[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
______
U.S. GOVERNMENT PRINTING OFFICE
94-955 WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
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.]
APPENDIX MATERIAL SUBMITTED
[GRAPHIC] [TIFF OMITTED] T4955.002
[GRAPHIC] [TIFF OMITTED] T4955.003
[GRAPHIC] [TIFF OMITTED] T4955.004
[GRAPHIC] [TIFF OMITTED] T4955.005
[GRAPHIC] [TIFF OMITTED] T4955.006
[GRAPHIC] [TIFF OMITTED] T4955.007
[GRAPHIC] [TIFF OMITTED] T4955.008
[GRAPHIC] [TIFF OMITTED] T4955.009
[GRAPHIC] [TIFF OMITTED] T4955.010
[GRAPHIC] [TIFF OMITTED] T4955.011
[GRAPHIC] [TIFF OMITTED] T4955.012
[GRAPHIC] [TIFF OMITTED] T4955.013
[GRAPHIC] [TIFF OMITTED] T4955.014
[GRAPHIC] [TIFF OMITTED] T4955.015
[GRAPHIC] [TIFF OMITTED] T4955.016
[GRAPHIC] [TIFF OMITTED] T4955.017
[GRAPHIC] [TIFF OMITTED] T4955.018
[GRAPHIC] [TIFF OMITTED] T4955.019
[GRAPHIC] [TIFF OMITTED] T4955.020
[GRAPHIC] [TIFF OMITTED] T4955.021
[GRAPHIC] [TIFF OMITTED] T4955.022
[GRAPHIC] [TIFF OMITTED] T4955.023
[GRAPHIC] [TIFF OMITTED] T4955.024
[GRAPHIC] [TIFF OMITTED] T4955.025
[GRAPHIC] [TIFF OMITTED] T4955.026