
        Prepared statement...........................................    52
    Knight, Philip
        Testimony....................................................    16
        Prepared statement...........................................    54
    Pryor, The Honorable Mark
        Opening Statement............................................     1
    Roderick, Janet
        Testimony....................................................     6
        Prepared statement...........................................    56
    Walls, C. Sam
        Testimony....................................................    15
        Prepared statement...........................................    60
    Watts, Joe David
        Testimony....................................................     4
        Prepared statement...........................................    61
    Wilson, III, Odies
        Testimony....................................................    20
        Prepared statement...........................................    63

     SMALL BUSINESS ASSISTANCE IN ARKANSAS: ACCESS TO CAPITAL AND SERVICE
                                    DELIVERY

                                  ----------

                          THURSDAY, FEBRUARY 19, 2004

                                  United States Senate,
              Committee on Small Business and Entrepreneurship,
                                                       Washington, D.C.
        The Committee met, pursuant to notice, at 9:30 a.m., in the
    Reynolds Business Center, Room 350, University of Arkansas,
    2881 S. University Avenue, Little Rock, Arkansas, Hon. Mark
    Pryor presiding.
        Present: Senator Pryor.

            OPENING STATEMENT OF THE HONORABLE MARK PRYOR,
                 A UNITED STATES SENATOR FROM ARKANSAS

        Senator Pryor. Well, it looks like most everybody is here,
    maybe one or two that will come in in a few minutes. First, let
    me go ahead and call the meeting to order as the Chairman of
    this field hearing for the Small Business Committee of the
    United States Senate.
        I am on the Committee in Washington, and you know as well
    as I do how important small business is to this country, to
    this economy and certainly to this state. There is no doubt
    about the fact that small business and agriculture really is
    the backbone of Arkansas' economy. We have some great Fortune
    500 companies here, we are proud to have them and very proud of
    what they do, but small business really is the backbone of
    Arkansas' economy.
        Before I get going, let me thank a few people. First, of
    course, is Senator Olympia Snowe of Maine who is the Chair of
    this Committee. She graciously allowed this to happen, and also
    sent Gregory Wach, one of her staff members, to participate.
    Kevin Wheeler is here as well from the Committee staff, and we
    appreciate Kevin and Greg being here. Senator John Kerry could
    not be here today. I don't know where he is today. I'm not sure
    he knows where he is today. He is out in other parts of the
    country doing what he is doing, but he is actually what they
    call the Ranking Member of the Committee. He is the leading
    Democrat on the Senate Committee on Small Business and
    Entrepreneurship.
        Also, I have to thank UALR. They have been so fantastic to
    let us use their facility and just really rolled out the red
    carpet for us. I mean everything from food to just all the
    logistics, whatever we needed, they have been fantastic, and
    the Arkansas Small Business Development Center. They have just
    been great. They have just been really accommodating and very,
    very helpful in every way.
        Janet Roderick, Laura Fine, who I used to work with her
    husband, Milton Fine. Jennifer Bonds, John Harris, and Kim Fox
    and Sandra Vail have all been extremely helpful, and a lot of
    other folks here on campus.
        Let me just run through some opening comments, and just say
    good morning to everybody, and I want to thank everyone for
    being here at the UALR Reynolds Business Center. I am proud of
    this facility, because the Don Reynolds Foundation and UALR
    worked together to make this a reality, and it is just going to
    do nothing but help UALR and help Arkansas businesses grow. It
    is just fun to watch this unfold.
        The witnesses, we're going to go through their names here
    in a minute, but we really, really appreciate all of you being
    here, taking your time and working with us. I know you put a
    lot of work into being here. You have had to carve out quite a
    bit of time and effort on your schedule. Also for everybody
    else that is in the room that is just here to watch and listen,
    I want you to feel like you can participate in the sense that
    certainly we look forward to your comments, and it would
    probably be most helpful if you could write down your comments,
    maybe e-mail them or fax them to us.
        We are going to leave the record of this Committee hearing
    open after we adjourn today. We are going to leave it open for
    several days and allow people to send in their comments and
    send in follow-up thoughts, etc. All that will be made part of
    the record and will be given to the Small Business Committee.
    What we are doing here is really taking the Arkansas business
    community as it reflects the national business community, and
    taking these good ideas back to Washington for people there.
        You know, one thing I have noticed is that we find
    ourselves in a sluggish economy. We all know that. For the last
    3 years we have had some ups and downs in this economy. It is
    an economy that does not have much job creation. That is really
    one of the things that you keep hearing people talk about is
    the lack of jobs that are created.
        I have not seen the statistics from the most recent month,
    but I know in December of last year, December 2003, this
    national economy, the entire economy when you net it all out,
    the national economy created 1,000 new jobs. That is not a lot
    of new jobs. A thousand new jobs nationwide is stagnant job
    creation for the economy.
        We all know the statistics, there is no doubt that small
    businesses in this country and in this state actually create
    jobs. Last week we had a hearing in Washington, we had the SBA
    Administrator there. We talked to him about a lot of different
    issues, and now this is kind of a local follow-up. This is a
    time for you-all to have input. Your input is really critical
    to the process. I am going to say that I am concerned that the
    President's fiscal year 2005 budget does not serve small
    business in Arkansas or the Nation very well.
        The Administration definitely claims that they support
    small business and want to help small business, but I think
    there is a time when there is rhetoric versus reality, and the
    Small Business Administration's budget is one of those
    instances where the reality is that actually there are a number
    of cuts in the SBA programs. I think that is unfortunate. I
    oppose those.
        In fact, last week one of the questions I asked one of the
    panelists was ``At the risk of sounding like a political
    pollster, tell me, is the SBA, in your view, going in the right
    direction or the wrong direction?'' All of them just lined up
    there, and they said, ``It's the wrong direction,'' and they
    listed out the reasons why. I would like to hear from you on
    that.
        One thing that has concerned me, we have had a number of
    questions and inquiries and even complaints about this, is the
    fact that the SBA has been consolidating some of its staff, and
    what they have done is they've cut out certain people in local
    offices. This is particularly true with liquidation efforts
    around the country. People that specialize in that in SBA
    offices, and they have downsized, and they have moved those
    jobs to Herndon, Virginia, which is in suburban Washington,
    D.C. I think that Arkansas, small businesses have had a
    significant reduction in the access to staff and expertise in
    the SBA office in Little Rock.
        One of the problems with this so-called work force
    transformation is the way it was handled. Man, we have heard a
    number of complaints from the business community in Arkansas
    about the way this was handled. I can speak for Senator Lincoln
    and Congressman Snyder, and I know they have gotten it, too,
    because I have talked to them about it. You-all may know the
    story, and you may not, but a number of employees around the
    country, including some here in Arkansas, was basically forced
    out of the local office by giving them, I think it was, 7 days
    to respond to an offer. If they took the buyout, so to speak,
    they could not work for the government for 5 years. It really
    was coercion.
        I have gotten e-mails and letters from not just here in
    Arkansas but from around the county I want to share with you
    later. I think that certainly we are going to see an adverse
    impact on the SBA in Arkansas, and the small business
    development centers will inevitably be impacted, I think, as
    well because of this budget.
        Also, something that is a real concern is the 7(a) loan
    program. You-all know a lot about that. You know a lot more
    about it than most people do, but certainly the 7(a) loan
    program, the developments there are very troubling. The fact
    that they are increasing fees, they want to go to a zero
    appropriation budget. There are just a lot of things in that
    7(a) program that is supposedly the flagship of the SBA
    administration.
        It is very troubling to see the direction that we seem to
    be going. They are doing this in Washington all in the name of
    savings. You know, they say they are saving the taxpayer
    dollars. Well, I just don't really agree with that, because I
    think that when you can strengthen small businesses, that means
    they are hiring people, those people are paying taxes, those
    people are off the unemployment rolls, those families are
    working, they are buying cars, they are making mortgage
    payments, etc., and I just think that, you know, there's just a
    very positive ripple effect from the 7(a) program.
        As well, I wanted to tell you that the microloan program
    has been totally eliminated under this new budget. This is
    something that is of special concern to me because Senator
    Bumpers actually created that program, and he based it--you-all
    may know this--he based it on a program that was going on in
    Pine Bluff called the Good Faith Fund. You know, he took this
    local idea that was a good idea and brought it to Washington
    and reconfigured it a little bit, but, basically, introduced it
    to the SBA, and it has been a very successful program.
        There are thousands and thousands of stories around the
    country about the positive impact the microloan program has
    had, but, unfortunately, in this budget, it is eliminated. We
    will talk more about that in a minute. I just think, given all
    the success that the SBA's had and all these programs and given
    the stimulative nature of these programs, these loans, these
    guarantees to our economy, and also the positive ripple effects
    that really help our economy and help our country, I just don't
    think it is wise to be cutting these programs at this time,
    especially given the state of the economy that we are in right
    now.
        What I want to do, is I want to sort of get out of the way
    and introduce our first panel. What I would like everybody to
    do, if possible, we have about 2 hours here this morning, and
    what I would like to do, if possible, is have people, the
    panelists identify themselves and kind of say who they are and
    what they do. Also, try to keep your opening comments to maybe
    3 minutes, 5 minutes maybe at the most.
        I know some of you have submitted written testimony, which
    is great, it is already part of the record. We are going to
    include all that as part of the record. We want to try to keep
    our opening comments somewhat short and then have plenty of
    time for questions and answers and discussion.
        If I may, I would like to thank everybody again for being
    here and go ahead and introduce the first panel. That's going
    to be Joe Watts, Keith Grimes, Janet Roderick, and Eduardo
    Gomez. Joe, if you don't mind going ahead and leading off for
    us, and, again, talk 3 to 5 minutes, and we'll go from there.

    STATEMENT OF JOE DAVID WATTS, FORMER LIQUIDATION OFFICER, SMALL
                        BUSINESS ADMINISTRATION

        Mr. Watts. Thank you.
        Senator Pryor. I am sorry, David, did I say Joe? I am
    sorry. David Watts. I am sorry.
        Mr. Watts. Either one. It doesn't make any difference.
        Senator Pryor. Okay.
        Mr. Watts. Well, I happen to be one of the lucky ones that
    was forced into retirement by the SBA. I was a former
    Liquidation Loan Officer.
        Back on September 10, 2003, I received notification via
    Federal Express by the SBA that I was engaged in the systematic
    review of its programs and business processes. As a result, it
    became apparent, that some of the longstanding processes could
    be streamlined and made more efficient.
        The SBA reviewed and concluded that the loan liquidation
    practices and oversight of this activity conducted by
    participating lenders is outdated, does not reflect the best
    interest of the lending industry, does not take full advantage
    of the current technology, and costs too much of the per loan
    basis. I would like to see this being backed up, and I would
    like to know what this technology is.
        The SBA targeted most everyone nationwide that spent at
    least 25 percent of their time doing liquidation activities and
    reassigned them to Herndon, Virginia, with the exception of
    Alaska, Maine, North Carolina, a few other states. This was
    based on an administrative cost allocation survey that everyone
    did back in April 2003. Not that this will make any difference,
    because I was the primary liquidation loan officer, and that
    was my function, and, you know, even though I didn't do it
    properly, this was still my function, and that's exactly what I
    did.
        In a small office such as ours, we all wear many different
    hats. Of course, we all do different things on a daily basis. I
    don't keep time sheets on exactly what, however, I do fill in a
    lot of slots for different people.
        The SBA offered early outs to some employees back on
    September 30, 2003. My counterpart, Ray Chappa, which was the
    other Liquidation Loan Officer, took the early out. He was
    coerced into taking the early out, like you did mention. That
    left me as the sole Liquidation Loan Officer, so I had to pick
    up his portfolios. After Ray left, that left me with in excess
    of 275 loans in various stages of liquidation.
        The SBA requires us to purchase the loans, review the loans
    and all the documentations, and try to get them ready for
    purchase. Most of our lenders are small local lenders or small
    town lenders. We don't really have the major bank systems here
    in Arkansas. On December 2, 2003, I received my notification
    that I had been selected for reassignment to Herndon, Virginia,
    and had until December 15th to either accept it or decline. On
    December 15, 2003, I did accept the reassignment, but I did
    note on there that I did accept this under extreme duress for
    fear of losing my job.
        On January 6, 2004, I notified the SBA that I had changed
    my mind and withdrew my acceptance and planned to retire. I
    wanted to work until January 30th to help get things cleared
    out before I left because the office was extremely shorthanded.
    The SBA would not allow me to do this. They said that it was
    because I was supposed to report to Herndon, Virginia, on
    January 20, 2004, and that I would be placed on inactive pay
    status effective January 20th. So, I retired on January 20th.
        When I left, none of the files had been shipped, nor had
    they been notified, that the files could be shipped to Herndon
    as of yet. Since then, they had been notified the files could
    be shipped to Herndon, but the files are still being held in
    limbo, and they're waiting to be shipped. Even if they could be
    shipped, it's going to be quite a while before they can be
    shipped to Herndon.
        As of right now, it's been over a year since the Arkansas
    district office has had a District Director. Linda Nelson had
    been the acting District Director and had done an extremely
    good job, but she has also been transferred to Herndon. The
    Arkansas district office has not had a Director for quite some
    time.
        Senator Pryor. Okay. Thank you. Like I said, I will follow
    up with some questions on that in a few moments.
        Keith.

    STATEMENT OF KEITH GRIMES, COMMERCIAL LOAN OFFICER, PINE BLUFF
                             NATIONAL BANK

        Mr. Grimes. I am Keith Grimes with Pine Bluff National
    Bank. Senator, thank you for having me here today to comment on
    the recent changes in the staffing of the SBA and resulting
    effects of the SBA Lending Act, particularly on Pine Bluff
    National Bank.
        Just to let you know, we were sort of caught unaware as to
    what was happening here. Just to tell you how that came about,
    I telephoned the SBA Arkansas regional office in January to
    speak with Mr. Watts on a loan we had in liquidation. I was
    informed at that time that Mr. Watts and Ray Chappa, the other
    gentleman in the Liquidation Department, had both retired and
    all present and future liquidations of SBA guaranteed loans
    would be processed through the new facility at Herndon,
    Virginia. The liquidation files in the possession of the SBA
    Arkansas regional office would be transferred to the National
    Liquidation Guaranty Purchase Center, and I will be informed at
    a later date by the staff at the center when they're able to
    accept my forthcoming purchase request on this particular loan.
        I would like to comment just real quickly and commend Mr.
    Watts and Mr. Chappa. I see Jim Coffee and the rest of the SBA
    staff here at the Arkansas district office, how well they've
    helped us here, and I think that particularly in Jefferson
    County, it's helped our economy there.
        Going on, I believe a delay in the processing on these
    liquidation loans will affect us in several ways. The first
    three, particularly affect Pine Bluff National Bank. We have
    interest that will have to be written off and we'll have to
    treat them as nonperforming assets. Our reinvestment
    opportunities will be limited through the guarantee not being
    fulfilled in a timely manner. Our delinquency rates will be
    driven higher.
        The fourth thing, I believe is not only important to Pine
    Bluff National Bank and other lenders, but to the economy as a
    whole. Here in Jefferson County and Pine Bluff National Bank, I
    believe other lenders would be more hesitant to underwrite new
    SBA guarantee loan requests. This greatly affects us there.
        Stating the obvious is Pine Bluff National's opinion that
    the interest of all parties affected would be better served by
    expediting the staffing of the National Liquidation Guaranty
    Purchase Center.
        I would like to thank you again for letting us voice our
    concerns here today.
        Senator Pryor. Thank you.
        Janet.

      STATEMENT OF JANET RODERICK, STATE DIRECTOR, ARKANSAS SMALL
                      BUSINESS DEVELOPMENT CENTER

        Ms. Roderick. Thank you. Senator Pryor, and representatives
    of the Small Business and Entrepreneurship Committee, I'm Janet
    Roderick, State Director for the Arkansas Small Business
    Development Center.
        Senator Pryor, on behalf of the Arkansas SBDC, I'd like to
    thank you and the Committee for inviting me to testify at this
    important hearing. It's an honor for me to represent the
    University of Arkansas at Little Rock College of Business and
    welcome you to this facility built with funding from Donald W.
    Reynolds, an entrepreneur, and certainly he started out as a
    small business person.
        The Arkansas SBDC is a premier provider of small business
    assistance in Arkansas. As you know, the SBDC program is funded
    by the U.S. Small Business Administration, the University of
    Arkansas at Little Rock, and six other University partners.
    Those University partners are Henderson State University in
    Arkadelphia, University of Arkansas at Fayetteville, University
    of Arkansas at Fort Smith, Arkansas State University, Southern
    Arkansas University and University of Arkansas at Monticello.
        The Arkansas SBDC program has been in existence since 1979
    providing management and technical assistance to small
    business. The program continues to contribute significantly to
    the economic impact in the state through the small businesses
    we serve each year. We are one of the few economic development
    programs that measure our impact. For example, in the past 5
    years, our Arkansas small business clients have created over
    4,000 new jobs. These small businesses have obtained over $200
    million in funding for their businesses.
        Senator Pryor, you can be very proud of the Arkansas SBDC.
    Each year, our economic impact, as measured by an outside
    consultant, has one of the most significant returns on
    investment of the taxpayer dollars in the nation. For every one
    dollar in Federal funds spent in the Arkansas SBDC, SBDC
    clients generated $4.86 in new tax returns. That's a good
    investment in any economy, any time I can put $1 in and get
    over $4 back in one years period of time, I believe is a great
    investment.
        The SBA funding for the SBDC program nationally has
    remained at a level funding since 2000. Prior to that, the last
    SBA increase was in 1994. In 2000, the funding formula was
    adjusted, and approximately half the states received a
    decrease. We actually got a slight increase, $6,000. Not near
    the rate of inflation.
        In order for the ASBDC to continue to provide services to
    the small business community, we have relied heavily on
    reorganizing, working smarter, using technology to deliver our
    services, and, of course, an increase in support and funding
    from our universities and banking partners.
        Two examples of how the Arkansas SBDC has been working
    smarter are, first, the SBDC is one of the early adapters of
    the Internet and website utilization. With the assistance of
    Aristotle, a small business here in Little Rock, the SBDC
    recently redesigned our website to provide information so the
    small business would use it. In 2003, we had over 300,000
    visitors. The most popular downloads were the feasibility
    workbooks, with nearly 26,000 downloads. Of course, ``New
    Venture Guides'' and ``How to Start Your Business.''
        We also send out e-news bulletins, which are sent out
    electronically to people who have requested to be subscribers.
    One provides basic business information, government regulation
    updates, and details on upcoming training events. The other is
    a technology related e-news letter providing technology news,
    grant opportunities, and SBIR SBTR information. We continue to
    work smarter, as I mentioned, but we've also had to reorganize.
        This is a map of our service areas. You can see that one
    service area has over 12,000 square miles to serve. At one
    time, we had twelve offices; now we've gone down to seven
    offices with our reorganization. At that same time, the
    universities and banks have come to the plate and helped us
    with additional funding. Our funding from the SBA has increased
    4.1 percent in the last 10 years. Just the basic rate of
    inflation certainly has increased more than that.
        Senator Pryor, our program is authorized nationally for
    $125 million. Yet, it continues to be appropriated at $88
    million, which is level funding for the Arkansas SBDC. Arkansas
    universities and banks recognize the importance of small
    business assistance to the state. Where is the SBA? Thank you.
        Senator Pryor. Thank you.
        Eduardo.

        STATEMENT OF EDUARDO GOMEZ, OWNER, ANDINA CAFE & COFFEE
                             ROASTERY, LLC

        Mr. Gomez. Good morning. My name is Eduardo Gomez. I am a
    small business owner, and I guess my comments are probably most
    relevant to the microloan program.
        Senator Pryor, representatives, ladies and gentlemen, good
    morning. I thank you for soliciting my comments. I'm proud to
    live in a democratic country governed by the rule of law where
    the government represents the will of the people and listens to
    them. I also want to thank UALR and the Small Business
    Development Center for hosting this meeting. I have had the
    opportunity to use their consulting services locally and have
    found them to be both available, professional, reliable and
    serious.
        I was born in Colombia, South America. I am a naturalized
    U.S. citizen. I have a Bachelor's degree in Economics and a
    Master's degree in Social Work from the University of
    Wisconsin, Milwaukee. My wife and I recently celebrated 33
    years of marriage. We have two grown children who are both
    college educated, married, and most importantly are good moral
    contributing citizens. We have two grandchildren. I came to
    Arkansas in 1983 as an International Marketing and Sales
    Manager with a multi-national corporation headquartered in
    Arkansas.
        In the summer of 1988, due to corporate reorganization, my
    wife and I were faced with the decision of uprooting our then
    teenage children or staying in Arkansas. We chose the latter.
    In order to support our family, I started an export management
    company which exported U.S. manufactured products abroad. These
    products were commercial water systems. Our main market was in
    the Middle East. In August, 1990, when Iraq invaded Kuwait
    during the first Gulf War, I watched the undoing of our
    business with the rest of the world on CNN.
        Although I had to find another job, the entrepreneurial
    spirit drove me to start another company some years later. This
    was about 7 years ago. This new business concept was a coffee
    shop and retail coffee roastery located in the river market
    district, which was then empty, and which the city wanted to
    use as a spark for the redevelopment of downtown Little Rock. A
    couple of years later, we had to open a separate roasting
    operation in a different location to develop the wholesale side
    of our business, our third company.
        When I was going to start my coffee shop, I needed start-up
    capital. I spoke to the SBA at that time, and was told that my
    new company lacked a track record to qualify for an SBA loan.
    At this time I wanted to borrow about $50,000. Although that
    did not deter me from my final objective, it did make the road
    quite a bit more difficult. Most entrepreneurs lack the capital
    to start a business. Many times the capital is not very much
    because the entrepreneur is willing to invest sweat equity,
    which usually far exceeds the amount of the small loan and
    which is probably more important to the long-term success of
    the business than any other single factor.
        Based on my own personal experience, the entrepreneur's
    business acumen, his personal tenacity, discipline and
    sacrifice, are the most important predictors of success. The
    second predictor is probably knowledge of the particular
    business. The third is probably knowledge of the business
    administration principles in general. None of these criteria
    were used to determine whether or not I could qualify for this
    small loan. Instead, the criteria used were based on
    conventional thinking of what a lender considers the lending
    parameters for minimizing the risk with an ongoing business.
        Let's face it, start-up capital is risk capital, but it can
    also be a doorway into the land of opportunity for those who
    are willing to make the effort. The question is how to invest
    in those who have the most potential for success. Someone said,
    ``we become what we measure'', and then traditional lenders are
    not set up to measure these types of parameters. Certain
    subcultures within the United States have actually recognized
    this and provide start-up capital through a peer managed system
    where business peers and mentors, not bankers, help each other
    develop new business opportunities. The assurance of payment is
    based on the personal commitment of the business person to his
    or her peers and on their own support and assistance to the
    business person. I have often thought that this could be
    somehow replicated in the community at large.
        Small business start-up loans can be key to get the small
    entrepreneur started. They are a way in which a society can
    prime the productive capacity of some its entrepreneurial
    citizens. Maybe rather than eliminating them, we should
    consider how to make them more effective. Maybe if they were
    managed differently, they could be a way for society to invest
    rather than spend in its future. Thank you again for giving me
    the opportunity to make these comments.
        Senator Pryor. Thank you Eduardo.
        Now, let me start by asking some questions. If it is okay,
    David, I thought I would start with you.
        The SBA has said to the Committee in Washington,
    centralization has--the pilot programs, that is, have reduced
    liquidation time of loans to 49 days compared to an average
    somewhere between 252 days to 987 days. Now, you worked in
    liquidation loans every day, and that was one of your day-to-
    day responsibilities there. Do those numbers from the SBA sound
    right?
        Mr. Watts. No.
        Senator Pryor. Now tell me why not.
        Mr. Watts. I don't even know where they get those numbers
    from. There is no way, Senator, that you can have those kind of
    numbers. Once you put a loan into the liquidation status, once
    a lender tells you that this loan is going to liquidation
    status, if properly done, as you put the loan in liquidation
    status, then you send the lender a checklist of items that are
    going to be required by the SBA to purchase the loan. Then the
    lender puts all the information together, and sends it to you.
        Once you receive that, you have to do a complete review of
    it, and you hope that the lender has sent you everything that
    you have requested. Which nine times out of ten is not going to
    be a complete package. Then you have to go back to the lender
    and ask for additional information. You're sitting there
    waiting for additional information to get back to you, and the
    clock is still ticking.
        Once you have received the complete packet, then you have
    to go through the purchase package, you have to get legal, you
    have to run it through legal, get their approval on it, then
    you have to go through and get approval authority on it. All
    that takes approximately 2 weeks. Then you can do the actual
    purchase. The actual purchase process can be done in a day or
    so.
        It's a long drawn out process. It's just a matter of how
    much time it takes the lender to get you all the necessary
    paperwork.
        Senator Pryor. Yes. In other words, each situation is
    different.
        Mr. Watts. Each situation is different.
        Senator Pryor. Yes. Do you know what your average was in
    the Little Rock office?
        Mr. Watts. I would say the average was roughly about 150
    days.
        Senator Pryor. Let me also ask this. The SBA also in this
    Committee hearing last week said the lenders do most of the
    liquidation already and that the employees were mostly obsolete
    and that the service to lenders would improve and service to
    small businesses would not decrease with this consolidation.
    What is your view of that?
        Mr. Watts. Well, the lenders are required to do the
    liquidation. The SBA has to review all the documents the lender
    submits, and do the purchase. But the lender submits all the
    liquidation information that the SBA requires.
        Senator Pryor. Yes.
        Mr. Watts. The SBA people are not obsolete.
        Senator Pryor. Let me, if I can, jump to Keith on a related
    question. First, if I may, could you characterize your bank,
    for the record, as small, large, urban, rural?
        Mr. Grimes. It's a small community bank.
        Senator Pryor. Okay. Tell me in your view, if you have
    heard Mr. Watts' answer there, if the quality of service and
    all would improve and the workload would improve or increase or
    decrease for your bank if you are expected to do all the
    consolidation. Could I hear your comments on that?
        Mr. Grimes. Yes, sir. First of all----
        Senator Pryor. I mean liquidation. I'm sorry.
        Mr. Grimes. Yes, sir. Sure. I would like to say I
    completely agree with what Mr. Watts just said in response to
    your answer. Second of all, answering your question, I don't
    see how it would be any more efficient to centralize that out
    of state as far as liquidation is concerned.
        We had a staff here in Arkansas that was familiar with the
    area, with the lenders, with the process, and I believe that
    each region would be different throughout the country as to how
    you have to liquidate collateral sometimes in these loans, and
    sometimes you may get 10 cents on the dollar in Jefferson
    County, where you may get 50 cents on the dollar around Dallas.
        How does somebody in Herndon that knows nothing about
    Arkansas and the economy going to know how to work with that? I
    don't believe it would be--I believe at least on our end, the
    banks with us liquidating, completing this, it would be much
    less efficient for us to do that.
        Senator Pryor. Do you have the staff to do that right now.
        Mr. Grimes. It's me.
        Senator Pryor. It is you.
        Mr. Grimes. Yes.
        Senator Pryor. Also, have you--from your testimony, I was
    not quite sure, but have you had any contact with the Herndon
    office yet?
        Mr. Grimes. No, sir. I went ahead and let them know that my
    package would be coming some time soon on this particular loan,
    that I have in liquidation. Other than that, I haven't heard
    anything back--well, I take that back. When I e-mailed the
    Herndon office, they acknowledged that they had received my e-
    mail and that they would let me know when they were ready for
    me to send in the purchase request.
        Senator Pryor. All right. Let me ask you if you know, and
    you may not, about the Herndon office for the SBA, are they
    going to assign certain people to Arkansas, and will you be
    talking to the same people all the time?
        Mr. Grimes. That, I don't know. I know Linda Nelson is
    there, I believe, but I don't know whether she was going to be
    assigned to Arkansas, and whether she would be familiar with
    Arkansas. As far as a particular person would be over a
    particular region, I do not know. They haven't communicated
    that to me.
        Senator Pryor. Have they communicated anything to you about
    the Herndon operation?
        Mr. Grimes. No, sir. Nothing whatsoever.
        Senator Pryor. All right. If I may, Janet, I would like to
    jump to you just for a second here, a few questions.
        That is, I know that under this proposed SBA budget, the
    President's proposed SBA budget, they are cutting funding for
    SBDCs by a million dollars. They are cutting women's business
    center funding by 500,000, the 7(j) technical assistance also
    has a cut. There is level funding for SCORE and veteran's
    outreach, which just based on inflation, could be considered a
    cut, and they also are reducing budgets for staffing and
    resources at the district offices.
        Saying all this, then at the same time, the SBA has come
    out and they've said:

              ``The SBA believes it can provide a full range of technical
            assistance more effectively by using its core national delivery
            programs. The agency will work through its primary
            infrastructure of women's business centers, veteran's outreach,
            7(j) technical assistance, SCORE chapters, and small business
            development centers and district offices to meet the needs of
            all small businesses.''

        I was wondering if you have any comments on, again, the
    direction the SBA is heading under this White House proposed
    budget, and if you have any comments on how you think that will
    actually work here in Arkansas.
        Ms. Roderick. Yes, sir, I certainly do have opinion on
    that. The SBA has on a national basis, been trying to get
    everybody to, as far as the technical assistance program, to
    work harder with less money, and deliver more numbers, not
    necessarily impact.
        One of the goals seems to be to say if you shook hands with
    someone, then you had an impact on their small business. Here
    in Arkansas, for example, our SBDC spends an average of about
    11 hours with the clients because that's where we believe we
    can have some impact. We can help them put their loan package
    together, we can help them access other capital. If they want
    to expand, we can help identify those markets. If you're asking
    people to work faster and do more numbers, you're certainly not
    going to have the impact.
        Also, about the veterans' program, I have a particular soft
    spot in my heart for that program. It's not here in Arkansas.
    It's located in another state. We get referrals occasionally
    out of Texas. The referrals are round about, and I resent that.
    I don't believe that our veterans deserve to get a phone number
    to call a phone number to call a phone number to finally call
    somebody else to get a contact to provide assistance for them.
        The veterans' program, because it's underfunded, has simply
    not been effective for our veterans here in Arkansas. It's just
    given them more numbers to call and less response.
        Senator Pryor. One concern I have with the consolidation
    and the cutting of resources is it is almost as if maybe SBA is
    taking a one-size-fits-all approach. They think maybe they can
    consolidate it in different offices, and whatever, and take
    employees out of the local community to try to do that. My
    experience is that businesses are very diverse, their needs are
    very diverse, what they are doing is very diverse, and it seems
    that we may be losing some of that, for lack of a better term,
    kind of finesse in helping businesses if we just consolidate.
        You mentioned that you spend about 11 hours per business,
    or something like that.
        Ms. Roderick. Yes.
        Senator Pryor. That's great. I think that is a lot of time.
    Do you have any comments on this one-size-fits-all concept?
        Ms. Roderick. Well, you're exactly right. The SBA central
    office has been trying to give the impression that one size
    does fit all. Certainly, as you listen to the bankers'
    testimony around here and you listen to the small businesses
    who are going to testify, you'll see the wide differences of
    clients we serve and the small businesses that we serve
    throughout the state of Arkansas. No, one size does not fit
    all, and you're absolutely right in your perspective of what
    you envision.
        I would like to make one statement, too. It may sound like
    I'm bashing the SBA, and I certainly don't mean to do that. We
    have had the best district office to work with here in Arkansas
    for years, and we work in partnership with them. We go out and
    provide lender training, and we provide opportunities for
    businesses throughout rural Arkansas and access the expertise
    that's available at our district office.
        With the drastic cutbacks that they've had, it's becoming
    more and more difficult for them to get out and work with our
    individual bankers throughout the state and to work in
    partnership with us. We have an extremely high success rate in
    working with our businesses to obtain capital. That's due in
    great deal to the partnership we have with this district
    office.
        Senator Pryor. Good. One last thing, you had a little
    statistic in your comments that you said for every dollar spent
    there is--one dollar equals four dollars. Tell me how that
    works again.
        Ms. Roderick. Okay. We have an economic impact survey
    that's conducted. We ask that to be conducted every year for
    our Arkansas businesses. We report how much money we put into
    the consulting, how much money goes into training, what our
    total budget is, as some of the measures for the economic
    impact. One of the measures is how many Federal dollars go into
    our program. Then the private consultant from Mississippi
    surveys our clients since it's self-reported. They report how
    much they paid in taxes.
        For example, in the year 2001, and how much did they pay in
    taxes in the year 2003. They indicate whether the SBDC helped
    them or not. If they believe that we did not help them, we
    don't count their statistics. 95 percent to 98 percent always
    say we've been extremely helpful. We then measure what their
    taxes were one year and what their taxes were the next year,
    how those have increased, and then how much we spend in Federal
    money in this program and how much they've paid in additional
    taxes.
        Senator Pryor. That is good. Eduardo, I do have a question
    for you, and that is, how many employees do you currently have?
        Mr. Gomez. I currently have about seven employees.
        Senator Pryor. You know, it seems to me that what you were
    saying earlier about risk and the need for capital in small
    business, even your experience, underscores the need in some
    cases to have the government there to stand behind some of
    these loans, too, because some of these loans are risky. Using
    the proper, you know, financial criteria, a lot of those loans
    can be made if the government's standing behind those loans.
        I know that you have had a big impact on the River Market,
    and you were one of the first tenants down there, weren't you?
        Mr. Gomez. I was the first.
        Senator Pryor. Yes. I remember when you were down there
    kind of going solo, and it was a construction zone down there.
    I remember that well.
        I just want to thank the panel for being here. We are
    actually going to change panels. We are going to try to move
    along, and I am going to take about a 3 or 4 minute break just
    to let you-all get set up and get situated.
        Mr. Watts. Senator Pryor.
        Senator Pryor. Yes.
        Mr. Watts. Could I have about 30 more seconds.
        Senator Pryor. Sure. Go ahead.
        Mr. Watts. I've got one other comment I would like to say.
        My largest concern, and this is a real major concern, is
    what is going to happen to the Arkansas district office of the
    SBA? Also the small business community and the SBA lenders. As
    it stands right now, the Arkansas district office has 13
    employees that are currently left. Nine in a professional
    position, and four in a clerical position. One of those
    professional positions is going to retire in April or May of
    this year, which is going to leave 12 SBA employees. Rumor has
    it that the loan division is going to be the next division
    that's going to be getting their notices, and that's going to
    be coming up real soon.
        They are going to try to set up two processing centers;
    there's going to be one in California and one in Kentucky. If
    that happens, you're going to lose four more professional
    positions. That's going to leave eight people left in the
    Arkansas district office.
        Now, do you honestly and truly think that they're going to
    keep an Arkansas district office? I mean, can you honestly sit
    there and tell me that they're going to keep an Arkansas
    district office, per se?
        Our office worked hard over the number of years that I
    worked for the SBA to gain the trust and admiration of the
    lending community here in this state. We were able to provide
    close personal service to these lenders. I must remind you,
    this is Arkansas; this is not New York or Washington. It's my
    opinion that this is only going to alienate the local and small
    lenders from the SBA.
        That's all I've got to say.
        Senator Pryor. Well, thank you. I think I share those views
    with you. That is one of the reasons we are here. That is one
    of the reasons we wanted you here, because you have got that
    experience out in the trenches. We appreciate your time and
    your commitment that you gave to not just this country, but
    certainly this state and all of our communities.
        Let's switch the panels. Thank you for your time.
        [Recess.]
        Senator Pryor. Okay. Let's move forward. If I may introduce
    this next panel, we have the same type set up. If we could do
    maybe 3 to 5 minutes, and then I will answer any questions. I
    guess, Daniel, you are going to go first. Is that right? Is
    that okay with you, Daniel, if you go first?
        Mr. Blair. That's fine.
        Senator Pryor. Why don't you go first, introduce yourself,
    talk a little bit about what you do, give your comments, and
    then let's just work our way around the room.

