[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
                       FULL COMMITTEE HEARING ON
                       LAYING THE GROUNDWORK FOR
                      ECONOMIC RECOVERY: EXPANDING
                  U.S. GOVERNMENT PRINTING OFFICE
                    SMALL BUSINESS ACCESS TO CAPITAL

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

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             June 10, 2009

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-028
Available via the GPO Website: http://www.access.gpo.gov/congress/house


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                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

        .........................................................

                                  (ii)

  
?

                         STANDING SUBCOMMITTEES

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 ______

                    Subcommittee on Finance and Tax

                    KURT SCHRADER, Oregon, Chairman


DENNIS MOORE, Kansas                 VERN BUCHANAN, Florida, Ranking
ANN KIRKPATRICK, Arizona             STEVE KING, Iowa
MELISSA BEAN, Illinois               TODD AKIN, Missouri
JOE SESTAK, Pennsylvania             BLAINE LUETKEMEYER, Missouri
DEBORAH HALVORSON, Illinois          MIKE COFFMAN, Colorado
GLENN NYE, Virginia
MICHAEL MICHAUD, Maine

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, Pennsylvania, Chairman


HEATH SHULER, North Carolina         MARY FALLIN, Oklahoma, Ranking
BRAD ELLSWORTH, Indiana              LOUIE GOHMERT, Texas
PARKER GRIFFITH, Alabama

                                 (iii)

  
?

               Subcommittee on Regulations and Healthcare

               KATHY DAHLKEMPER, Pennsylvania, Chairwoman


DAN LIPINSKI, Illinois               LYNN WESTMORELAND, Georgia, 
PARKER GRIFFITH, Alabama             Ranking
MELISSA BEAN, Illinois               STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          VERN BUCHANAN, Florida
JOE SESTAK, Pennsylvania             GLENN THOMPSON, Pennsylvania
BOBBY BRIGHT, Alabama                MIKE COFFMAN, Colorado

                                 ______

     Subcommittee on Rural Development, Entrepreneurship and Trade

                  HEATH SHULER, Pennsylvania, Chairman


MICHAEL MICHAUD, Maine               BLAINE LUETKEMEYER, Missouri, 
BOBBY BRIGHT, Alabama                Ranking
KATHY DAHLKEMPER, Pennsylvania       STEVE KING, Iowa
ANN KIRKPATRICK, Arizona             AARON SCHOCK, Illinois
YVETTE CLARKE, New York              GLENN THOMPSON, Pennsylvania

                                  (iv)

  
?

                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M..........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

Blankenship, Ms. Cynthia, Vice Chairman & COO, Bank of the West, 
  Grapevine, TX, On behalf of Independent Community Bankers of 
  America........................................................     3
Wojtowicz, Ms. Jean, Founder, Cambridge Capital Management Corp. 
  Indianapolis, IN, On behalf of the National Association of 
  Development Companies..........................................     5
Heacock, Mr. Roger, President & CEO, Blackhill Federal Credit 
  Union , Rapid City, SD, On behalf of the Credit Union National 
  Association....................................................     7
Huels, Ms. Hollis A., Senior Vice President, Capital for 
  Business, St. Louis, MO, On behalf of the National Association 
  of Small Business Investment Companies.........................     9
McGannon, Mr. Michael, Senior Vice President & CLO, Country Club 
  Bank, Kansas City, MO, On behalf of the American Bankers 
  Association....................................................    11
Doerfler, Mr. Douglas A., President and CEO, MaxCyte, Inc., 
  Gaithersburg, MD, On behalf of the Biotechnology Industry 
  Organization...................................................    23
Cohen, Mr. Lawrence, President, Doc & Associates, Ltd., Tomball, 
  TX, On behalf of the International Franchise Association.......    26
Waters, Mr. Tim, President & CEO, Hoffman Equipment, Piscataway, 
  NJ, On behalf of Associated Equipment Distributors.............    28
Bofill, Mr. David, President, Dave Bofill Marine, Inc., Long 
  Island, NY, On behalf of the National Marine Manufacturers 
  Association....................................................    30

                                  (v)

  
?

                                APPENDIX


                                     Prepared Statements:
Velazquez, Hon. Nydia M..........................................    37
Graves, Hon. Sam.................................................    39
Blankenship, Ms. Cynthia, Vice Chairman & COO, Bank of the West, 
  Grapevine, TX, On behalf of Independent Community Bankers of 
  America........................................................    41
Wojtowicz, Ms. Jean, Founder, Cambridge Capital Management Corp. 
  Indianapolis, IN, On behalf of the National Association of 
  Development Companies..........................................    50
Heacock, Mr. Roger, President & CEO, Blackhill Federal Credit 
  Union , Rapid City, SD, On behalf of the Credit Union National 
  Association....................................................    57
Huels, Ms. Hollis A., Senior Vice President, Capital for 
  Business, St. Louis, MO, On behalf of the National Association 
  of Small Business Investment Companies.........................    67
McGannon, Mr. Michael, Senior Vice President & CLO, Country Club 
  Bank, Kansas City, MO, On behalf of the American Bankers 
  Association....................................................    75
Doerfler, Mr. Douglas A., President and CEO, MaxCyte, Inc., 
  Gaithersburg, MD, On behalf of the Biotechnology Industry 
  Organization...................................................    84
Cohen, Mr. Lawrence, President, Doc & Associates, Ltd., Tomball, 
  TX, On behalf of the International Franchise Association.......    88
Waters, Mr. Tim, President & CEO, Hoffman Equipment, Piscataway, 
  NJ, On behalf of Associated Equipment Distributors.............    97
Bofill, Mr. David, President, Dave Bofill Marine, Inc., Long 
  Island, NY, On behalf of the National Marine Manufacturers 
  Association....................................................   102

                                     Statements for the Record:
National Association of Federal Credit Unions....................   105
Small Business Lending Matrix and Analysis [Submitted by the 
  International Franchise Association]...........................   107

                                  (vi)

  


                       FULL COMMITTEE HEARING ON
                       LAYING THE GROUNDWORK FOR
                      ECONOMIC RECOVERY: EXPANDING
                    SMALL BUSINESS ACCESS TO CAPITAL

                              ----------                              


                        Wednesday, June 10, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
        Washington, DC. House of RepresentativesCommittee on Small 
                                           BusinessWashington, D.C.
    The Committee met, pursuant to call, at 1:00 p.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia Velazquez 
[chairman of the Committee] presiding.
    Present: Representatives Velazquez, Moore, Dahlkemper, 
Schrader, Bean, Altmire, Bright, Graves, Luetkemeyer and 
Coffman.
    Chairwoman Velazquez. The House Small Business Committee 
will come to order.
    Whether you talk to the owners of a Silicon Valley start-
up, a Mom and Pop restaurant or a hardware store on Main 
Street, entrepreneurs across the nation face a common 
challenge. They cannot find the capital necessary to sustain 
their businesses. For many firms, this can make the difference 
between staying open or going under.
    During today's hearing we will examine what options are 
available to help small companies access capital. Lenders and 
entrepreneurs will share the real world challenges they face in 
today's tightened credit conditions, as well as their ideas for 
making things better.
    In previous recessions, the Small Business Administration 
has filled the gaps in private capital markets. Today that is 
not the case. Loans funded by the SBA's flagship program have 
been double digit declines, meaning when we need the SBA to 
step in and help lift the capital markets, they are actually 
doing less. This is a result of poor policy decisions and a 
lack of funding at the agency over the last eight years finally 
taking its toll on the programs.
    The American Recovery and Reinvestment Act has helped lay 
the foundation to start turning things around. The new law 
makes loans less expensive for borrowers, putting more money in 
the hands of small firms.
    It also gives banks greater incentives to lend by 
increasing the percentage of a loan the government will 
guarantee. It is a start, but we have a long way to go.
    Today the SBA has not implemented over half of the Recovery 
Act provisions that Congress passed and the President signed, 
but as more and more of these initiatives come on line, 
entrepreneurs should see an improved lending environment. Even 
with these steps, small businesses are still finding it 
difficult to secure credit. Overall lending is down over 50 
percent. At this rate the SBA will make nearly $5 billion less 
in loans than it made in the previous year, demonstrating the 
serious difficulties in the credit market still exist.
    How we overcome these challenges will be an important part 
of today's discussion. All options are on the table in finding 
a solution to these very real problems. Where we can enhance 
existing initiatives we should do so, but when programs no 
longer work, they must be replaced with measures that do meet 
small business' needs. No initiative should continue simply 
because of a special interest. The only measurements should be 
do these programs serve small businesses and do they help small 
firms access capital. If we cannot answer yes to both of those 
questions, then we have to ask why are they here.
    Our goal must be to expand options for small businesses 
seeking financing. As with health care in many communities, 
entrepreneurs have only one or two options for lending. That is 
no real competition, and it does not give firms the flexibility 
they need to realize their potential to grow and create jobs.
    Ultimately the full range of small business' capital needs 
must be met, from the micro borrower who needs a few thousand 
borrowers to the high growth company seeking equity investment. 
No such menu of choices exists today, and the options are 
becoming more limited. By the end of last year, venture capital 
was down 26 percent. Venture capital was instrumental to the 
role technology played in turning the economy around in the 
1990s, and it will be just as important today as it was a 
decade ago.
    In creating paths to capital for small firms we have our 
work cut out for us. If we have learned anything in recent 
years, it is that insuring the capital markets function 
smoothly requires a robust public-private partnership.
    It is my hope that today's hearing begins a dialogue about 
how to renew that partnership. I have always said that access 
to capital is access to opportunity. In today's economy, the 
ability to tap into capital means a laid off worker can launch 
their own venture. It means companies who would otherwise close 
their doors stay open and keep providing jobs. It means that 
when the economy improves, small businesses can hire again and 
sustain our nation's recovery.
    I thank our witnesses for taking time out of their busy 
schedule and companies to be here with us today, and now I 
yield to the Ranking Member, Mr. Graves, for his opening 
statement.
    Mr. Graves. Thank you, Madam Chair.
    I want to thank you for holding this important hearing on 
the ability of small businesses to obtain needed capital. Given 
the recent job numbers, the country will be relying on small 
businesses to help the American economy grow.
    Although Shakespeare warned the people that the people 
should neither be a lender nor a borrower, he was unfamiliar 
with the modern American economy. Today the car-boat dealer 
needs financing to purchase inventory to resell. The home or 
commercial builder needs funds to buy land in the face of 
mortgage backed security debacles. The manufacturer needs funds 
for investing in the latest equipment to make it competitive in 
the global economy. Capital then is the life blood of the 
American economy.
    There is no doubt that the current environment for raising 
capital is difficult even for the largest businesses with the 
AAA credit ratings when they have to compete against the 
voracious appetite of the most credit worthy borrower in the 
world, the United States government. So I can imagine how 
difficult it is for small businesses to find capital.
    Since the end of the Korean conflict, the federal 
government has recognized that small businesses have a much 
harder time raising capital than their large business 
competitors. Programs overseen by the SBA provide small 
businesses with access to debt and equity financing. These 
programs have a number of restrictions and limitations that may 
reduce their utilization among small businesses.
    In times of economic necessity, imposing unnecessary 
barriers to existing programs for providing capital seems 
counterintuitive. As a result, I am interested in hearing the 
opinions of our witnesses on the value of the SBA programs and 
what changes are needed to insure that America's small 
businesses can obtain the needed infusions of capital to keep 
the economy alive.
    And, again, Madam Chair, I appreciate you having this 
hearing, and thank you to our witnesses for all coming a long 
way in many cases for being here.
    Chairwoman Velazquez. Thank you.
    And I welcome our first witness, Ms. Cynthia Blankenship. 
She is the Vice Chairman and Chief Operating Officer of Bank of 
the West in Grapevine, Texas. Bank of the West was founded in 
1985 and specializes in customer service and small business 
financing. She is testifying on behalf of the Independent 
Community Bankers of America. The ICBA represents more than 
20,000 locations nationwide.
    Welcome.

                STATEMENT OF CYNTHIA BLANKENSHIP

    Ms. Blankenship. Thank you, Chairman Velazquez and Ranking 
Member Graves.
    I appreciate the opportunity to be here today and present 
the views of the nation's community banks on both capital 
markets and small business lending.
    In addition to small business lending, Bank of the West has 
been a long time partner with the Small Business Administration 
and is strongly committed to helping our communities, using the 
SBA's 7(a) program and the 504 loan program. Bank of the West 
has more than $10 million in SBA loans in its portfolio, and we 
service these loans. This represents six percent of our total 
loans.
    Notably, as of May, our total small business lending and 
SBA lending are running ahead of the amount last year in 2008. 
So we are doing our part and working hard to get capital out 
there to the deserving small businesses.
    My bank's SBA loans create hundreds of jobs by financing 
the local preschool, health center, hardware store, and auto 
dealer.
    Community banks represent the other side of the financial 
story. Community banks like Bank of the West experienced 
difficult economic times before, and like always, we stick with 
our communities and our small business customers.
    As Chairman of the ICBA, I was recently honored to 
participate with President Obama and Treasury Secretary 
Geithner, as well as Chairman Velazquez and Ranking Member 
Graves, in advancing important policy initiatives to small 
business lending.
    ICBA strongly supports the recent initiatives to bolster 
small business loan program included in the American Recovery 
and Reinvestment Act of 2009. SBA lending program must serve as 
a counterbalance during these challenge credit markets for 
small businesses.
    Unfortunately, at a time when the economy is faltering, the 
sharp 2009 decline in the number of SBA loans is troubling. The 
recent uptick in SBA loans is a positive and welcome sign, but 
we still have a very long way to go before it reaches solid 
levels again.
    Community banks are well positioned and willing to help get 
our economy back on track. While community banks represent 12 
percent of all bank assets, they make 20 percent of all 
business loans and more than half of all business loans under 
$100,000. Some 48 percent of small businesses get their 
financing from banks with one billion dollars and less in 
assets.
    Therefore, we encourage policy makers to be mindful and 
supportive of the community banking sector's important role in 
supplying credit to small business. To that end, ICBA supports 
strong SBA programs, fair regulatory treatment and tax policies 
that will foster robust community bank small business lending.
    Specifically, ICBA appreciates your work, Chairman 
Velazquez, and the work of the Committee in enacting $730 
million in ICBA-backed SBA-related funding in the American 
Recovery and Reinvestment Act. This included reduced fees for 
borrowers and lenders and increased guaranty levels, a new 
deferred payment program, and a secondary market initiative.
    Given the prolonged length and depth of the recession, the 
credit crunch, ICBA encourages Congress to extend or make 
permanent the SBA fee reductions beyond 2009. We urge SBA to 
follow the statute and Congress' intent to give priority to 
small banks in implementing the 7(a) lender fee reduction.
    ICBA is encouraged to see the SBA finishing the 
implementation of the ARC loan program. This program will allow 
existing small business bank customers to better service their 
debt and ride out the economic slowdown.
    The SBA market must be restored. I know first hand that my 
bank would be able to make more small business loans if I was 
able to sell my existing inventory into the secondary market. 
ICBA offers several additional policy recommendations aimed at 
returning more community banks to SBA lending. These include 
insuring SBA makes good on their loan guarantees and provides 
more flexibility in small business size standards and market-
based loan pricing.
    ICBA also believes the bank regulatory pendulum has swung 
too far and is crushing many community banks' ability to lend 
to small businesses.
    In conclusion, the need for affordable small business 
capital is greater than ever. Community bankers run small 
businesses themselves, live and work in the communities with 
their small business customers, and we will do everything we 
can to insure that we meet the credit needs of our local 
community.
    Thank you.
    [The prepared statement of Ms. Blankenship is included in 
the appendix.]

    Chairwoman Velazquez. Thank you.
    Our next witness is Ms. Jean Wojtowicz. She is the chair of 
the Board of Directors of the National Association of 
Development Companies. She is also founder of Cambridge Capital 
Management Corporation, a manager of nontraditional sources of 
capital for businesses in Indianapolis, Indiana. The National 
Association of Development Companies provides legislative and 
regulatory support for its members.
    Welcome.

                  STATEMENT OF JEAN WOJTOWICZ

    Ms. Wojtowicz. Thank you.
    I am so pleased to be here, and I would like to thank the 
entire Committee for their continued support of the CDC 
industry and the 504 loan program.
    First I would like to discuss the need to reduce the cost 
of this program. SBA has informed us that its 2010 budget 
increases the cost of 504 loans by 38.9 basis points per annum, 
and this is due to at least two factors in the SBA's 
econometric subsidy model: the national unemployment rate and 
the forecast of the 504 default rate.
    With both of these factors being impacted by the current 
recession and their real effect expected to be shortlived, we 
ask the Committee to consider requesting an appropriation 
sufficient to offset this fee increase for the next two years 
as small businesses return to a growth mode and improve their 
cash flow.
    This request needs immediate attention in order to negate 
the impact of this fee increase on our borrowers for fiscal 
2010. It is inconsistent in this economy to offer small 
businesses fee relief through the stimulus bill in February of 
2009 and turn around and increase their cost of borrowing in 
October of that same year.
    Second, we need to reach out to more small businesses. Our 
industry thanks the Small Business Committees for their 
leadership role in adding key programs to the stimulus bill 
earlier this year that are beginning to impact capital access 
and job creation.
    However, we believe that more should be done quickly to 
have added impact. Even as SBA works to implement new programs 
and fee reductions created in the stimulus bill, the loan 
eligibility and underwriting criteria to maximize the 
effectiveness of these programs are drifting toward more 
conservative and restrictive interpretations.
    For example, SBA has moved to restrict borrowers from 
accessing their personal home equity in order to inject these 
funds into 504 expansion projects. NADCO has prevailed upon the 
agency to reconsider this policy while they collect additional 
data. We are hopeful that when SBA completes this analysis they 
will again allow business owners to inject capital in any way 
possible.
    We believe that many small businesses either need access to 
larger loan amounts or have already reached their maximum 
availability under current law. This can be addressed in three 
ways.
    First, increase the maximum 504 debenture beyond its 
current limit of $1.5 million.
    Second, allow a borrower to maximize use of both 504 and 
7(a) loan limits.
    And, third, eliminate the regulation that restricts 
business owners with higher net work and liquidity from 
accessing these loans.
    Next I would like to emphasize the need to reduce loan 
losses with more effort devoted to loan liquidation and 
recoveries. At Congress' direction several years ago, SBA 
created a new regulation that enabled it to take advantage of 
the recovery expertise within the CDC industry. Many CDCs 
already performed such tasks for other loan programs that they 
administer. They have simply not been given the ability and the 
freedom by SBA to do this on a broad scale for their 504 loans.
    NADCO believes that losses can be reduced if CDCs are 
actively engaged in the loan recovery process. This will 
require cooperation with rather than dictation from SBA 
liquidation staff.
    Further, NADCO proposes that SBA use its loan servicing 
contractor to speed up collection and payments for defaulted 
loans and we ask that this accounting information be made 
available to CDCs to assist them in their recovery efforts. Can 
you imagine trying to collect a loan without being able to tell 
the borrower what the balance is or in today's electronic age 
not being able to have a borrower wire a payment or send an ACH 
payment on a defaulted loan?
    The SBA loan programs are over 20 years old, and an 
environment of restrictive and overbearing regulations has 
evolved within the agency. With this new administration and 
fresh thinking from senior policy makers, NADCO sees an 
opportunity to break out of the old program structure and 
bureaucracy. We see the chance to work with this new leadership 
team and with the new Congress to expand program benefits to 
more borrowers.
    Like any maturing organization, SBA has to reevaluate its 
products to serve the changing needs of small businesses. NADCO 
urges Congress to collaborate with the new SBA management and 
with far sighted, market driven lenders to create the financing 
and economic development programs so vital to America's future. 
Nimble and forward thinking small businesses will lead us out 
of this recession. Let's help them do it sooner. Working 
together, we can get America working.
    Thank you.
    [The prepared statement of Ms. Wojtowicz is included in the 
appendix.]

    Chairwoman Velazquez. Thank you.
    And I welcome now Mr. Roger Heacock. He is the president 
and CEO of the Black Hill Federal Credit Union in Rapid City, 
South Dakota. The Black Hill Federal Credit Union has over 
49,000 members with assets of more than $765 million.
    Mr. Heacock is here to testify on behalf of the Credit 
Union National Association, the national trade association 
serving America's credit unions.
    Welcome.

                   STATEMENT OF ROGER HEACOCK

    Mr. Heacock. Chairwoman Velazquez, Ranking Member Graves, 
and members of the Committee, thank you so much for the 
opportunity to testify on behalf of the Credit Union National 
Association. I am honored to address the impact SBA lending has 
on our local economy, our credit union, and our members, and to 
suggest ways to improve SBA programs.
    Black Hills was first authorized to do SBA lending in 
January 2003, and we truly value our partnership with the SBA. 
We wrote more SBA loans than any other financial institution in 
South Dakota during 2008, 29 loans for a total of $1.6 million. 
We are looking forward to working with new SBA Administrator 
Karen Hills and find working with the SBA beneficial to the 
credit union and our members for several reasons.
    We have a number of members who started small businesses 
using SBA loan funds while continuing to work at their primary 
job as their main source of income. The SBA helped us be there 
for our members, and this has resulted in additional employment 
opportunities.
    There is additional risk to these types of borrowers, and 
quite frankly, other lenders shy away from helping them because 
there is not a proven cash flow. We are able to do this type of 
lending because of the guarantee that SBA provides. The 
programs allow us to help the borrower who comes in and may not 
have the equity investment we would generally like to see but 
has a good business plan. The SBA helps us create an acceptable 
level of risk, and it is a win-win situation for all of us, the 
credit union, the SBA, and the borrower.
    CUNA is a strong supporter of the 7(a) and 504 loan 
programs, essential tools for achieving our mission to serve 
the needs of members. However, several important factors 
discourage more credit unions from participating as SBA 
lenders.
    First, the statutory cap on credit union MBLs restricts the 
ability of credit unions from helping their members even more. 
Even though the cap does not apply to SBA loans, it is a real 
barrier, keeping some credit unions from establishing an MBL 
program at all.
    Not all loans fit SBA parameters, and credit unions are 
reluctant to initiate an MBL program when they may reach the 
cap in a fairly short order. CUNA is also aware that some 
lenders have not had a positive experience with the SBA, citing 
the application process, fees, and time of decision making.
    In that vein, we think there are ways to improve the work 
that is done by the SBA. As the Committee reviews SBA programs, 
we encourage Congress to make additional funds available to the 
agency so that fees can remain low and the guarantees can 
remain sufficient.
    We appreciate Congress setting aside $375 million for the 
temporary elimination of fees and raising the guaranty 
percentage on some loans to 90 percent as part of the Recovery 
Act.
    In closing, credit union business lending represents just 
over one percent of the depository institution business lending 
market. Credit unions have about $33 billion in outstanding 
business loans compared to $3.1 trillion for banking 
institutions. We are not financing skyscrapers or sports 
arenas. We are making loans to members who own and operate 
small businesses.
    Despite the financial crisis, the chief obstacle for credit 
union business lending is not the availability of capital. 
Credit unions are, in general, well capitalized. Rather, the 
chief obstacle is the statutory limits imposed by Congress in 
1998. Under current law, credit unions are restricted from 
member business lending in excess of 12.25 percent of their 
total assets. This arbitrary cap has no basis in either actual 
credit union business lending or safety and soundness 
considerations.
    And the U.S. Treasury Department found that delinquencies 
and charge-offs for credit union business loans were much lower 
than that for either banks or thrifts.
    The cap effectively limits entry into the business lending 
arena on the part of small and medium size credit unions, the 
vast majority of all credit unions, because the costs and 
requirements, including the need to hire and retain staff with 
business lending experience exceed resources of many credit 
unions.
    While we support strong regulatory oversight of member 
business lending, there is no safety and soundness rationale 
for the cap. There is, however, a significant economic reason 
to eliminate the cap. America's small business needs access to 
capital.
    We estimate that if the cap on credit union business 
lending were removed, credit unions could safely and soundly 
provide as much as $10 billion for new loans for small 
businesses within the first year. This is an economic stimulus 
that would not cost the taxpayers a dime or increase the size 
of government.
    Madam Chairwoman, thank you very much for convening this 
hearing and inviting me to testify. I look forward to answering 
the Committee's questions.
    [The prepared statement of Mr. Heacock is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. Heacock.
    Our next witness is Ms. Hollis Huels. Ms. Huels is the 
Senior Vice President of Capital for Business in St. Louis, 
Missouri. Capital for Business is a national private investment 
firm focused on providing capital to middle market businesses.
    Ms. Huels is testifying on behalf of the National 
Association of Small Business Investment Companies, the oldest 
organization of venture capitalists in the world.
    Welcome.

                  STATEMENT OF HOLLIS A. HUELS

    Ms. Huels. Madam Chair, Ranking Member, members of the 
Committee, thank you so much for the opportunity to appear 
today and offer the National Association of Small Business 
Investment Companies' views on expanding small business access 
to capital.
    I am a Senior Vice President and a partner with Capital for 
Business. We are a private equity fund headquartered in St. 
Louis, Missouri, and have been an active investor through the 
SBIC program for almost 50 years. I am also chair of our Board 
of Governors of NASBIC.
    We appreciate the Committee's continued commitment to small 
business. We particularly appreciate the SBIC reforms that were 
included in the Recovery Act. Your actions have helped many of 
our small business partners.
    SBICs are private equity funds that invest exclusively in 
domestic small businesses. While the bigger names in private 
equity and venture capital invest globally, SBICs invest 
locally in Main Street businesses. Many of SBA's greatest 
success stories, Federal Express, Intel, Outback Steakhouse, 
Whole Foods, Apple, Quiznos, and many, many more received their 
early funding through the SBIC program.
    SBICs should be part of your approach to end the recession, 
grow the economy and create jobs. The SBIC program has been a 
successful, market-driven, collaboration providing over $55 
billion of financing to over 106,000 U.S. businesses. While 
these are large numbers, the program is currently 
underutilized.
    The program's design is simple and effective. Debenture 
SBIC fund managers raise private capital for investment in 
small business and are able to enhance these investment by 
borrowing periodically from the SBA. Currently, the SBIC 
debenture program has capacity to facilitate investments of 
about $4 billion a year in America's small business. However, 
currently only $1.5 billion are being utilized. Over the next 
four years, this is an opportunity cost of approximately $10 
billion.
    SBICs are needed now. Small business investment is in tight 
supply, but demand is strong. It is in times of economic stress 
that small business can be nimble and take advantage of growth 
opportunities, but they need access to capital.
    We recently polled our NASBIC members found that 100 
percent of the respondents reported that banks are pulling or 
reducing their senior lines of credit available. Seventy-five 
percent of the respondents reported less subordinated debt 
available for small business.
    One of the most respected publications in the lower middle 
market, GF Data Resources, recently reported that ``we are now 
in the throes of a dramatic slowdown in non-distressed private 
equity sponsored buy-out activity.'' While this year SBICs have 
invested in over 1,000 companies with an average investment of 
just over a million dollars, the impact of SBICs is hindered by 
the relatively low number of licensees. Imagine what could be 
done if the program were running anywhere near full capacity.
    For seed and early stage companies the situation is even 
worse. Early stage and equity investing for small business has 
largely dried up. A recent survey by the National Association 
of Seed and Venture Funds found that 90 percent of early stage 
entrepreneurial companies, some of the nation's best job 
creators, are having serious difficulty raising follow-on 
capital.
    The SBA previously had an effective tool that was 
exceptionally successful at using the private market to steer 
equity investments into domestic small business with taxpayer 
money as an enhancement. While it lasted, this program invested 
over $13 billion and over 385,000 new jobs were created and 
hundreds of thousands of more were saved.
    While almost 70 percent of venture capital goes to high 
tech and life science industries, this program invested in 
small business manufacturing.
    Unfortunately for America's small business, the demand for 
the SBIC capital is increasing at a time when the SBIC program 
is at its nadir. Last year, only six SBIC funds were licensed. 
This is down over 90 percent from the peak. Licensing from the 
1990s only took a few months, and in contrast, last year many 
SBICs had to wait well over a year.
    The good news is that for Fiscal Year 2009, the SBA has 
already licensed nine SBICs, an increase of over 50 percent 
from the prior year. The SBA is openly trying to get licensing 
waiting periods down to four months. This is a great start, but 
we would be in a better place if 30 or 40 new funds were 
licensed each year.
    There is evidence of a dramatic uptick in the number of 
fund managers interested in becoming SBICs. The program should 
welcome more funds and investors and thereby providing a 
market-based solution to the current capital crunch.
    My written testimony details and explains the areas of 
improvement and reform, but I will briefly describe them. 
First, increase the number of SBICs. Keep the successful funds 
in the program. We need more SBICs in more places, particularly 
the West.
    Insure that the SBICs that can raise private capital are 
not placed at a disadvantage and implement the energy 
debenture.
    We also need to provide incentives for banks and others to 
invest in SBICs and create a stable equity option for early 
stage investment.
    In conclusion, the Recovery Act it was projected to save or 
create four million jobs cost nearly 197,000 per job. The small 
business jobs can be created for far less, close to 11 to 
$33,000 per job. If we take advantage of the SBIC program we 
can have a real impact on small business.
    Thank you.
    [The prepared statement of Ms. Huels is included in the 
appendix.]

    Chairwoman Velazquez. Thank you.
    Our next witness is Mr. Michael McGannon. He is the Senior 
Vice President and Chief Lending Officer of Country Club Bank 
in Kansas City, Missouri. Country Club Bank was founded in 1953 
and is based in Shawnee Mission, Kansas.
    Mr. McGannon is testifying on behalf of the American 
Bankers Association, found in 1975. The ABA brings together 
banks of all sizes and charters into one association.
    Welcome.

                 STATEMENT OF MICHAEL McGANNON

    Mr. McGannon. Thank you, Chairwoman Velazquez, Ranking 
Member Graves and members of the Committee.
    My name is Michael McGannon, Senior Vice President and 
Chief Lending Officer of Country Club Bank in Kansas City, 
Missouri.
    Country Club Bank is a family owned community bank with 
over $650 million in assets.
    The focus of this Committee is extremely important. 
Consistently, small businesses are drivers of new ideas, new 
employment, and new economic growth. For banks like mine, small 
businesses are our bread and butter. While some might think the 
banking industry is composed of only large global banks, the 
vast majority of banks in our country are community banks, 
small businesses in their own right. In fact, over 3,400 banks, 
41 percent, have fewer than 30 employees.
    The topic of SBA lending for small businesses is especially 
important and timely. The efforts that have been made by this 
Committee, the Congress as a whole, and the administration to 
improve the environment and opportunities for small businesses 
through changes to the SBA program have been needed for many 
years. These changes are particularly important in the 
difficult economic conditions which are affecting all 
businesses, including banks.
    The SBA program has struggled over the last several years. 
SBA Fiscal Year 2008 loan volume figures showed a 30 percent 
decline year over year in the 7(a) loan guaranty program, and 
Fiscal Year 2009 figures would indicate a similar reduction in 
volume.
    The economy is certainly playing a significant role in 
overall loan volume decline. However, many lenders are 
concerned that this decline is also due to SBA programs 
becoming too costly and difficult for lenders and small 
businesses who wish to access the program.
    For this reason we recommend the following changes to the 
SBA program. First, SBA should work with trade associations 
like ABA to formulate SBA programs that are attractive to 
lenders of all sizes, and especially to community bankers. Most 
small community banks are intimidated by the amount of 
paperwork required for a regular SBA 7(a) loan. In the past the 
SBA had a product in which there was a two-page application for 
the bank to complete and had an 80 percent guarantee. This 
program has been eliminated.
    Furthermore, the SBA needs to eliminate the financial and 
human resource burden on community banks created by SBA audits, 
particularly a concern with several new programs coming on line 
this year. These audits review loans already on the books that 
are already being scrutinized by other federal regulators, such 
as the FDIC or the OCC.
    Worse, banks are required to pay for their own SBA audit 
even though it does nothing to correct or stabilize a loan or 
to assist if there is the need for a liquidation.
    Second, SBA should reduce the time it takes for 
participating banks to collect on loan guarantees. In our own 
experience, we have been fortunate to collect on all guarantees 
submitted. However, the time frame for these collections is 
sporadic. There is a near universal agreement in the lending 
community that efforts to collect on the loan guarantee from 
SBA can be a time consuming and costly process.
    Third, community banks need personal contacts with 
knowledgeable people who can answer our questions. Our bank has 
had the benefit of a very cooperative SBA office in Kansas 
City. This relationship has been vital in making sure we stay 
on track with new changes in SBA regulations.
    However, banks in outlying areas do not have the benefit of 
a local SBA office that understands them, their clients or 
their town. Instead, they have to contact someone at a 1-800 
number and get answers to questions.
    As a community banker from Missouri, I take pride in 
knowing the business and the community that an entrepreneur is 
trying to serve. It is critical that SBA returns to a model of 
helping local small businesses and banks through off-site 
training programs that can tend to the needs of the lending 
partnership.
    Thank you for your time and attention today.
    [The prepared statement of Mr. McGannon is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. McGannon.
    Ms. Blankenship, I would like to address my first question 
to you, if I may. You mentioned a problem and Mr. McGannon also 
mentioned the same problem with the SBA either denying or 
delaying payment on guarantees. Can you talk to us about how 
serious this problem is, and if so, how does it affect the 
program's overall success?
    Ms. Blankenship. Well, in my own experience at our bank, we 
have not been denied any of the guarantees when we have had to 
go back to SBA. However, I have heard through the association 
that there are banks. There is a grumbling that there are many 
delays and maybe they are just getting a little pickier on the 
paperwork and the appraisals.
    And what that does is just foster an air of distrust with 
using that program. If a bank can be able to rely on that 
guaranty, then they feel very comfortable in using that program 
and it works to their benefit. But if they do not know that the 
government will stand behind the guaranty, then it will affect 
the program.
    Mr. McGannon. The SOP manual from the SBA is over 400 pages 
long, and I think that if you are not a banker that is in the 
routine of making SBA loans, you get lost on dotting all of the 
Is and crossing all of the Ts.
    My sense is that, and once again, we have never had a 
problem collecting on a guaranty. Sometimes it takes longer 
than we would like, but we have been paid in full. I think the 
concern with bankers that are not in the routine of making SBA 
loans would find that trying to follow the SOB, trying to be 
sure that disbursements are appropriate at the front end, I 
think a lot of bankers may have trouble documenting or 
remembering to document the use of proceeds on the front end of 
an SBA loan, and when it comes time to collect on a defaulted 
loan, they may not have the paperwork in place to step through 
the disbursement process on the front end.
    Chairwoman Velazquez. Thank you.
    Ms. Huels, one of the short comings of Government 
Investment Program is the emphasis placed on early results. 
Consequently, there is a tendency to prematurely terminate 
programs that do not achieve results immediately. In the case 
of patient equity investment, how long does it take for 
investment programs to bear fruit?
    Ms. Huels. That is a great question. When equity capital is 
invested into a company, there is an immediate impact as far as 
the ability to hire employees, which will reduce the 
unemployment rate or increase the employment. So those dollars 
and the resulting payroll taxes and things, you will see an 
immediate impact.
    In the midterm, you see an impact. The company that 
receives equity capital is obviously buying goods and services 
from other companies so that capital is spent through the 
economy by buying goods and services.
    I think what you are referring to is when do you see return 
on your equity capital, and most private equity funds have a 
ten-year life. They spend the first three to five years 
investing the capital. Then the companies need time to mature 
and to grow, and then those investments are typically harvested 
in a seven to ten-year time frame. It is patient capital. It 
takes quite a while.
    Chairwoman Velazquez. Okay. Thank you.
    Ms. Wojtowicz, we are all aware that the current recession 
grew out of the collapse in real estate prices, and this has 
significant consequences for the 504 program, which is often 
used to finance real estate. Do you believe that the SBA and 
the CDC community have the tools to mitigate potential fallout 
from these conditions?
    Ms. Wojtowicz. I certainly do. I actually think that the 
depression in the real estate prices will create some 
opportunities. We have certainly seen an uptick in our backlog 
of new transactions where borrowers who have previously been 
leasing facilities are now seeing clear and finding some 
bargains actually in the commercial real estate market.
    As it relates to our existing portfolio, I think we have to 
be very cautious. We do have to find a way to be patient. This 
is not the time to be trying to liquidate or to force 
liquidation of real estate holdings if there is any changed of 
rehabilitating a borrower. Forcing a borrower, walking through 
a foreclosure and trying to sell commercial real estate in this 
market will only increase the losses to the program and the 
taxpayer.
    Chairwoman Velazquez. Thank you.
    Ms. Blankenship, today, and you were in the White House 
participating with President Barack Obama when he made that 
announcement for the use of money for a lending facility 
through Treasury for small businesses, but the Federal Reserve 
TALF program has only lent roughly $116 million back with small 
business loans. Meanwhile Treasury's $15 billion SBA loan 
purchase program has yet to make a single transaction.
    Given these factors, do you think more should be done to 
restart the secondary market for SBA loans?
    Ms. Blankenship. I certainly continue to say that the 
secondary market plays a very critical role because you 
understand that when we make those loans, our bank does not 
typically hold the loans. We sell those guaranteed portions 
back into the secondary market, allowing us to then re-leverage 
those funds into additional loans.
    When there is no secondary market, then that is what causes 
the freeze of credit. We are seeing some recovery on the bank 
side in the secondary market. I think the dealer side is still 
suffering. The TALF program, I think the challenges there were 
that you had to go through a primary dealer, and there were 
some issues about releasing your customers' names, and so that 
is an issue.
    The White House plan, I am not sure what the holdup is 
there. So whatever we need to do, we need to make sure that we 
continue to look at the secondary market and continue to push 
initiatives that will restore that market and restore the 
confidence, and that is really what it boils down to is the 
confidence in that market.
    Chairwoman Velazquez. But you feel that the way the program 
was structured it will unlock the secondary market?
    Ms. Blankenship. I think there is a ways to go yet. I think 
perhaps maybe a panel of bankers and broker-dealers could be 
brought in and maybe asked their opinion. Where is the freeze 
occurring? What is the holdup? Is it the paperwork? Is it the 
burden?
    And, you know, with the TALF funds, there were additional 
restrictions placed on banks and brokers. So that is an issue.
    Chairwoman Velazquez. Mr. McGannon.
    Mr. McGannon. I would certainly agree with Cynthia. As far 
as Country Club Bank goes, we have always held our SBA loans. I 
think that we just have never had reliance on the secondary 
market. If it is out of our control, I think that we feel like 
we need to try to take care of what we are funding.
    But Cynthia is right. If the secondary market does open up, 
it does give every bank an opportunity to re-leverage those 
dollars into more SBA lending.
    Chairwoman Velazquez. Thanks.
    Mr. Heacock, do you believe that the Small Business 
Administration is doing enough to encourage and train new 
lenders to participate in this program?
    Mr. Heacock. I cannot say I have an answer to that.
    Chairwoman Velazquez. That is troubling.
    Mr. Heacock. Well, whether they are doing enough because in 
our area we have had a great relationship with the district 
office, and we get all of the assistance we need as far as 
training. They have monthly teleconferences, and so we really 
do get adequate training.
    Nationwide I cannot speak to that, but locally, excellent.
    Chairwoman Velazquez. Thank you.
    Now I recognize the gentleman, Mr. Graves, Ranking Member.
    Mr. Graves. Thanks, Madam Chair.
    My first question is to Ms. Huels.
    Has the economy changed as far as your investment practices 
go? With the downturn in the economy, have you changed your 
policies or practices or backed off or anything like that?
    Ms. Huels. We have not. We invest primarily in midwest 
based industrial manufacturing companies, and while many may 
think manufacturing has declined in this country, we find there 
are significant opportunities to invest in growing middle 
market, lower middle market manufacturing companies.
    We have not changed our profile. If there is a profile that 
has changed, it is really the availability of senior lending 
available to us. So what we have done is we have had to write a 
little bit bigger check and provide more of the capital because 
the senior lenders are typically providing less.
    Mr. Graves. When you talk about middle range, what is that 
range?
    Ms. Huels. For us the middle market is a company with seven 
to $100 million in revenues, relatively small companies in 
comparison to some of the large multinationals we read about.
    Mr. Graves. And my next question is for the lenders out 
there, and we can start with Mr. McGannon, and it is the same 
question as far as your lending practices go in light of the 
economy. Have you all backed off? Have you increased?
    I mean, are you requiring more from investors?
    Mr. McGannon. We had a 12 percent increase in loan activity 
in 2008, and looking back at 2008 just briefly, we got off to a 
slow start, not unlike 2009 in terms of actual loan growth. We 
accelerated throughout the year, even through September into 
the end of the year of 2008, when obviously things started to 
cycle downward in the economy.
    In 2009, we have had just moderate growth year to date, but 
I can tell you that our pipeline is growing in terms of pending 
loan requests. There was more activity in April in terms of new 
loans booked than we had since last September. So am encouraged 
by that.
    Our loan requests are down. It is a quieter time. Without 
question I think there are a lot of borrowers that are 
reassessing whatever their business is. But having said that, 
we are gaining market share from other financial institutions 
in the Kansas City marketplace.
    Our underwriting, I get that question asked a lot. Our 
underwriting really has not changed. We feel like we have had a 
strong credit culture in our bank for many years. Certainly we 
are more concerned about collateral values, and so we may, in 
fact, when you think about underwriting, we may well, in fact, 
require more money down on a particular project if it is real 
estate related, as an example.
    But by and large, our underwriting remains unchanged.
    Mr. Graves. How about the credit unions, Mr. Heacock?
    Mr. Heacock. Thank you.
    We have not backed off at all. As I said before, we wrote 
more SBA loans than any other lender in South Dakota last year, 
and it is continuing this year.
    As far as non-SBA loans, we had a record year last year and 
it is continuing very, very strong. Credit unions nationwide, 
for the most part, have plenty of capital to lend, and we have 
had, I know, locally some financial institutions that are not 
willing to lend to some small businesses. Also, they are 
changing some terms and conditions. They are coming to us.
    Oftentimes we can help them. Sometimes we cannot, but we 
are there and available and have the funding.
    Mr. Graves. Ms. Blankenship.
    Ms. Blankenship. Yes. Actually our loans increased just 
over ten percent from 2007 to 2008 as well, but interestingly, 
our SBA loan percentages have been running about two to two and 
a half percent per year of our total portfolio. This year it is 
running 6.38. So we have really gotten behind a push to use the 
SBA program because what banks are facing right now is kind of 
a double-edged sworn. You hear Congress saying, ``Lend, lend, 
lend,'' but then the examiners are overreacting and they are 
coming in and we are getting stories of, you know, all 
commercial real estate being classified.
    So, you know, in my opinion, this is an opportune time to 
use the SBA program because you can mitigate some of that 
because you have that guaranty. Because the overwhelming 
majority of SBA loans will include typically, at least in our 
portfolio, some type of real estate as collateral.
    So we really need to mitigate the overreaction from the 
examining force. Again, I think it has been stated today there 
is an opportune time.
    The only other thing that I think would make the program 
more accessible in these times is perhaps raising the limits 
that we currently have on the size of 7(a) loans, and I think 
also on the 504s. So I think that would help a lot.
    Mr. Graves. Jean, how about the development side?
    Ms. Wojtowicz. Well, if you take a look at our national 
statistics, we saw record years in 2006 and 2007. Two thousand 
eight fell off significantly, and 2009 is off again, at least 
in our own portfolio in the national statistics as well.
    We cannot do a 504 loan unless we have a bank partner. I 
would say that when I look at my list of partners that are 
working with us on transactions, it does tend to be more of the 
community banks and fewer of the national lenders in that 
scope. The high point is starting to grow, but certainly not 
yet at a level to return us to where we were two years ago, and 
it is a significant concern.
    Chairwoman Velazquez. Mr. Moore.
    Mr. Moore. Thank you, Madam Chair.
    And I would like to welcome Mr. McGannon, who is from our 
area in the Kansas City area, and I appreciate all of the 
witnesses who are testifying today.
    The American Recovery and Reinvestment Act signed into law 
by President Obama in March included a number of provisions 
designed to increase small business lending through Small 
Business Administration programs. Specifically, the stimulus 
law increased to 90 percent the SBA guarantee on 7(a) loans, 
temporarily waived the guarantee fee on 7(a) loans, and 
provided incentives to restate the secondary market in which 
lenders sell portions of SBA loans to private brokers and 
investors.
    What effect has the Recovery Act had on your ability to 
make SBA-backed loans? And I would ask that question to any of 
the witnesses who care to answer.
    Ms. Blankenship.
    Ms. Blankenship. Yes. Well, as I stated just earlier, our 
percentage of our total loan portfolio has been running about 
two and a half and now it is almost six and a half. And so we 
have really utilized that program, and just as of yesterday we 
had the local SBA office out of the Dallas area come in and 
talk to 20 of our lenders about the enhanced programs both on 
the 504 and the 7(a) because we, again, feel like this is the 
time to really maximize the use of this program.
    Mr. Moore. Very good. Any other witnesses? Mr. Heacock, and 
Mr. McGannon, you will be next.
    Mr. Heacock. I know on a state level, the temporary 
elimination of fees has been very, very important. Apparently 
the volume declined quite a bit at the end of last year, last 
fall, but with the elimination of fees the volume has picked up 
considerably.
    Mr. Moore. Thank you.
    Mr. McGannon.
    Mr. McGannon. I would agree. I think that like any other 
product, it has to be competitive, and to eliminate the 
guarantee fee makes the product more competitive to other 
traditional bank financing vehicles.
    I would also say that the ARC program is very timely, and I 
think that it will serve a direct purpose. I can think of three 
or four borrowers in our bank right now that would certainly 
qualify and benefit from a program like that.
    Mr. Moore. Thank you, Mr. McGannon.
    Madam Chair, I had a second question on secondary markets, 
but you have already asked the question. So I will yield back 
my time and thank you very much to the witnesses.
    Chairwoman Velazquez. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Ms. Blankenship, you made a comment a minute ago and during 
your testimony with regards to the impact of regulatory 
authorities coming into the bank. Can you elaborate on that a 
little bit more?
    Ms. Blankenship. Certainly. What we have seen is just 
because of the past six months and the financial meltdown that 
we are all getting painted with the same brush, and while the 
big banks got bailed out and were given the TARP money, their 
primary intent for that was to lend money. But yet what we are 
hearing from small businesses is that they cannot get it.
    This is a double-edged sword because the banks are willing 
to lend. They have capital to lend. We have heard that here 
today, and that continues to be true the community banks, but 
the examiners are painting us all with one brush. They are 
painting the small banks the same way they do the two big to 
fail banks.
    And so when they come in and say, ``Okay. If you have got 
commercial real estate,'' and we have heard stories like this, 
``we are going to classify it across the board,'' well, even if 
you are using an SBA program for our reporting purposes, that 
has to be reported as commercial real estate, and if you have a 
regional office, regardless of what the mandate is from 
Washington, sometimes the examiners in the field do not always 
carry the same operating procedures and practices as we hear 
out of the head offices in Washington.
    So it can make banks hesitant to make those types of loans 
because at a time like this, we cannot afford for perhaps you 
are a well capitalized bank, and if you have certain 
classifications, your ratings go down and you fall into 
adequately capitalized. Then your FDIC assessment goes up, and 
all of our costs. There is a tremendous amount of cost being 
levied on the small banks right now.
    Mr. Luetkemeyer. You are a great witness. You answered the 
question perfectly. I do not have to do any more leading 
questions with you.
    Mr. McGannon. May I add something? I am sorry.
    Mr. Luetkemeyer. Yes. You are next, sir.
    Mr. McGannon. Okay.
    Mr. Luetkemeyer. Go ahead.
    Mr. McGannon. Cynthia obviously is right about the 
regulatory environment. Examinations have never been tougher, 
and I have found myself on many occasions really working hard 
to defend in front of regulators good customers of the bank, 
good borrowers, performing loans. You know, maybe there is a 
shortfall from a collateral standpoint, but again, that is a 
secondary source of repayment, the primary source of repayment 
being their business and their income that they are generating, 
how they are stepping up to support their businesses.
    And so it takes a few days to get over an examination and 
literally to get back into being upbeat about lending into your 
community. That is what we all want to do. That is what we are 
paid to do as a community bank. It is our duty to do that, but 
you almost have to really regroup after an examination.
    Mr. Luetkemeyer. It has been my experience in dealing with 
the banking community in my district and my state that there 
seems to be a disconnect from Washington and the local 
regulators. Is that what you are seeing?
    In other words, Washington says we have not changed our 
criteria. We have not changed our examination procedures or the 
way we look at stuff, and yet when you have the examiners come 
in, it is a whole different world with the way they come in, 
and they, again, paint you with a broad brush, as Ms. 
Blankenship said.
    Mr. McGannon. It is very true.
    Ms. Blankenship. That is correct.
    Mr. Luetkemeyer. One of the questions that I want to have 
for you two again, as well, with regards to the TARP funds, did 
either one of your two institutions take any of those?
    Mr. McGannon. No.
    Ms. Blankenship. I did not.
    Mr. Luetkemeyer. Okay. One of the questions that has been 
posed to me with regard to the TARP funds is initially they 
were supposed to be for the banks that were in trouble, for the 
institutions that were in trouble, and as I have seen the funds 
dispersed, it seems like it has gone to more and more 
institutions that are not in trouble.
    And in fact, I have found that some of the banks were asked 
to take the money so that they would go out and buy other banks 
rather than actually absorb weak assets.
    Have you seen or heard of instances like that or are you 
aware that we have an opportunity maybe to help a weak bank 
with the TARP funds that we have not taken advantage of?
    Ms. Blankenship. As I understand from Treasury Secretary 
Geithner was present at one of our meetings several weeks ago, 
and he indicated that there would be an initiative for some of 
the perhaps returned TARP funds to go to some of the banks that 
had applied and perhaps had missed the deadline or did not 
qualify the first time around.
    I think just from my experience I am hearing that a lot of 
smaller community banks have opted not necessarily to use that 
program because of the regulatory burden associated with it, 
and typically those banks are well capitalized.
    We did not use it. We would have considered possibly using 
it, and I think there are some opportunities for an additional 
program perhaps that would fund M&A activity of, say, a strong 
community bank to acquire a weak or a failing community bank 
with the assistance, but I do not know that under the current 
program a lot of banks would be willing to accept the terms 
associated with that.
    But I think you could take those TARP funds and perhaps 
look at another initiative if you wanted to look at the M&A.
    Mr. Luetkemeyer. Very good. Thank you.
    Thank you, Madam Chairman
    Chairwoman Velazquez. Ms. Bean.
    Ms. Bean. thank you, Madam Chairwoman, for holding the 
Committee and this hearing. It has been an important issue, 
access to affordable capital for our small businesses.
    I want to thank our witnesses today for echoing the 
importance of the small business to our economic recovery and 
the importance of access to capital.
    This week before I came out to Washington, I hosted in 
Illinois, which I represent with Senator Durbin a round table 
of small businesses who had been participating or were 
considering working with the SBA lending programs, and some had 
expressed past frustrations, but also like many of you today 
have expressed hopefulness about the new programs and some of 
the things that were done on the stimulus.
    And we really did it to help get the word out. I know one 
of the questions from one of my colleagues was is the SBA 
getting the word out. I know in Illinois they were very helpful 
in trying to let people become aware of some of the new 
resources that are available.
    And I know, Ms. Blankenship, you had been there with us at 
the press conference at the White House when the President had 
committed the $15 billion to try and get additional funding to 
get the secondary market moving, but I think that was following 
the AIG bonus fallout. So the press entirely did not cover it. 
So in an effort to let some of our community lenders and 
businesses know, we hosted a round table. It was very well 
received.
    The good news that I was hearing from them, and I just want 
to get your thoughts, was that they are seeing from where 
particularly in the secondary market it had been up at about 
325, 328 million per month, was the activity; so many of the 
community banks in our area were finding about roughly half of 
the SBA loans they would write they would then move quickly 
into the secondary market and, as you said, they could then 
recycle that capital back into new loans; that it dropped off 
after September with the credit crunch to a low point of only 
85 million.
    And so at a time when businesses needed even more access to 
capital, there was less available, but from what I have heard, 
and again, Ms. Blankenship mentioned it in your testimony, we 
have seen that now get closer to those levels back pre-
September in recent weeks, and so that is a hopeful thing.
    And I know they have also, in talking to Administrator 
Mills at the SBA, they have really worked to address some of 
the issues to get the 15 billion moving, and they are just 
getting training going on that.
    I just wanted to see if you had any further thoughts about 
the ARC programs, which will be loans and increments of 35,000 
that should start rolling out June 15th, to help. It is 
something that the Chairwoman and many of us on the Committee 
have long advocated for, is to allow businesses who have been 
longstanding, ongoing. profitable entities, sometimes 
businesses that have been around for generations, who have seen 
their credit lines dry up, either taken away or reduced 
significantly even without a late payment, and so in response 
to that they have had to find other higher cost avenues of 
credit.
    This is going to allow them to restructure that debt, get 
zero interest loans, and increments of 35,000. What are your 
thoughts about that? Obviously there is limited funding. It is 
tied to the stimulus at this time.
    And the other question I have is some of the programs that 
we have seen that are core within the SBA lending program are 
very targeted to new businesses or smaller entities who have 
less of a direct impact on the job growth in some of our middle 
market types of companies. Is there more that we can be doing 
there, to whomever wants to take this?
    Ms. Blankenship. Well, I will start. Regarding the ARC loan 
program, you know, I think it is a great program to help some 
of those distressed small business customers, but one thing 
that we have to consider as banks, I think it was the OIG's 
office had an estimated default rate on those loans of 70 
percent. So I think you are going to find some hesitancy on the 
part of banks to make a loan that has an estimated default rate 
of 70 percent because, again, when we are in this crushing 
regulatory environment, the last thing we need are more loans 
to be classified.
    The second thing is it says that there is still no 
definition for the term ``viable.'' It has to be a ``viable'' 
loan. So I think bankers just need some clarification there so 
they have some confidence when they make that loan that the SBA 
guaranty will stand behind the terms of that.
    But outside of that I think it is a terrific program. I 
think we really just need to hold its hand and walk through it 
and make sure it is working the way it was intended.
    Mr. McGannon. I would say on the ARC program specifically I 
think it is very important that the bank that has been the 
lender to that business also be the lender on the ARC loan. I 
do not think it is a good idea for that same borrower to go to 
another bank to get that loan.
    And the reason why I say that is when we first heard about 
this program at our bank a month or so back, I had three 
different lenders come to me and say, ``I think I have a 
borrower that would benefit from this program,'' and when we 
talked about each one of them, you could clearly see that they 
were existing customers of the bank, obviously, had been with 
us for a year or two or more, had proven themselves in terms of 
being resourceful, resilient borrowers, and that they had a 
clear temporary need to get through a cash cycle.
    And so, again, the banker that knows the borrower and 
understands their business is the most appropriate banker to 
make that loan.
    As far as the overall 7(a) program, I think it is critical 
to, if we can, extend the waiving of the guaranty fee to make 
that program competitive with other traditional bank financing 
vehicles. If that could be done, I think that there would be 
more and accelerated momentum for 7(a) loans to get back to 
where they once were and beyond.
    The other part of this though I think is the outreach to 
smaller, maybe rural banks that just do not know enough about 
the SBA programs, are not confident enough in the SBA programs, 
not knowledgeable enough to implement and actually make some of 
these loans.
    Chairwoman Velazquez. Time has expired.
    Mr. Coffman.
    Ms. Bean. Thank you.
    Mr. Coffman. Thank you, Madam Chairman.
    Mr. McGannon and Ms. Blankenship, I get complaints from my 
local bankers and from my small businesses, but particularly 
from my local bankers who say that, on one hand, the federal 
government wants them to lend and, on the other hand, I think 
just the regulatory scheme is such that it is kind of the zero 
defects, that you know, they had a 20 percent increase, I 
think, in their capital reserve requirements, if I am using the 
proper term, ten to 12 percent, and that has caused them to 
pull back on their lending.
    I mean, have we gone too far on the regulatory side where 
we are not allowing bankers to exercise their own judgment in 
terms of the ability of the borrower to repay the loan? Could 
you address that issue?
    Ms. Blankenship, we will start with you.
    Ms. Blankenship. Certainly. Again, we cannot be painted 
with the same brush, and you know, yes, has the regulatory gone 
too far right now? Yes, it has because you find banks are 
hesitant to lend because of the increasing costs that I talked 
about. The FDIC, we are additionally being asked to put more 
money in loan loss reserve. So that takes the money out of 
loans, money available that could be leveraged back into loans.
    So all of those are challenges right now. To make this 
program more effective, we have to continue, as I said, to look 
at the initiatives and what is working and get back to less 
paperwork and involving more banks in this program.
    Additionally, you know, if we could get some Subchapter S 
reform, you would find that a lot of small businesses could 
raise their own capital. Right now they are restricted to one 
type of stock. If they could be allowed to issue preferred 
stock and increase their shareholders.
    So I think there are many ways that we could approach this, 
but again, to really answer your question, the regulatory 
environment, until we can get some equity there and know that 
the way you supervise a too big to fail bank is not the way you 
supervise a small business bank, which is what we are.
    Mr. Coffman. Okay.
    Mr. McGannon. We realize the regulators are under a lot of 
pressure, and I will say that our examinations are more 
difficult, but I continue to think that they are fair. We spend 
more time discussing our borrowers, as I mentioned earlier. 
Even though they are performing well, they are going through 
several more layers, I think, in our portfolio, and again, I 
can only speak to our bank, but they are fair. They just want 
to learn as much as they can about what our borrowers are doing 
and how they are performing.
    And, again, I certainly understand that.
    Mr. Coffman. Would anyone else like to comment on that? 
Yes.
    Mr. Heacock. I would just like to say from a credit union 
perspective, we have been heavily regulated for many years on 
business loans, a tremendous amount of regulation, but having 
said that, so far our examinations have been fair. I have heard 
from other colleagues that maybe there is not that kind of 
consistency. In other areas of the country the examinations are 
very difficult, and it is maybe kind of anti-business lending 
philosophy on the part of the examiner.
    Mr. Coffman. Would anybody comment on the fact that I often 
hear that the other shoe is going to drop and it is the 
exposure to commercial real estate, and what will that do to 
lending? Is that going to further tighten it up?
    What is your prognosis of the future here?
    Mr. McGannon. We are concerned about commercial real 
estate, but I think just to make the distinction, commercial 
real estate covers a lot of different types of property. When 
we think about commercial real estate in terms of owner 
occupied commercial real estate where a business owner owns his 
or her building, we continue to have confidence because it all 
hinges on how his or her business is doing, how are they 
performing. So the collateral truly is secondary in nature.
    The commercial real estate in terms of hotels and multi-
family and those types of things, you know, we are concerned 
about where cap rates are going, where appraised values are 
currently, and certainly there is a watchful eye toward that 
part of the market.
    Mr. Coffman. Thank you very much.
    Chairwoman Velazquez. Okay. I would like to ask Ms. Huels 
another question.
    You made reference to the need for improving licensing 
functions and particularly for SBICs that have successfully 
operated funds that are simply seeking a license renewal. What 
changes would you tell us should be made to the licensing 
process to encourage the creation of new SBICs?
    Ms. Huels. Successful SBIC fund managers that are coming 
back for a second, third, or fourth license, there is no 
additional risk. If they are an SBIC in good standing, they 
have been examined; they have had no findings; and their 
management team is remaining the same or most of the management 
team is remaining the same, you know, with a background check 
because hopefully nothing has changed there, but I think a 
background check would be something prudent and the fund 
manager showing that they can raise additional private capital 
or new private capital, that fund ought to be formed and 
receive a license very quickly.
    These are fund managers that are known to the SBA. They are 
in good standing and should receive a license quickly. We had 
an example of a second or a third fund licensee that took 17 
months to receive a second or third license. It was just far 
too long of a process.
    Chairwoman Velazquez. For the creation of new SBICs?
    Ms. Huels. Creation of new SBICs should happen in a three 
to six-month time frame. I think we would prefer four months. 
The process is at this point too long. It can take longer than 
a year to receive a first time license, a process that is a 
little bit cumbersome, a lot of paper work and somewhat 
subjective.
    Chairwoman Velazquez. Thank you.
    Mr. Heacock, if a credit union has never made a 7(a) or 504 
loan before, what resources does it need to become familiar 
with SBA's financing programs?
    Mr. Heacock. That would be a pretty steep learning curve if 
you have never done one. Yes, you would need to work with your 
local office, if you have got a local representative, and of 
course with the state office, the district office to learn as 
much as possible because there are a lot of procedural steps 
that you need to take and you need to follow. If you do not 
follow those correctly, you can lose your guarantee.
    Chairwoman Velazquez. Mr. McGannon.
    Mr. McGannon. Outreach is very important. I think that 
education is very important in all of these programs, and it is 
certainly lacking, and I do not know at what level we need to 
start, but we are fortunate to have someone in our office who 
has been an SBA lender for probably 15 years and just knows the 
ins and outs of the program very well. So when we have another 
lender even in our bank that is looking at an SBA loan, we make 
sure that she is on the front end of it and understands it and 
can make sure it is documented properly.
    So there is definitely a learning curve involved here.
    Chairwoman Velazquez. Thank you.
    Okay. Mr. Graves, do you have any other questions?
    Well, let me take this opportunity again to thank all of 
you for being here today, and you are dismissed or excused.
    Thank you.
    I would ask the members of the second panel to please come 
forward.
    We are going to proceed with our second panel. Let me 
welcome our first witness, Mr. Douglas Doerfler. He is the 
President and CEO of MaxCyte, Inc., Gaithersburg, Maryland. 
MaxCyte is s research and development company that concentrates 
on self-modification. He is testifying on behalf of the 
Biotechnology Industry Organization founded in 1993. Bio 
provides advocacy and services for more than 1,200 members 
worldwide.
    Welcome. You will have five minutes to make your 
presentation.

                STATEMENT OF DOUGLAS A. DOERFLER

    Mr. Doerfler. Thank you, and good afternoon, Madam Chair 
Velazquez, Ranking Member Graves, members of the Committee.
    Thank you for the opportunity to testify in front of this 
Committee during a very, very difficult, time for the research 
and development based companies that I represent.
    As mentioned, I am Doug Doerfler. I am founding CEO of 
MaxCyte in Gaithersburg, Maryland. We are a research and 
development company developing technologies to modify cells, 
make cells into drugs to treat diseases like pulmonary arterial 
hypertension, leukemia and brain cancer. We have products in 
clinical trials today.
    We have about 20 people in the company. So we are clearly a 
small business.
    I am also associated with Bio and on the board of 
directors, and of the 1,200 companies that are members of Bio, 
more than 90 percent are considered small companies. So the 
biotechnology industry is an industry with small companies.
    We are small, and what is important about this is our 
inability to raise necessary capital to maintain the research 
and development programs that we have as companies at Bio.
    A little bit about the industry. We employ directly about 
1.3 million jobs in the U.S., and indirectly over seven million 
jobs, and these are particularly high paying jobs with the 
average employee making two-thirds more than the average 
private sector job.
    According to the latest data, one-eighth of the U.S. 
biotechnology companies that were active in 2008 are either 
bankrupt today, they have winded down or become acquired. And 
since January of 2008, over 125 biotech companies have laid off 
over 10,000 scientists and employees. In doing so, they have 
dropped many important programs. These are clinical programs 
that we have data on involved in therapies for HIV, cervical 
cancer, multiple sclerosis, and diabetes.
    Forty percent of the U.S. biotech companies have less than 
one year's worth of cash, and about a quarter have less than 
six months' worth of cash. And the total amount of capital that 
we raised sine 2008 has fallen 55 percent from 2008 to 2009.
    We commissioned a study with biotech investors, and over 80 
percent of investors in the biotech area have significantly 
altered their ways of investing. They now are no longer 
investing in high risk, high reward companies like those found 
in the biotech industry.
    What is also disturbing is investments by angel investors 
in the life sciences industry has all but disappeared. There 
are just no angels out there to help support some of the 
earlier stage companies.
    So there is little oxygen in this industry to survive, and 
once these companies fold up or we stop clinical programs, it 
is virtually impossible to revive these. So once we stop a 
program for a particular therapy, it is very difficult to get 
them back on their feet.
    So the decline of the biotech industry jeopardizes not only 
the patient population but also our competitive edge in the 
21st century global economy. Biotech is one of the few 
industries in the world that the United States is the 
predominant force in. This is for developing therapies. It is 
for developing alternative fuels and for developing alternative 
food sources.
    So the question: how can SBA provide assistance to early 
stage, high risk, high reward small businesses like mine? This 
is a biotech focused discussion, at least from my perspective, 
but I have colleagues in the alternative fuels area and in the 
information and technology industries and they share some of 
the same concerns that I do.
    First, the SBIR program has traditionally been enormously 
helpful to small biotech companies, and after the 2003 ruling 
which has prevented many of our small companies from 
participating due to their capital structure, there was a 
recent report issued by the National Research Council that 
stated that some of the most promising small companies, small, 
innovative companies were excluded from this program.
    Until this is addressed and small U.S. biotechnology 
businesses are allowed to compete based on science and the 
potential to benefit public health and not on how many 
investors we have or how many minority investors we have, this 
program will not achieve its maximum impact, which is helping 
high risk, high reward companies to succeed.
    Access to many of the SBA programs we heard about in the 
earlier panel that could help small, high risk, high reward 
technology businesses are unfortunately limited. Most of our 
companies, most biotech companies, do not have any revenue 
resources, and it usually takes about ten years for us to 
actually begin to bring in revenues.
    So it is impossible for us to take advantage of the SBA 
premier programs such as Preferred Lender or the guaranty loan 
programs.
    The SBIC programs also tend to focus on companies with 
revenue streams that are beyond the start-up phase. These 
companies are typically lower risk and lower gain companies, 
and Bio would like to work closely with the Committee and SBA 
to determine if there are ways in which this program can be 
improved to stimulate more investment in high risk, high reward 
industries like Biotech.
    In order to develop programs to promote our innovative high 
growth sector, we need to talk about the business model for 
just a minute, and there are really four elements of this. One 
is there is a lengthy amount of time, lengthy time horizon 
associated with product development. That is number one.
    Chairwoman Velazquez. Mr. Doerfler, your time expired, and 
I will allow for you in 30 seconds to provide us with a 
closing. But you know, during the question and answer period 
you will have time to expand on any point that you have not 
mentioned.
    Mr. Doerfler. Okay. Thank you.
    Our long time horizons; our collateral is not assets as 
intellectual property; and revenues are not significant for 
about ten years.
    So what we are here to do is examine these potential 
opportunities with SBA and work closely with you to figure out 
ways for us to help in developing new fundings sources for our 
companies.
    Sorry.
    [The prepared statement of Mr. Doerfler is included in the 
appendix.]

    Chairwoman Velazquez. Thank you.
    Our next witness is Mr. Lawrence Cohen. Mr. Cohen is the 
President of DOC & Associates in Tomball, Texas. His firm is a 
franchisee of the Great American Cookie Company and Pretzel 
Tying.
    Mr. Cohen is testifying on behalf of the International 
Franchise Association.
    Welcome.

              STATEMENT OF LAWRENCE ``DOC'' COHEN

    Mr. Cohen. Good afternoon, Chairwoman Velazquez, Ranking 
Member Graves, and members of the Committee. My name is Doc 
Cohen, and I am grateful to have the opportunity to speak to 
you about the credit crunch and the strong measures that are 
needed to promote capital access for small business.
    I will try to make three key points today. The first is 
fairly obvious. Credit is essential for small business.
    The second, this is not a typical recession, and many more 
small businesses need the capital access programs of the SBA in 
order to obtain financing. I think policy makers should be 
willing to consider even temporarily further changes to the SBA 
programs, including sizable increases in the dollar amounts for 
the SBA 7(a) loan program, guarantees to accommodate the needs 
of small business.
    And third, a compelling case exists that franchise 
businesses offer the best opportunity to promote job growth in 
a strong, sustainable recovery.
    As you said, I am a franchisee at the Great American Cookie 
Company, and I am here on behalf of the International Franchise 
Association. According to a 2008 study conducted for the IFA 
educational foundation, there are more than 900,000 franchise 
businesses in the U.S. creating 21 million American jobs and 
generating 2.3 trillion in economic output.
    I am proud to represent franchising. The business methods, 
training and support that I have received as a franchisee have 
been one of the keys to my success. From my first Great 
American Cookie Company store in Lafayette, Louisiana 30 years 
ago, I now operate 30 stores in the Houston, Texas area, and we 
employ almost 300 people.
    I was very fortunate that when I began my career in 
franchising there was a functioning credit market, including 
the SBA programs. Availability of credit helped me succeed in 
franchising. Today's small business entrepreneurs, however, are 
not quite so lucky. Under normal circumstances small businesses 
tap financing from a number of different sources, including the 
SBA programs, but during this recession, lenders have 
dramatically curbed their willingness to assume risk.
    Some credit might be available, but the terms and delays 
that entrepreneurs are encountering can be staggering. This 
leaves the SBA as virtually the only girl at the dance, 
sometimes not the best looking girl.
    Last year I had the opportunity to add eight new locations. 
I had previously acquired a reducing line of credit from my 
lender of ten years, but it appeared that I would need 
additional funds in order to complete my expansion. The answer 
I was given by my bank was not quite no, but the terms being 
offered in late 2008 had become all too restrictive. I could 
borrow an additional $500,000 more only if I agreed to keep a 
million dollars in liquid assets with the lender. In other 
words, they would lend me my own money, but only half of it.
    [Laughter.]
    Mr. Cohen. My track record in business and my healthy 
balance sheet were not enough anymore. So I actually chose to 
forego the additional borrowing and finance the two new stores 
or the last two stores using cash generated from operations.
    The eight stores that I eventually opened required a 
capital investment of $1.8 million and created 74 new direct 
jobs, but I will likely delay opening additional stores until 
the restrictions on credit are eased.
    Lack of credit is keeping entrepreneurs on the sidelines 
and delaying our recovery, and the problem is even looking 
worse for those looking to get into business for the first 
time.
    The findings of a recently released study, The Small 
Business Lending Matrix and analysis prepared for the IFA 
Educational Foundation, support the notion that an economic 
recovery and job creation will start with small business 
lending. In fact, the study determined that for every million 
dollars in new small business lending, the franchise business 
sector would create 34.1 jobs and generate $3.6 million in 
economic output.
    Now, I would like to ask that this entire report be 
included with my statement if the Committee would approve 
that.[Study submitted by Mr. Cohen is included in the 
appendix.]
    Chairwoman Velazquez. Without objection.
    Mr. Cohen. Franchise businesses are poised to help lead the 
economy on the path to recovery. Studies show that the 
franchise industry consistently out performs the non-franchise 
business sector creating more jobs and economic activity in 
local communities across the country. A 2008 IFA report, for 
example, documents that franchising grew at a faster pace than 
many other sectors of the economy from 2001 to 2005. Franchise 
business output over this period increased 40 percent compared 
to 26 percent for all businesses.
    The message is clear, Madam Chairwoman, provide small 
business entrepreneurs and franchisees with access to capital 
and we will create jobs. We are not looking for a bailout. What 
we need is functioning credit markets. If the commercial 
markets cannot function, Congress needs to figure out a way to 
use the SBA as a temporary alternative.
    There are several steps that Congress could consider to 
make it easier for entrepreneurs to access capital, and I have 
detailed these recommendations in my prepared statements.
    I have one final note. Unbelievably, the SBA has actually 
created new roadblocks for small businesses during this 
recession. In March it shifted policy on goodwill financing of 
transfers and acquisitions and placed a cap on the amount that 
can be financed under the guaranteed loan program. Since the 
true value of most businesses is tied to the cash flow rather 
than the value of the assets on the books, the policy has 
placed an arbitrary limit on the valuation of some businesses.
    Finally, I would like to suggest the best solution for the 
struggles facing small business is more lending, not more 
government spending. As shown in my experience in the hundreds 
of thousands of small franchise businesses in every local 
community, lending leads to more sustainable renewable job 
growth and economic recovery.
    Thank you for the opportunity to participate in today's 
important hearing on small business capital. I think you will 
agree with the franchise business community can play a vital 
role in this recovery.
    [The prepared statement of Mr. Cohen is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. Cohen.
    Our next witness is Mr. Tim Watters. He is the President 
and CEO of Hoffman Equipment is Piscataway, New Jersey. Hoffman 
Equipment is a full service authorized dealer of heavy lifting 
and construction equipment.
    Mr. Watters is testifying on behalf of Associated Equipment 
Distributors. AED has 700 distributor member companies and 
accounts for over $50 billion of annual sales.
    Welcome.

                    STATEMENT OF TIM WATTERS

    Mr. Watters. Good afternoon, Chairman Velazquez, Ranking 
Member Graves, and other distinguished members of the panel.
    We are a family owned business headquartered in Piscataway, 
New Jersey. We sell, rent and service construction equipment. 
We represent about ten different manufacturers, including Case, 
Terex, Grove, Manitowoc and Doosan. We employ about 75 people 
from five locations in New York and New Jersey.
    And just as an aside, Madam Chairwoman, our service 
territory includes the 12th Congressional District of New York.
    We also have an export department, and about 20 percent of 
our volume is export related of U.S. equipment and parts.
    As you mentioned, I serve on the AED board. AED is a 
national association of authorized independent distributors for 
construction, mining, forestry, and agricultural equipment, and 
the vast majority of AED's members are small, locally owned 
family businesses such as mine.
    There are three ways the current credit crisis is hurting 
our industry. First is that as a distributor, my own cost of 
borrowing is increasing and in some cases credit may even be 
unavailable. Access to capital is critical to our industry. 
Distributors such as myself borrow money to finance equipment 
in our inventories and rental fleets and to operate our 
companies on a day-to-day basis. We generally utilize large 
banks and finance companies as sources for this lending.
    Continued access to credit from sources such as these is 
absolutely necessary for our industry to exist, and the current 
crisis has made it difficult, increasingly difficult for 
dealers such as myself to find this capital.
    The second way the crisis has hurt our industry is that our 
customers and the developers they work for cannot find 
financing for their jobs. You are all well aware of the current 
condition of the residential construction market. Essentially 
it is dead, and the commercial construction is slowing as well. 
Since developers cannot finance their projects, our customers 
have no work and so need no machinery, and we therefore have no 
business.
    The lack of credit creates a chain of events, painful 
events, I might add, that ultimately lead to decreased business 
and employment throughout our entire industry.
    The third way the credit crisis has impacted our industry 
is that we are unable to finance our customer's retail 
transactions. Contractors themselves rely heavily on credit 
when purchasing equipment. The most common sources of credit 
here again are finance companies and banks. These banks and 
finance companies have made access to their credit resources 
unavailable or, in the rare case when they are willing to 
finance a transaction, exceedingly expensive.
    So the net result is if we as a distributor are lucky 
enough to find a customer that has work and is actually willing 
to purchase a new machine, we then have difficult to finding 
him financing to make that transaction possible.
    In April, AED conducted a member survey to clarify what 
impact the credit crisis was having on our industry. The 
findings paint an ugly picture. Eighty-one percent of our 
respondents reported they had lost sales in the last year 
because qualified purchasers had been unable to get financing. 
Fifty-six percent of distributors reported increase in their 
own credit costs, and 44 percent of respondents said their 
companies had difficulty security credit.
    The findings illustrate that the lack of access to capital 
is undermining equipment markets and increasing the cost of 
doing business for equipment distributors. The impact of all of 
this on our markets has been staggering. In some regions of the 
country the market for new equipment sales has fallen by as 
much as 85 percent from peak levels in 2006.
    Our own company has experienced sales this year less than 
50 percent of what we sold just last year. We have responded to 
this drop in business volume with layoffs and cutbacks of every 
type we can make, and we are still hanging on just hoping to 
survive this mess.
    Having said all of this, I think there are some things that 
Congress and the executive branch can do to help ease our pain. 
First, Congress should put new multi-year authorization laws in 
place for federal highway, sewer and drinking water 
infrastructure programs and dramatically increase investment in 
these areas. We need to create infrastructure construction 
activity. Investing in our infrastructure speeds economic 
recovery, will help address the staggering 19 percent 
unemployment rate in construction workers and restore lending 
confidence in our industry.
    This will also create demand for the thousands of products 
that are consumed on a typical construction project, including 
equipment sold by firms such as mine.
    Second, the SBA should be directed to work with finance 
companies and banks serving our industry to develop loan 
products that meet our unique needs. SBA should also reexamine 
its size standards to determine whether they are preventing 
companies that otherwise fit the definition of small business 
from benefitting from SBA programs.
    Once construction is reached and programs are in place, SBA 
should be encouraged to undertake aggressive outreach to 
lenders, contractors and distributors.
    And finally, and I will go quick, Congress and the 
executive branch should continue to work to improve access to 
capital for the finest companies that serve all American 
industry because in spite of what the banks were saying 
earlier, which they are continuing to lend at previous rates, 
that is not what we are seeing from the business side of 
things.
    Thank you.
    [The prepared statement of Mr. Watters is included in the 
appendix.]

    Chairwoman Velazquez. Thank you.
    And our next witness is Mr. Dave Bofill. Mr. Bofill is the 
President of Dave Bofill Marine in Long Island, New York. His 
firm is the nation's second largest and third largest seller of 
Scout and Cris Craft boats, respectively.
    Mr. Bofill is testifying on behalf of National Marine 
Manufacturers Association, which represents 1,400 companies 
that produce an estimated 80 percent of marine products used in 
North America.
    Welcome.

                    STATEMENT OF DAVE BOFILL

    Mr. Bofill. Thank you.
    Good afternoon, Madam chairwoman, Ranking Member Graves, 
and distinguished members of this Committee. Thank you for 
inviting me to testify today on the important topic of 
expanding affordable wholesale marine floor plan financing 
access to marine dealerships.
    My name is David Bofill, and I am President and owner of 
Dave Bofill Marine. I come to you wearing three hats, one of my 
company, one of the National Marine Manufacturers Association, 
and one of being on the board of directors for the New York 
Marine Trade Association for the last eight years.
    I sell Cris Craft and Scout boats from my two Long Island 
locations. I have been in the boating industry for 35 years, 
and my operation at its peak employed 20 people. I am a small 
business and, in fact, the majority of the boating industry is 
made up of small businesses and most boats are might right here 
in the United States. The brands I carry, Cris Craft and Scout 
boats, are made in Florida, North Carolina, and South Carolina.
    Unfortunately, my story is being played out in both 
dealerships and manufacturing plants across the country. I have 
had a thriving business for over 35 years, but this credit 
crisis will force me to close my doors.
    What frustrates me the most is that most of us in the 
boating industry are used to riding the ups and downs of the 
economy, but this downturn is different. Today I am dealing 
with a reluctant consumer, but more so the sudden loss of 
wholesale credit at anything close to reasonable rates to 
finance my inventory. Over the last year, the floor plan 
lenders to the boating industry, including Key Bank, Textron 
Financial, Wachovia, and several others, have abruptly stopped 
lending in the boating industry.
    Some of these banks, as you know, received federal 
assistance under the TARP program, but severed their ongoing 
business relationships with the marine dealers anyway. Today, 
General Electric Capital has become the dominant lender with 
over 70 percent of the market. However, G.E. recently has 
informed all of us that they are radically changing loan terms 
resulting in doubling of interest payments and, in my case, my 
interest will go from 10,000 to $20,000 per month.
    Lenders overall have scaled back lending, dramatically 
increased their rates, cracked down on curtailments and are not 
issuing loans or extending current lines of credit to enable 
marine dealers to finance any new inventory. The inability of 
dealers to finance current inventory or purchase new model 
inventory to display means that manufacturers now have shut 
down production by at least 60 percent.
    With hundreds of dealerships being forced out of business 
as mine, 20,000 manufacturing jobs vanishing and 135,000 
boating industry jobs that are now gone, something must be 
done. It is important that you know that these businesses like 
mine were not failing businesses or companies with flawed 
business models. We relied in good faith on lenders for typical 
business credit, and when the financial markets collapsed, we 
had nowhere to turn.
    What we need to survive is access to credit at reasonable 
terms. What Congress could do to help many small businesses in 
the boating industry is to facilitate the creation of new 
credit market. Both dealers and manufacturers need to help in 
encouraging regional banks to create or reestablish floor plan 
lending departments.
    The industry strongly supports the Small Business 
Administration's plan to establish a floor plan lending program 
for boats, motors and trailers. The industry has welcomed this 
program as a critical lifeline, but problems still remain. This 
Committee and Congress could help in three specific ways.
    One, make the SBA dealer floor plan financing program 
permanent and do it quickly. As written now, this program only 
lasts one year. It will be hard to attract new lenders without 
the important certainty of this program.
    Two, make the increased business size limits permanent. 
This is an important change that reflects the marketplace. The 
traditional standard for marine dealers is far too low to 
include dealers who sell high cost products but do so with such 
a small staff.
    Three, increase the cap on SBA 7(a) loans. The current 
limits are too low to provide financing for the majority of 
small dealers and manufacturers. It is common for a small boat 
dealer to have inventory in the $5 million range.
    Thank you for inviting me to testify today. The marine 
industry is suffering. It is an American industry of 
manufacturing and servicing that deserves support. The lack of 
reasonable credit is likely going to lead me to close my doors 
soon, and it will cause other dealers to shut down as well.
    Thank you, and I am happy to answer any questions.
    [The prepared statement of Mr. Bofill is included in the 
appendix.]

    Chairwoman Velazquez. Thank you, Mr. