[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


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                      ONE HUNDRED EIGHTH CONGRESS

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


                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

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

                           Witness Testimony

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

          Alphabetical Listing and Appendix Material Submitted

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

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

                              ----------                              


                      THURSDAY, FEBRUARY 19, 2004

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         STATEMENT OF TYRONNE DAVIS, OWNER, DAVIS OIL 
                         AND PETROLEUM

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

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

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

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