              STATEMENT OF DANIEL BLAIR, GENERAL MANAGER,
           DANIEL UTILITY CONSTRUCTION, LITTLE ROCK, ARKANSAS

        Mr. Blair. I'm Daniel Blair. I'm the General Manager for
    Daniel Utility Construction here in Little Rock. It's a second
    generation family business. My parents started contracting in
    1964. My comments are relative to the 7(a) program.
        Some brief history is our industry and company experienced
    a lot of growth in the 1990s. Then following the bubble burst
    in 1999, there's been 3 years of pretty serious decline,
    following generally to our general economy. We were hurt pretty
    bad. The industry was hurt pretty bad. In 2 of those 3 years,
    we were fine. Had a great year, in fact--in 2000, 2001, 2002.
    Last year was a challenge. We laid off about 50 employees, and
    really just waited for the economy to start improving. Around
    the fourth quarter of last year, we started seeing that, and as
    the economy was improving, so did our outlooks for 2004.
        That was when I actually approached Mr. Wall's company
    about helping us to consolidate some debt and help our cash
    flow problems. As you move from a period not doing
    extraordinarily well to growth opportunity, cash is going to be
    a problem. So we hustled around.
        I was informed that the program was going to change after
    the first of the year. We spent some time right between
    Christmas and New Years's trying to get this in place, and
    everything seemed to look good. As of the middle of January, we
    were informed that no fundings were going to happen. We didn't
    know what the deal was. The people that were helping us didn't
    know what the deal was. Then they came back and said, ``Okay,
    we have a lower debt maximum that we can deal with.''
    Basically, the loan as we applied for it, was denied.
        They did offer us a different package that wasn't
    acceptable to us. As it stands for me right now, we really
    expect 2004 to be a record year for us in terms of growth and
    receipts and income. I expect that I'll place about 50 new
    employees.
        Senator Pryor. Fifty?
        Mr. Blair. Yes. That's about what I have now. We really
    expect to see a tremendous year. It's going to be a real
    challenge for us from a cash flow standpoint to be able to
    achieve that without this help.
        The rough numbers for us were decreasing our cash flow
    needs from around $40,000 to about $10,000, and stretching the
    loan out over a longer period of time, but it was just really
    going to give us a break near term.
        I suspect that because the economy is improving, there may
    be perhaps thousands of people like me, tens of thousands,
    around the country that are in similar patterns. Ready to take
    off, and, yet, are challenged with some of the economic issues
    that we've had in the last few years.
        Senator Pryor. Thank you.
        Mr. Walls.

     STATEMENT OF C. SAM WALLS, CHIEF OPERATING OFFICER, ARKANSAS
                          CAPITAL CORPORATION

        Mr. Walls. Thank you, Senator, and thanks for the
    opportunity to talk about something that I believe has enormous
    importance to the Nation. It's not just Arkansas, but it's
    across the Nation.
        I am the Chief Operating Officer of Arkansas Capital
    Corporation. It is a private non-profit business development
    corporation that on occasion is the largest SBA 7(a) lender in
    the state. Like the U.S. Small Business Administration,
    Arkansas Capital Corporation was formed during the 1950's to
    assist small businesses with long-term financing options that
    were going unmet in traditional capital markets. Also, like the
    SBA, our parallel missions continue to this day.
        In Arkansas, as in numerous other states, small- and
    medium-sized businesses had the highest potential for growth of
    any sector of our economy. Although improving, the current
    economic climate continues to be a very difficult one for small
    businesses to successfully navigate, it is in that light that
    Arkansas small business can ill afford an underfunded small
    business loan guarantee program.
        Let there be no misunderstanding. Arkansas Capital
    Corporation fully supports the SBA's mission and understands
    the agency's importance and impact on Arkansas' business
    community. We cannot afford another lending holiday or further
    cuts to this vital program. It is imperative that Congress and
    the current administration agree to fully fund this economic
    development stimulus program.
        In order for the SBA to fulfill its mission, it must have
    partnerships. It must have the SBDC, it must have lenders, and
    it must have borrowers who act as good partners with the
    agency. There are certain rules about partnerships, and one of
    those rules is good partners do not do things that harm their
    partners. It is extremely important that we understand where
    the agency is headed, what its long-term plans are, because
    lenders are businesses, and our borrowers are, obviously,
    businesses, and businesses must plan in order to know how to
    conduct their affairs in the future. Much of the disarray that
    the agency exhibits today is very difficult for all of us to
    continue to count on our relationship with it to benefit the
    small business community.
        Senator Pryor. Thank you.
        Mr. Walls. Thank you.
        Senator Pryor. Mr. Knight.

      STATEMENT OF PHILIP KNIGHT, EXECUTIVE VICE PRESIDENT, SMALL
                BUSINESS LENDING, ARKANSAS NATIONAL BANK

        Mr. Knight. Thank you, Senator Pryor. I appreciate the
    opportunity to meet with you today and speak to you on current
    and proposed changes to the SBA.
        Let me begin by introducing my bank and myself. My name is
    Philip Knight. I'm the Executive Vice President over small
    business lending for Arkansas National Bank. We're a locally
    owned community bank in Bentonville, Arkansas. We consist of
    nine branches at nearly $500 million in assets, and we serve
    Benton and Washington Counties primarily.
        For the past 2 years, ANB has been the leading SBA lender
    in Northwest Arkansas, and in fiscal year 2003, ANB made 22
    loans for $7.8 million. Thus far in the first 4 months of 2004,
    we've made nine loans for $2.3 million. This made ANB the
    fourth in loan volume and third in dollars in 2003, and fourth
    in loan volume and fifth in dollars currently throughout the
    state of Arkansas.
        At ANB, we're dedicated to helping small business. The
    recent actions taken by the SBA have given us reason for great
    concern. The following will summarize some of these concerns.
        The stability of the SBA 7(a) loan program, we felt like,
    is paramount. Caps and suspensions of lending are detrimental
    to the overall program goals and the credibility of economic
    development and stimulus. They cause lending partners and small
    business constituents to lose confidence in the SBA and its
    overall viability. Will it be there when we need it, is the
    question. If we can't count on it, why try to keep up to date
    with the training required to be SBA savvy and why market it to
    our customers.
        Personnel reassignments have caused delays in the
    liquidation process, without any indication from the SBA as to
    when case resolution will resume. There's been no communication
    from the SBA since the local Liquidation Officer, who we now
    know, Mr. Watts, was forced to retire, and loan files were
    supposedly forwarded to a central office right in the middle of
    the process. The word's out that the SBA no longer wants to
    discuss the liquidation cases, and it's discouraging their
    personnel from talking to us on the phone. We're to be directed
    to a website for assistance.
        Not only is this not very good customer service, it creates
    an adversarial relationship and will ultimately cause a lack of
    confidence in the guarantee process and will no doubt cause a
    lender to think twice about making future SBA loans. Again, the
    result will be less capital available for Arkansas small
    business.
        SBA transformation plans, apparently, include moving all
    loan processing functions from our local district offices to a
    central office or expanding the 7(a) program into an SB express
    with reduced guarantees for the lenders. Neither option is good
    for small business, because it will most likely result in fewer
    loans being made, less capital being available, again, for
    small business.
        The SBA has not communicated with its lending partners,
    especially the local community banks. I read the testimony of
    Mr. Bredsoe that said that they had talked to banks. I would
    suspect if they did, it was not the small community banks. We
    have to rely on third parties to keep us informed on what
    constantly is changing in the SBA. The SBA did not seek our
    input on reduced guarantees. Most small banks are not willing
    to accept that much risk on these types of loans.
        The Arkansas district office loan personnel provide daily
    assistance, both lenders and applicants. They're available to
    answer any technical questions, as well as provide advice as
    needed, often conferring with us on eligibility issues, on
    structuring of loans, and other specifics, and on particular
    complex loan issues. Not everything fits in a black and white
    box. They conduct training for lenders and informational
    seminars for clients. Without their help, many lenders would be
    unwilling to participate in SBA lending and will certainly be
    unwilling to accept the higher risk of flying solo with a
    reduced guarantee.
        SBA district personnel talk to and meet with small business
    owners and potential owners every day. Without them, these
    people would be left with no resources available locally and
    would be directed to a website. Again, not very good customer
    service. Nothing can substitute for a friendly face when you're
    looking for help.
        Senator what would your constituents think if they had no
    way to contact you for assistance other than a website? Not
    everyone uses the Internet. While there are a multitude of
    other issues surrounding the current proposed changes to the
    SBA including the present lowering of the maximum loan size to
    750,000 and denying the use of piggyback loans, I do appreciate
    the opportunity to address these changes that I believe will
    have a definite negative impact on the small business community
    in Arkansas and those lenders who try to serve it.
        Senator Pryor. Thank you.
        Kevin.

      STATEMENT OF KEVIN HESTER, EXECUTIVE VICE PRESIDENT, FIRST
    STATE BANK, CONWAY, ARKANSAS AND DIRECTOR, NATIONAL ASSOCIATION
                    OF GOVERNMENT GUARANTEE LENDERS

        Mr. Hester. My name is Kevin Hester. I'm with First State
    Bank in Conway, Arkansas, and I would like to thank you for the
    opportunity to testify today.
        We've been involved in the SBA program our full 5 years
    we've been open, and we have achieved preferred lender status
    with the SBA. I'm also a Director of the National Association
    of Government Guarantee Lenders. They are the trade association
    for the participants of the SBA 7(a) program, and our members
    account for approximately 80 percent of the 7(a) loans made
    annually. Commonly called the SBA's flagship program, the 7(a)
    program has proved to be an excellent public/private sector
    partnership.
        Today the 7(a) loan program is operating at less than full
    capacity as a result of an inadequate 2004 budget request. Due
    to a funding shortfall, the SBA closed its 7(a) program for a
    week earlier this year. When the SBA reopened the program, they
    imposed a $750,000 cap and other lending restrictions. Sudden
    program stoppages and administrative changes make it difficult
    for both lenders and borrowers to use the 7(a) program.
        Since the 7(a) program is such an important source of long-
    term capital for small business, we ask for the Committee's
    assistance to see that the 7(a) program gets appropriately
    funded and managed to avoid the program disruption experienced
    this year.
        On the heels of the inadequate 7(a) program budget request
    for fiscal year 2004, the administration has proposed raising
    7(a) program fees even more for 2005. The President's 2005
    budget calls for a zero subsidy rate and no appropriation. This
    proposal is a non-starter. It is disturbing that the program
    would face further fee increases, given that the Office of
    Management and Budget has documented the fact that 7(a) lenders
    and borrowers have already returned over $1.2 billion in excess
    fees to the treasury.
        It does not seem to matter that the administration had a
    budget bust this year, requesting too little program authority
    resulting in loan caps and program restrictions that have
    harmed many small businesses. It appears that in addition to
    many borrowers being told ``Too bad'' this year, next year's
    borrowers will be told ``More fees.''
        With the 2005 estimate of demand of $12.5 billion, the
    administration has finally recognized that small business loan
    demand has grown, albeit a year too late. We question, however,
    the need to limit the program. If the administration wants to
    support the 7(a) loan program and its mission to provide long
    term capital to small business, why limit the program to
    anything less than the authorization limit of $16 billion, as
    proposed in the pending reauthorization bill?
        Our small business customers need a reliable source of long
    term capital, not rhetoric about how important they are. Small
    businesses need to be treated fairly, and they need the
    administration and Congress to support the SBA and its 7(a)
    loan program. Thank you.
        Senator Pryor. Thank you.
        Mr. Hinton.

             STATEMENT OF SAMUEL W. HINTON, SMALL BUSINESS
      EXECUTIVE, METROPOLITAN NATIONAL BANK, LITTLE ROCK, ARKANSAS

        Mr. Hinton. Senator, I want to thank you for holding this
    hearing in Little Rock today, and thank you for allowing me to
    participate. My name is Sam Hinton. I'm the Small Business
    Executive for Metropolitan National Bank here in Little Rock.
        I want to take this opportunity to recognize a very special
    guest that's with us today, Mr. Tony Wilkinson, the head of
    NAGGL, the National Association of Government Guarantee
    Lenders, in Stillwater, Oklahoma. I personally appreciate the
    fact that he came to Little Rock to support small business in
    Arkansas today.
        Based on my understanding of the scope and nature of this
    hearing, I will briefly address four different areas. First
    being the Little Rock SBA district office. We work very, very
    closely with the SBA district office. We ask the question,
    ``What do they do?'' ``Are they necessary?'' ``Do we need them
    here?'' Absolutely. They provide so much assistance and
    direction of a personal nature. They assist in packaging,
    analyzing, and approving 7(a) loans.
        As a lot of us who have been in this game for a long time
    know a little bit more about it, but if we expect other banks
    in this state to participate in SBA lending, it is critical
    that the SBA district office continue at this point.
        They provide information and educational assistance to
    small business. Information is the key to success. Most
    businesses fail due to lack of management ability. We have got
    to have additional training and support to help small business
    succeed. We'll find access to capital if we've got the
    information and the management ability to make them successful.
    That's what the SBA helps with. They support and sponsor two
    very important groups, the Service Corps of Retired Executives,
    and the Small Business Development Center.
        I've had the opportunity to work with small business
    development centers all over the Nation, and I promise you, we
    have one of the best right here in Little Rock, Arkansas. We
    need to continue that sponsorship and that support. They help
    small businesses be successful. They provide information and
    knowledge on a local level to a lot of different organizations
    and they sit on a lot of different committees. We need a human
    being there, not a computer site. We need an SBA representative
    to help in what we're trying to do in Arkansas. They're a key
    point of contact for all small business.
        I, personally, at Metropolitan National Bank strongly
    support the continuation of the SBA district office here in
    Little Rock.
        The second point, 7(a) loan program. We are very heavily
    involved in the 7(a) loan program. Metropolitan National Bank
    did not have a specific small business department until I came
    on board. We are now developing that, and there's currently
    nine members of our team. A large part of our focus is SBA
    lending.
        I had a customer that had been approved for a loan that had
    some cost overruns. I would normally have the authority to go
    into a little bit of cost overrun with a percentage increase. I
    was not able to do so in this case. He could not order his
    equipment, and had to slow down his opening.
        We had another client that was approved for a $990,000
    deal. Cutbacks brought us back to $750,000. The deal just
    wouldn't work at that level. Don't forget the fact we're
    actually hurting people out there. We're hurting business
    owners. I encourage that we fund the SBA program. We need to
    get it back to the full maximums, we need to allow for
    piggyback loans to allow banks to do creative financing on some
    of this and let us see what we could have.
        The SBA express program, in my opinion, is not necessarily
    the answer. I think we need the funding to make the program
    work. I'm all for efficiencies and synergies, and economies of
    scale, and we'll participate at any level. The smaller banks in
    Arkansas don't have the knowledge and expertise to participate
    at an express level. We strongly encourage that you keep 7(a)
    as a viable, simplified, and affordable option for the
    borrowers in Arkansas.
        As it relates to the microloan program, that's a tough
    program. It's one that's hard to administer. I think the issues
    with microlending is the administration of it. If we come up
    with some kind of simplified scoring mechanism, and treat it
    almost like a credit card service that can be fast and furious
    and down and dirty, that could be something we can do.
        Overall, I don't believe that the microloan program would
    have that much of an impact. If we lose the SBA and the 7(a)
    program, we're in much greater hot water.
        Finally, assisting the SBA and the Arkansas business
    community. We need to continue to create efficiencies and
    economies of scale as appropriate, but we need the SBA here.
    Let's don't forget the human factor. It is very important to
    utilize high tech things as much as possible, but keep the
    human factor here.
        We, at Metropolitan, are willing to assist in any way.
    We're willing to carry our fair share. Besides the University
    and the SBA, we are the largest supporter of the SBDC, because
    we believe in them. They're doing a great job, and you've heard
    that already. We will continue to support in any way and help
    and do our part. I just encourage you to help us help them.
    Thank you, sir.
        Senator Pryor. Thank you for being here.
        Mr. Wilson.

      STATEMENT OF ODIES WILSON, III, INTERGOVERNMENTAL RELATIONS
                 MANAGER, CITY OF LITTLE ROCK, ARKANSAS

        Mr. Wilson. Senator Pryor, and other distinguished members
    of the panel, my name is Odies Wilson, and I'm the
    Intergovernmental Relations Manager for the city of Little
    Rock. As part of that stead, I manage the city's small business
    development activity for small minority-owned and women-owned
    businesses. I also have the distinct pleasure to serve as the
    Chairman of the Minority Business Development Roundtable, which
    is a demonstration project funded by the U.S. Department of
    Commerce for the development of small minority businesses.
        Most of the comments that I would make in support have been
    made by several members and the guests. I think I work very
    well with Sam, I work very well with Arkansas Small Business
    Development Centers, but the basic comment I would make is that
    the support and survival of small and minority businesses
    throughout this state and this country are dependent upon the
    continued support of the small business development
    administration projects and the minority business development
    administration projects that we work with so consistently.
        I would say that one of my real pleasures in the last
    couple of years, for instance, we've been working with Arkansas
    Small Business Development Centers on the entrepreneurial
    package. One of the things that we really focus on is that one
    of the real challenges in business, and particularly in
    Arkansas, is the African American businesses, the business
    participation rate, as defined by the U.S. Department of
    Commerce is one of the lowest in this country. Arkansas,
    Alabama, Pennsylvania, and Wisconsin are average--the business
    participation rate is based on average number of business per
    one thousand. Arkansas is the 17th.
        One of the things we focused on in the city of Little Rock
    is trying to focus on how we can increase the entrepreneurial
    participation of African American and other minority businesses
    within our jurisdiction.
        One of the real challenges has been aided by our
    partnership with the Arkansas Small Business Development
    Centers. In the last 2 years, for instance, we've had 131
    businesses enrolled in that program. 101 of those businesses
    have come out with full business development plans that focuses
    on expanding and growing their business.
        Across the Nation, I think the business participation of
    Business Development Centers is about 28 percent. We are about
    78 percent because of the focused intent on doing business with
    people. Also, an outgrowth of that association with Arkansas
    Minority Business Development Center is based on that
    demonstration project. It's a 2-year funded, $175,000, a year,
    and we put in about $45,000 per, so about $220,000 over the
    last 2 years, the roundtable is Business Development Center, we
    got all the participants that are actually dealing with
    capacity building services throughout central Arkansas, but the
    State, Federal elements, but actually what we do is every
    month, we give out mini grants, subgrants between $1,000 and
    $10,000 on best practices, on innovative approaches to
    enhancing business development activities.
        In the last year, for instance, first year of the project,
    we did 18 projects, and those 18 projects accrued. We are
    tracking our activities between contracts and sales and
    activities over $32 million worth of business activities. For a
    little under $200,000 Federal money and the net. I'm saying the
    dollar multipliers are just phenomenal, because we really do
    believe in the power of collaboration and cooperation.
        I think one of the things we're missing, and I think Sam so
    ably made the point, is that when you start depersonalizing,
    when you start desympathizing, when you start downsizing and
    computerizing, you take out the human elements. I think why
    does our system work better than other systems that we're
    dealing with is because there's a face, and there's a person.
    There's a personal contact that's involved in what we do.
    People know that they can come to our center, and they're going
    to talk to someone that's going to be able to give them some
    help, going to be able to negotiate the list of phone numbers
    and referrals and resource people, who does what, and who can
    most ably assist them most expeditiously.
        Because one of the things that really we focused on and one
    of the realities that--and I work with Sam a lot, but I differ
    with him a little bit, U.S. Department of Commerce assigns
    microenterprises as enterprise that gross $10,000 or less.
    Roughly in the United States of America, 35 percent of all
    small businesses, 35 percent of all small businesses has
    $10,000 or less gross receipts. Then 39 percent of all African
    American business is similarly situated. I think it's very
    important that my closing comments would be that we support not
    only the 7(a) loan program, also the SBA local office and the
    personal contacts, but that we also support the concept of
    microlending.
        We are a Federal empowerment zone, we have a microlending
    program, for instance, where we work with local lenders and
    Metropolitan Bank and others that we did--the SBA 80 percent,
    we did the other 20 percent, so a hundred percent funded
    microloans whereas we gave out over $500,000 worth of loans,
    and we had zero defaults. We did a hundred percent loans, we
    did very liberal credit requirements and those kind of things,
    and we had zero defaults on those loans.
        The point that I'm making, I think local participation, the
    focus on partnerships, and the real focus on the viability of
    small and--because there's so many rippling effects when we
    talk about microenterprises, because we're talking about the
    working poor, people who are in business not because they're
    not making a lot of money, but because they believe in the
    business, because, like I said, $10,000 microenterprises, one-
    third of most of the business in this country and this state,
    and people are working to make a living, and we should support
    them all we can.
        I will close my comments with that.
        Senator Pryor. Well, thank you. That is one of the reasons
    we are here today; to hear from folks out in the real world.
        Mr. Harris.

     STATEMENT OF SAMUEL L. HARRIS, III, EXECUTIVE VICE PRESIDENT,
                  ARKANSAS NATIONAL BANK, SPRINGDALE,
                                ARKANSAS

        Mr. Harris. Thank you, Senator Pryor. My name is Sam
    Harris, and I'm the Executive Vice President of Arkansas
    National Bank in Springdale, Arkansas. It's my pleasure today
    to have the opportunity to address the U.S. Senate Committee on
    Small Business and Entrepreneurship on such an important issue
    and contributions made by the U.S. Small Business
    Administration.
        In particularly, the SBA district office here in Little
    Rock. I represent Arkansas National Bank, one of Northwest
    Arkansas' leading producer of SBA loans, and one of the top
    producers statewide, as my friend Philip Knight mentioned
    earlier. My comments are a little bit different than Philips,
    but along the same lines.
        Our financial institution originates millions of dollars in
    SBA loans each year. The SBA loan programs are an important
    part of our efforts to reach out to our business communities
    and fund the entrepreneurial spirit and momentum that is so
    very pervasive in Northwest Arkansas. We could not be as
    effective in these endeavors without the valued assistance of
    the SBA district office in Little Rock, Arkansas, and its
    outstanding staff of loan specialists and servicing personnel.
        I'm here today to share with the Senate Committee as to why
    I think it's critical for the SBA to continue to have
    independent district offices in each state, and especially here
    in Arkansas.
        Although it might appear that the SBA district office
    consolidation would on the surface solve program funding
    issues, in the long run, I believe it would be detrimental to
    the program and cause future losses that would more than offset
    any savings that might be realized by the consolidation of the
    program and the offices. Here is why.
        Having such fine representatives such as lending chief Bill
    Horn, and his staff, in the Little Rock district office gives
    the SBA a local presence that allows the agency to make solid
    lending and servicing decisions based on local knowledge of
    issues and the economic climates of areas of commerce and
    different communities throughout the state. Also, a local
    office is in a better position to make suggestions to lenders,
    which leads to better structured loans, better decision-making
    for the SBA, the bank and the customer. It has been my
    experience that higher asset quality will yield fewer losses in
    the business of finance.
        Having the SBA district office here in Little Rock,
    Arkansas provides a higher quality product for the SBA and a
    better return on the investment of the U.S. Government with a
    loan portfolio of higher asset quality and fewer losses. The
    SBA has a long and distinguished record of being in touch with
    entrepreneurs and the small business community as a nation. It
    would be well served to remain a locally-based program with
    locally-based professionals. Thank you.
        Senator Pryor. Thank you.
        We also have Tyrone Davis here, who is a small business
    owner. Tyrone, would you like to say a few words?

             STATEMENT OF TYRONNE DAVIS, OWNER, DAVIS OIL
                             AND PETROLEUM

        Mr. Davis. Thank you, Senator Pryor. Personally, I have
    written a response to your Senate Hearing that I'd like to put
    in the records. I am an avid participant of all the SBA
    programs. I started my firm back in 1992 after a long history
    with an oil company. Someone had mentioned SCORE, I
    participated in that.
        One of the first things that I started my business--I
    started out at the Arkansas Small Business Development Center
    going through every training program they had. I would suggest
    any new businesses that start off in business go through those
    training programs. In addition to that, the University had
    another program called the Small Business Academy where they
    took graduate students to come over and look at my company and
    gave me a strategic plan so that I have something to follow.
    I'm all for the SBA and, Congressman, anything that you can do
    to save our district office, I'm all for it.
        Senator Pryor. Thank you so much.
        You know, we have a lot of witnesses on this panel, and I'm
    just going to go through and put questions to the witnesses,
    kind of almost randomly here, and--I don't know exactly where
    to start, but if I may start I will in the middle with Kevin.
        I have a few follow-up questions on what you said in your
    testimony. One thing is, you said that you have an outstanding
    7(a) loan portfolio of about $13 million at your bank. Do you
    know about how many businesses that translates into.
        Mr. Hester. It would be about 60 businesses.
        Senator Pryor. Do you have any sense of how many employees
    are involved in those 60 businesses? Would you know that off
    the top of your head.
        Mr. Hester. I'm going to guess between 750 and 1,000.
        Senator Pryor. Yes. Also, you mentioned the SBA having a
    flagship program, a 7(a) program. One thing you touched on is
    it is an excellent public/private sector partnership. It seems
    to me that we need to be looking for those type of partnerships
    where we can work with the public sector and the private sector
    and get out here and do some good for some people. Seems to be
    a smart way that we can spend our tax dollars, because the
    lenders have the risk, and, you know, you have a guarantee from
    the SBA, but nonetheless, the way it is established is that we
    share that risk. You have every incentive in the world to get
    out and make good strong loans to companies that can get out
    and do some good with it. Still the government provides that
    safety net.
        Do you have any comments on that partnership you have with
    the SBA?
        Mr. Hester. The partnership is very good. The lenders are
    asked to do a lot of things, and we have increasingly taken
    more responsibility, but the SBA does need to be there to do
    certain parts of the process. I think that changes that are
    being made in the system and in the operations will take them
    out of that. They will not be able to do the job that they've
    done in the past. Especially without the district offices.
    Arkansas being one them. They won't be able to perform the
    parts of the partnership that they've done in the past.
        Senator Pryor. Right. I agree with you on that. You also
    mentioned in your testimony that the zero subsidy and the non-
    appropriations is a nonstarter for you. Tell me why that is.
    Why do you feel so strongly about that.
        Mr. Hester. It just will not work. Two years ago we had a
    reduction in fees, and now we're going to go back and ask the
    borrowers to go back to the fee structure we had before. The
    zero subsidy rate, we really don't have a whole lot of
    information of how they calculate the subsidy rate at this
    point, and that's another problem, an issue we have to deal
    with. The zero subsidy with no appropriations just will not
    fund the program. The program will not fund itself.
        Also, with a 50 percent guarantee, you're going to lose a
    lot of banks. Philip mentioned it. It's the same situation with
    us. You'll have a lot of banks that will not participate in a
    program, the fees that they'll generate will be lower, and the
    program just will not work.
        Senator Pryor. Right. I share that concern as well.
        Mr. Wilson, let me ask you if I may. You mentioned the
    microloan program, and I want to ask you about that, but also
    you talked about minority-owned businesses and the statistics
    here in Arkansas. I think I know the answer to this, but I
    would like to hear it from you.
        Why is it important that we should try to have minority-
    owned businesses in this state and in this country? What is the
    value of that to our economy and to our society?
        Mr. Wilson. I think the biggest point--just take the
    Arkansas references. Roughly 20 percent of business--I mean,
    the population of Arkansas is minority, and we're talking about
    African Americans, Hispanics, Asian Pacific Islands, American
    Indians, the Federal definition. Right now, that business
    participation rate that I was referring to is about--it's less
    than 6 percent. In reality, one of the things you find that--in
    good times and bad times, people's economic status and
    participation in the American dream really establishes how they
    view their whole lifestyle.
        I think that it has a very strong implication, and you have
    contributing factors on crime rates, on unemployment rates, on
    poor health, on education. I think it has a rippling effect as
    how that impacts us.
        I think the best approach to equity in America or in our
    income is not so much to focus on civil rights but silver
    rights. It's actually trying to do all that we can to make sure
    that everybody participates as best they can in the economic
    depressed prosperity of our country. I think that's one of the
    things that we really try to do. If those special efforts are
    not encouraged, just like desegregation of education, and some
    other historical things would not have occurred without the
    assistance of the strategic and very pointed assistance of the
    Federal Government. I just don't think it occurs naturally. You
    have to do extraordinary efforts to remedy extraordinary
    deficits.
        I also think that statistical anomaly you have to do all
    over this county. If that's the case, just like we're putting
    extraordinary resources in the rebuilding the infrastructure of
    Afghanistan and Iraq, I think that same concept, we can justify
    putting some extraordinary remedies to addressing those
    disparities.
        Senator Pryor. Well, let me ask then a follow-up with the
    microloan program which you referred to in your testimony a few
    moments ago. Given your experience with the program, do you
    think--and by the way, as background, you know the President's
    budget would eliminate the microloan program and fold it into
    some other programs, but do you think the microloan program as
    it exists today has been satisfactorily implemented to help
    those people who really need the help?
        Mr. Wilson. No, I do not. Simply because--and I think Sam
    made a good point. I mean, in good banking operations,
    microloans does not make good banking sense, because of the
    size of the loan, the service on the loan, and all those
    things.
        That's what I'm saying, the whole focus on doing
    extraordinary things. Like the programs that we dealt with in
    Pulaski County, for instance, like I said, we went above the 80
    percent SBA guarantee, and we did the other 20 percent. It's a
    100-percent guaranteed loan. In other words, the bank has no
    risk, zero risk.
        Then we had ADFA, Arkansas Development and Finance
    Authority, a public and another state agency to do the
    administration of the loan. There was no added administrative
    over here to the bank. In other words, you made it easier for
    them to service those loans. We service those loans through
    Metropolitan Bank, a local bank. Like I said, at this point in
    that program, zero defaults.
        The whole program is based on the fact that they already
    had to go to a bank and been turned down. Then we would get
    them after they got turned down. We would look at them
    individually, case by case, on the viability of their business
    concept and the profitability of their loans and so forth.
        A number of those loans were no defaults, and a number of
    them have become traditional loans from Metropolitan Bank. Our
    point is that you have to have extraordinary efforts on the
    bottom end, and this may not really be due to the business
    participation rate, because we start talking about people
    working, and we're talking about less than 10 employees, and
    they might have a large growth revenue for their business. They
    might go through a couple of hundred thousand dollars, but when
    you start talking about their gross receipts at the end of the
    day, with those people with less than 10 employees, their gross
    receipts is $10,000 or less. That's what the point is. That's
    35 percent of small businesses in America.
        That is the danger that we talk about when we start talking
    about the job creation. It creates a lot of jobs on the lower
    end of the spectrum, a lot of people that would be left out of
    the process otherwise.
        Senator Pryor. Mr. Sam Walls, let me ask you, if I may. I
    think you said you are the largest SBA 7(a) lender in the
    state?
        Mr. Walls. Yes, sir.
        Senator Pryor. Do you know off the top of your head what
    the average size of your loans are? Do you have an average on
    that?
        Mr. Walls. Senator, we're somewhat different than a bank in
    that we are by legislation prohibited from competing with
    banks. We are, like SBA, a gap filler, between what can be
    obtained from the traditional capital markets and what the
    borrower needs. As a consequence, we do not do the small loans.
        Senator Pryor. I see.
        Mr. Walls. Small, being defined as less than a hundred
    thousand dollars. Unless it is for a minority or a women-owned
    business. We will do those. Our average generally is going to
    be something like $300,000-$500,000. It will vary between, say,
    $250,000 and $400,000 in any given year.
        Senator Pryor. Yes. Tell me the challenges from your
    standpoint, the challenges that smaller businesses have in
    getting capital. What makes it so hard for small companies to
    have access to capital?
        Mr. Walls. Well, I think in the context of the SBA, it's
    clearly a matter of risk for the lender. A lot of small
    businesses don't have the track record or a long enough track
    record that the lenders can get comfortable with. Sometimes
    it's a matter of collateral, the inadequacy of collateral.
        The fundamental tenant of lending is that your first way
    out is through cash flow and, hopefully, profitability, and the
    second way out is collateral.
        Senator Pryor. Yes.
        Mr. Walls. If you make a loan that does not have any
    collateral or a guarantee, you're not lending, you're venture
    capitalizing. A lot of bankers find that out the hard way.
        Senator Pryor. That is right.
        Mr. Walls. I think that's where the SBA product steps in
    and makes a deal doable for a lender that otherwise would not
    be doable. The typical small business, much like has been
    referred here today, generally doesn't have a lot of assets
    that would shore up a larger credit.
        In our case, we're dealing with bigger numbers, we're
    talking about pieces of capital equipment, buildings real
    estate, things of that nature.
        Senator Pryor. Yes.
        Mr. Walls. One the hardest types of capital to get is
    working capital, regardless of the size of the enterprise. I
    think that's an area where the SBA is particularly important.
        Senator Pryor. Good. Now, I am going to ask Philip Knight
    this next question, but I'm going to base it on something you
    said, Mr. Walls a few minutes ago. You said that good partners
    do not do things that harm their partners, and that is one of
    the principles in partnership, but, Mr. Knight, you, I think,
    referred to in your testimony about how closely you work with
    the SBA and some of the concerns you have.
        Describe for me your working relationship and your
    partnership, with the SBA here in Arkansas and how that
    relationship has been progressed.
        Mr. Knight. Okay. Couple of different avenues. Let me start
    with the loan processing side. It is very typical for me to
    contact one of the loan officers. We're fortunate to have in
    our area a loan officer in Fayetteville that serves Northwest
    Arkansas, and, yet, sometimes he doesn't have all the answers,
    and we'll come to Little Rock to loan officers here. It is very
    typical to call and ask eligibility questions.
        If you've seen the SOP, you know it's a substantial manual,
    and there are all kinds of rules and regulations we're to
    follow in order to ensure that we're getting our guarantee on
    our loan. Sometimes there are issues that come up that fall
    somewhere between the white and the black, and we have to make
    judgment calls.
        I can tell that you right now--I've worked in SBA in two
    different districts, and the Arkansas district interprets
    things different than the Dallas district that I came from. I
    think that that's true largely because of the uniqueness that
    is our state. That's probably the same way across the country.
    I would guess that each of the district offices tailor their
    interpretations around their local regional economies.
        Now, if we go to a centralized processing, than what we
    have here is someone who is looking at a loan in Arkansas, at
    the same time someone is looking at--that same person may be
    looking at a loan in Los Angeles. There's just a myriad of
    different.
        Senator Pryor. Right.
        Mr. Knight. I mean, we don't need to go into it----
        Senator Pryor. Right.
        Mr. Knight [continuing]. But all of the difference we have
    there.
        Senator Pryor. This kind of goes back to having that
    familiar working relationship with people in a so-called local
    office----
        Mr. Knight. Absolutely.
        Senator Pryor [continuing]. That understand the terrain, so
    to speak, and not some toll free number or website. I think
    that you mentioned that no one knows what kind of service you
    are going to get there.
        Mr. Knight. Absolutely. On the liquidation side, you know,
    I've worked with David through liquidation, and, in fact, I
    worked through my very first liquidation with David. I called
    him, and I said, ``David''--knowing David for quite a while
    before we had that situation, I said, ``This is my first one.
    Would you hold my hand and walk me through it?'' I can't do
    that----
        Senator Pryor. Right.
        Mr. Knight [continuing]. Going to Virginia or Kentucky or
    Sacramento, or wherever it's going to be.
        Senator Pryor. Across the country.
        Mr. Knight. That's right.
        Senator Pryor. Now, let me, if I can, switch over to
    another witness here quickly.
        Mr. Hinton, I was going to ask you about your testimony, I
    think you were very clear that you think it's important that we
    continue to have an Arkansas presence for SBA and how important
    the local offices are, and many of your comments addressed the
    7(a) program. In your written comments, you touch on the
    microloan program. Let me ask this: As I understand the
    microloan program, these people who--these microborrowers
    sometimes have average credit scores around 500, or something
    around that number, but I think the average size of these loans
    may be around $11,000. Do you think that if the microloan
    program is eliminated at the Federal level, do you think that
    private entities will come in and have a market there for those
    borrowers?
        Mr. Hinton. No, I do not.
        Senator Pryor. The economics do not work. Is that right?
        Mr. Hinton. Yes, I mean, we're talking about success, and
    success for a small business owner encompasses many things, and
    we're kind of preaching to the choir here, but experience,
    management ability, equity injections, cash flow, profit, and
    credit worthiness are the considerations.
        When you're trying to consider how to make a $5,000,
    $10,000, $15,000 loan, first of all, you worry about the equity
    injection. Most success stories are based on the fact that it
    does require some ownership or equity in the business, that the
    fact that having a personal ownership does ensure a little bit
    better chance of success.
        You know, you start questioning someone that really can't
    come up with $5,000, then the economies of scale, the fact that
    most traditional financial institutions just cannot do this.
    It's not something that can be afforded. I am all for that, and
    I work very diligently to help smaller clients. That's where I
    think you make the most impact. It's not about maybe the number
    of jobs, it's that father or mother that has a child, and
    they're trying to do good and make a living in this country,
    and I always try to simplify things down to the basic level,
    and I think that's what dictates our decision, or should. I
    still say there's a smarter way to do this.
        We keep trying to do the same old thing, and that keeps on
    failing. You know, certain groups have figured out how to do
    this. I mean, you know, there's ways to do mass type of
    financing based on scoring mechanisms that we can help a
    broader segment. You know, you get a credit card application
    almost every day. They take much lower credit scores, they
    operate on a system of numbers. It has to be fast and
    efficient.
        For me to invest time that it would take to lend someone
    $5,000 or $10,000 is not necessarily the most reasonable way. I
    am all in favor of microloans supporting the smallest of small
    business, but in a much more creative way.
        Senator Pryor. Right.
        Mr. Hinton. It still gets back to let's save the 7(a). It
    will be a moot point if we don't save the SBA and the larger
    loan programs.
        Senator Pryor. Yes. Mr. Harris--by the way, we have three
    Sam's on the panel. Sam Harris, you came down from Springdale
    today. Correct?
        Mr. Harris. That's correct.
        Senator Pryor. People in Arkansas are sensitized to the
    fact that that part of the state has a robust economy, that,
    really, there's some exciting things happening there in terms
    of population growth, and opportunities there. Nonetheless,
    today you've come in, and you talk about how important the SBA
    is, even in that environment.
        I would like, if you could, to comment on that, because I
    know the Northwest Arkansas economy, and the economy where you
    are, has suffered some in the last couple of years, 3 years,
    there's no doubt about that, but also it's still considered a
    very strong economy by Arkansas standards, and so I would like
    to hear a little bit more about the SBA in a growing economy, a
    strong economy. If you could comment on that, I would
    appreciate it.
        Mr. Harris. I think some of the comments have already been
    made with respect to why it's important to have the guaranteed
    loan program for the lenders; to entice us to get out there and
    make loans. Even in a good economy, that doesn't mean that
    there aren't projects that aren't going to require the loan
    program. A good economy doesn't mean that everyone can go to a
    bank and get a conventional commercial loan.
        I think many of the situations are the same in a good
    economy as they are in maybe an economy that's not quite so
    robust. People still need working capital loans for their
    businesses, and some of the points that were made earlier about
    some of the things that Sam talked about, about the collateral
    issues can be an issue.
        The Low Doc program and the 7(a) program are excellent
    programs that allow lenders to get out there when a business
    has an excellent cash flow, but maybe they have some other
    weaknesses, but it's still a strong business that creates a lot
    of jobs, it's a profitable business, the bank decides to go
    ahead and do the project, and that company grows.
        I know Philip and I could sit here for hours and talk about
    our success stories as well as the rest of the lenders in the
    room from these programs. I think now more than ever we need
    to, you know, focus on this issue. Let's get it restored, let's
    get the full funding on the programs, and move forward with
    that.
        I don't think because we're in a robust economy that we
    should back off of the programs.
        Senator Pryor. Right. I appreciate that. Yes, sir.
        Mr. Knight. I might add, Senator Pryor, that with a robust
    economy, there is more needs for service-oriented business. I
    mean, yes, Wal-Mart is the largest retailer and the largest
    company in the world, but they have to have a whole array of
    different support businesses around them. Those businesses come
    to us and don't have the collateral, and they don't have the
    history, start up businesses.
        One of the things Mr. Walls didn't talk about, but is
    notorious in lending, there are certain types of businesses
    that are more risk oriented. Without the SBA, we're not going
    to make these loans to these types of businesses. That is one
    of the areas that the SBA is very important for. In a robust
    economy, there are more businesses starting, and they are more
    risky.
        Senator Pryor. All right. Mr. Blair, I am going to finish
    these questions with you on this panel, and that is, you have
    just gone through a process with the SBA which was not
    fruitful, as I understand it. How was it dealing with the SBA?
    Were they helpful? Did you run into any bureaucratic red tape,
    so to speak? I mean, how was it to deal with the SBA?
        Mr. Blair. Well, actually, I guess the process was made
    easier by Sam Walls' company, so, you know, my dealings with
    them was pretty good.
        Senator Pryor. Yes.
        Mr. Blair. You know, the bottom line, however, became they
    weren't going to fund the loan----
        Senator Pryor. Right.
        Mr. Blair [continuing]. In the manner that we needed it
    funded. I guess, ultimately, it didn't work out, and it wasn't
    good, but----
        Senator Pryor. Do you have that access to capital now? Are
    you going to go back to the SBA or have you already figured out
    another way----
        Mr. Blair. We're scrambling right now.
        Senator Pryor. Okay.
        Mr. Blair. I don't know. I don't know just exactly how
    we're going to approach that.
        Mr. Wilson. Senator, if I may.
        Senator Pryor. Yes, sir.
        Mr. Wilson. There's some public policy implications. I
    think Janet made the point that the authorization first, the
    appropriations, I think is real important, in that, you know,
    like for instance, the SBC Centers, the $125 million
    authorization versus $88 million appropriation. I think that to
    continue to fight to have those authorizations fully funded,
    when there's extraordinary efforts. Also, the flip side of
    that, too, is even within the $88 million appropriation is
    actually to focus on setting priorities.
        Senator Pryor. Yes.
        Mr. Wilson. And put pressure on those administrative
    agencies to set priorities, and I think that's one of the
    things I would like to bring forth even with limited knowledge
    and limited time. Certain things in the hierarchy of needs are
    more important than others.
        Senator Pryor. Okay. Let's go ahead and change panels. I
    appreciate you-all coming in and your time. Again, the record
    will remain open. Anything you think about later that you may
    want to add, that's great, and we may have some questions that
    we may present to you here in the next few days because we did
    run out of time today.
        Let's go ahead and change panels. We're going to have our
    last panel come in. We'll just take a couple of minutes to
    break as we do that.
        [Wherein a break was taken from 12:25 to 12:36.]
        Senator Pryor. Let's reconvene. We have Charles King and
    Janet Roderick on the panel. Again, you-all know the format.
    Try to talk maybe 3 minutes, 5 minutes at the most.
        Mr. King will you lead off?
        Mr. King. Yes. Thank you, Senator. Janet and I were just
    talking, I want to thank you, first of all, for saving the best
    for last.
        Senator Pryor. Exactly.

        STATEMENT OF CHARLES KING, EXECUTIVE DIRECTOR, ARKANSAS
           REGIONAL MINORITIES SUPPLY AND DEVELOPMENT COUNCIL

        Mr. King. We would like to say thank you, first of all, for
    bringing this hearing to Little Rock, as well as say thank you
    for the support we receive not only from you but your office
    staff in particular. All of them have always been very
    responsive to every request we've had, and I think that's
    important as we move forward in this type of process.
        My name is Charles King, and I am the Executive Director of
    the Arkansas Regional Minorities Supply and Development
    Council. Our organization is a private, nonprofit organization.
    We were established in 1978, and our mission is to promote the
    development of business opportunities between minority business
    enterprises, corporations, and government agencies.
        We undertake a number of activities to accomplish our
    mission, and these activities include but are not limited to
    certification of minority businesses, facilitation of business
    and contract opportunities, between minority vendors and the
    business community, training workshops, annual minority
    business opportunity trade fair, networking opportunities,
    technical assistance, and advocacy efforts.
        I want to say up front that through all of these efforts,
    not one week goes by that we do not have the opportunity to
    refer at least one client to the SBA. Our membership consists
    of some of the most recognized and respected corporations in
    the world.
        We're a membership-based organization, corporate membership
    based. That includes Wal-Mart Stores, Tyson, ALLTEL
    Communications, Comcast, Nestle, and Enterprise Rent-A-Car,
    just to name a few. I say that because actually what we're
    talking about today in capitalizing minority-owned and small-
    owned businesses, these corporations are really the end users.
    Many of them are end users simply because some of them have
    reporting responsibilities to different Federal agencies that
    they work with. These corporate members rely on us to produce
    qualified, certified, minority businesses to respond to
    procurement and contract opportunities. These companies are
    very reliant on small business administration programs.
        The support offered by the SBA, in many cases, is the only
    assistance available to allow small disadvantaged businesses to
    compete. The programs that are most crucial to the minority
    business community in Arkansas is the 7(j) and (a) program, the
    microloan program, and the outreach officer. It is our
    understanding that these programs are at risk of severe
    cutbacks or total elimination. We believe that this would be a
    death blow to most of the minority businesses that are poised
    for growth in Arkansas.
        Most business owners would tell you that the No. 1 need for
    minority business owners is access to capital. However, we
    believe that the true No. 1 need is access and information,
    much like that offered by the 7(j) program. Small and minority
    business owners are in need most of learning how to access
    available resources. They don't have the resources to hire
    someone to do what a large majority firm would do to hire
    others while they continue to run their businesses.
        The assistance offered leads to success in minority
    business applying for badly needed capital.
        Now, I was reading that in Senator John Kerry's remarks
    that 40 percent of the loans that are done across the country
    are 7(a)-based loans. In Arkansas, the SBA 7(a) loan guarantee
    program provides over 80 percent of the loans to small
    businesses in our area. I would also add that the microloan
    program, which I believe is critical to Arkansas-based small
    and minority-owned businesses. Though it's not heavily
    utilized, it's something that is very, very well needed in
    Arkansas, and I believe it would be a crime if that program
    were to be eliminated.
        The 7(a) loan program, the terms are easy on the already
    strained pockets of small businesses. One example is one of the
    minority businesses we have with us today in this room, and
    that's the Davis Petroleum Company. Davis Petroleum Company is
    a small supplier of antifreeze and petroleum-based lubricants.
    In 1999, he received a 7(a) loan of $250,000. This loan allowed
    him to expand his business and hire additional employees.
        As a result of the assistance that Mr. Davis received, he
    was eventually named by the U.S. Defense Systems in Richmond,
    Virginia, as a top quality supplier. That's the organization's
    highest award. The assistance the Davis Petroleum Company
    received along the way allowed him to be prepared to receive
    this recognition, as the defense system was able to receive top
    quality service from a supplier who just happened to be a small
    disadvantaged business. It is likely that without this loan, he
    possibly would not be in business today.
        In Arkansas, over the last 5 years, the SBA has issued
    approximately 1,744 loans. These loans had a value of over $422
    million. 300 hundred of those loans were to minorities, 473
    were to women, and 276 were to veterans. So far this year, the
    agency has issued 158 loans with 17 minority, and 30 women
    loans, and 28 going to veterans.
        As a rural state, Arkansas has over the last 2 years,
    issued 194 loans to rural areas. Two years is the longest
    available tracking for rural loans. I would note that Arkansas
    is considered mostly a rural state with only 14 areas being
    considered urban.
        Now, it's our opinion that the overall budget request,
    which is less than 15 percent of last year's budget, is a
    terrible disappointment. The small businesses account for a
    majority of the jobs created in this country each year, the
    quality of work is high, and the pay allows families to pay
    their bills, pay their taxes, and provide for the betterment of
    the community. The SBA has become the lifeblood of this
    industry of small businesses. Continued cuts would only serve
    as a death blow to the continued growth and development of one
    of the country's most vital resources, the small business.
        We humbly request that the SBA not be cut, but rather be
    fully funded to allow the continued operations of an important
    program that we talked about.
        Senator Pryor. Thank you. Janet.
        Ms. Roderick. Thank you. Again, my name is Janet Roderick,
    and I'm the State Director for the Arkansas Small Business
    Development Center, and I appreciate the opportunity to speak
    and address this group one more time. I want to talk about the
    lowering of the cap and the temporary freeze and how that
    impacted our clients.
        When the freeze went into effect, we did a quick and dirty
    survey of our clients throughout the state, and we found out
    that we had 25 SBDC clients with over $8 million in loans that
    were somewhere in limbo, somewhere in the process.
        Senator Pryor. I'm sorry. How many again.
        Ms. Roderick. Twenty-five businesses with a little over $8
    million that were frozen. The SBA district office here in
    Little Rock worked very hard to do what I would call ``the
    right thing'' by those clients and keep them informed--and
    those were just our clients. Those are not all the SBA loans
    there were. They did the right thing by trying to keep
    everybody informed as best they could, but they were not
    receiving any information out of the central office.
        Since that time, the freeze has been lifted; however, the
    lower cap of $750,000 remains in effect and still has negative
    impact on our clients.
        More often than not, these are businesses that have the
    potential to have a significant impact on job creations. Let me
    give you an example.
        An Arkansas-based technology business is poised for
    tremendous growth. This business has been in operation for more
    than a decade and has a nationwide customer base, and it
    employs about 30 people. After years of research and
    development, the business is now ready to launch a new product.
    This new product has already generated national exposure on
    news outlets such as CNBC and fuels excitement in their
    customer base and beyond. In order to finance the growth, this
    business worked with one of our SBDC consultants to develop an
    SBA loan proposal in the amount of a million dollars. This was
    right towards the end of the year. Then, without much notice at
    all, and around the Christmas holidays, the SBA lowered the
    cap.
        This new SBA loan cap of $750,000 is a barrier to this
    business, as well as many other businesses in Arkansas and
    across the Nation. These businesses need capital to grow and
    prosper, and the SBA loan program provides access to capital
    that might otherwise be unavailable. This new loan cap punishes
    successful established businesses that aspire to take their
    businesses to the next level.
        The second issue I want to speak about, concerns a news
    release from the SBA dated February 14, 2004. The SBA proposes
    to cut the SBA guarantee to 50 percent, increase the cap to two
    million, and have lenders apply using their own forms and
    processes instead of ``lengthy and burdensome government
    forms.'' The SBA says this will add 500,000 jobs. This might be
    true in big cities with large banks, but it's certainly not
    true in rural America.
        Senator Pryor, as you're aware, start-up funding provides a
    real challenge to small businesses--to the small community
    banks. While these banks are active members of the community
    that the small businesses will operate in, and they have a
    vested interest in helping provide capital for economic growth,
    the lenders are also well aware of the risks involved in the
    small business operation, start-up particularly. These problems
    of survival rates for small business start-up, the inherently
    limited collateral of assets available to be pledged to secure
    loans, equity injection requirements, and in some cases,
    previous credit issues, makes it extremely difficult for the
    lender to provide commercial loans without a guarantee program.
        Many of the commercial loans made to start-up businesses in
    Arkansas are for $150,000 or less, which the SBA currently
    provides an 85 percent guarantee. For many of these SBDC
    clients, it's the bank's ability to receive the guarantee that
    is a critical element to receiving bank participation in the
    venture.
        Although lenders hope they will never have to liquidate the
    loan, and the business will be successful, they are well aware
    of the survival rates of small business start-ups and generally
    rely on this guarantee to secure the loan.
        The end result of this proposal for small businesses in
    rural Arkansas will be significantly fewer small community
    banks using the SBA loan program with only a 50 percent
    guarantee, significantly fewer start-up businesses being
    funded, which will have a negative impact on community economic
    vitality, more small businesses establishing and expanding
    operations by using the dreaded credit card form of financing
    their business with the excessive interest rates, and those
    small businesses that do not receive a commercial loan, receive
    a commercial loan without the SBA guarantee, may jeopardize the
    company futures by accepting unfavorable terms such as short
    term maturities with balloon payments, and having no assurance
    that these bank notes will be renewed when they're due.
        Senator Pryor, I have e-mails from several banks located in
    the northeast part of Arkansas who responded to an e-mail from
    Herb Lawrence who is our center director at Arkansas State
    University concerning the SBA proposal. I'll be happy to submit
    them for the record. In closing let me say, Senator Pryor, you
    have repeatedly spoken out against government policy groups
    that were not in the interest of Arkansas' small business
    sector. I hope you will speak out against what I fear is the
    gradual dismantling of the SBA and the continued failure of the
    government to adequately fund small business management
    assistance programs. Thank you.
        Senator Pryor. Thank you. And rest assured, I will speak
    out against it.
        Now, let me ask you, Janet, you know, I asked earlier, is
    the SBA going in the right direction or the wrong direction?
    Have I already asked you that question?
        Ms. Roderick. No, but I'll be happy to provide you an
    answer to that.
        Senator Pryor. I would like to hear your comments on that,
    because, like I say, I asked this question in Washington, and
    there was a panel of probably four or five, I do not remember
    right now, and they all had very strong opinions on it. I would
    like to hear your opinions because you have a different
    perspective than most.
        Ms. Roderick. Well, certainly, I would say, ``No, I don't
    believe they're headed in the right direction.'' Here in
    Arkansas and throughout the country, particularly in rural
    states--I've been the State Director of probably the most rural
    state, I was the State Director of the Small Business
    Development Center in Alaska.
        We know that people need the one-on-one contact. We know
    that we still work with, ``Excuse me. I know that you work
    here. Can you help me out?'' We talked about using the Internet
    and we use it a lot. However, there are many of our small
    businesses who still do not actively use the Internet,
    particularly those who are located in rural parts of our
    country because they don't have access to high speed Internet.
    That's changing, but it's changing slowly.
        Doing away with the district offices, and I do believe
    they're looking at the dismantling of the SBA as we know it now
    with district offices, is absolutely the wrong direction for
    our business community.
        Senator Pryor. Let me just run through for the audience, so
    you will understand what we are talking about here, some of the
    cuts that we are looking at in the President's budget for the
    SBA, and, therefore, cuts in trying to help small businesses in
    this country.
        The 7(a) loan guarantee program would have zero funding
    under the President's budget. The microloan program which we
    have talked about to some extent today, will be eliminated
    under his budget. There will be several programs eliminated for
    entrepreneurial development, counseling, business resources,
    and outreach. In fact, of 20 programs, the President's budget
    eliminates 10 of the programs. You know, we could run through a
    long list of what they are--we'll submit this for the record.
    Certainly, it is of great concern to small businesses.
        We hear about it all the time in our office, and just
    talking to people, I hear about it every time I come back, it
    seems like.
        Also, Mr. King, a few moments ago you talked about 7(j) and
    how effective it has been and what a good program it has been.
    Under the President's budget for fiscal year 2005, they will
    cut it by $500,000. You may think, ``Well, what does that
    really mean?'' Well, that is a 25 percent cut. That is a 25
    percent cut in that program.
        In fiscal year 2004 it was a $2 million line item, and in
    this fiscal year that we are talking about now, it will be a
    $500,000 cut on that. It will be $1.5 million.
        Mr. King, let me, if I can, focus on you for just a moment.
    We, actually, are pretty far over time here, so I am going to
    keep my questions very brief.
        In your view, how is the SBA helping Arkansas and helping
    the Nations's economy? I mean, just in general terms, how does
    it help?
        Mr. King. It's a tremendous help. Let me just piggyback on
    the comment you made just a minute ago about the 7(j) and the
    type of outreach. It's my understanding from reading that the
    outreach offices will be eliminated. I've spent a great deal of
    the last 6 months of last year on the road with who would be
    considered the outreach officer here in the Little Rock office,
    just educating our citizens across this state on what is
    available to them and then how they should apply for the
    assistance that they can get through the SBA.
        Something that these bankers really appreciate, I know
    you've talked to a lot of great bankers, and we worked with a
    lot of them that were here today, but what they don't have time
    to do is something that really the rural part of Arkansas
    really needs a lot of, and that's a lot of hand holding, a lot
    of hands-on approach. That's going to be lost because that
    person is going to be eliminated.
        Because we are such a rural state, and someone said that
    all politics are local, all business is local, too. People want
    to be able to reach out and touch someone, especially a state
    like this where you don't have people that are accustomed to
    thick forms and things of that nature. The overall impact is
    just tremendous, within the minority business community.
        You asked the question of one of the other panelists, and I
    was sitting there going, ``Say something.'' That is that in
    minority businesses, 90 percent of the employees of minority
    business is a minority. You're talking about the very basic of
    employment, family support, community building, and things of
    that nature. The SBA is very much a part of that foundation.
        Senator Pryor. Well, that is my impression as well. I thank
    for you that answer. I am going to ask you a question that I
    asked Miss Roderick just a moment ago, except a little
    different twist.
        I asked her if in her view the SBA was going in the right
    direction or the wrong direction. You talk to a lot of
    businesses in this state every day; what is the word out there
    in the business community about the direction the SBA is going
    in light of this President's budget proposal.
        Mr. King. People are very nervous. If programs like the
    microloan program is eliminated and the 7(a) loan program is
    severely cut back, what it's going to lead to, I believe, is a
    lot of small and particularly minority businesses becoming
    subject to more predatory lending practices. The factoring
    organizations will grow, the small amount of profit that
    they're making now will be taken away by those factoring
    organizations. They'll go to these--they may even resort to
    check cashing places to get loans just to make payroll.
        Because the average minority business has less than two
    employees right now, but they're poised for growth more than
    that. They're going to be going to practices that won't allow
    them to grow anymore, if that happens.
        Senator Pryor. Well, thank you. I want to thank everybody
    for participating in this hearing. We have had a lot of people
    here watching, and I am glad you-all are here, and appreciate
    you-all's input as well. We have gone over our time here.
        UALR has just been fantastic about letting us use their
    facilities. Again, we want to thank UALR and all the people
    involved in this hearing. The staff that came down from
    Washington, we appreciate you as well. I wanted to remind
    everyone that the record for this hearing will remain open for
    2 weeks, and we welcome any submissions that anybody wants to
    make, any thoughts, comments, whatever it may be.
        Let me give you one bit of advice, though. Do not mail your
    submissions to Washington, because our mail system up there,
    due to the Ricin and anthrax-laced letters, is kind of all
    jumbled up right now. I would highly recommend that you mail
    those to our Little Rock office, and our office in Little Rock
    will be sure that we get it to the staff in Washington. Please
    just mail that to the Little Rock office, or you can contact
    Derrick Freeman, who is sitting here behind me, or Walter
    Pryor, who is sitting here behind me, too, the folks I have
    working up in Washington who do a great job and who really
    helped organize this whole thing.
        Anything else that we need to cover?
        With that, this meeting is adjourned. Thank you so much.
        [Whereupon, at 12:58 p.m., the Committee adjourned.]

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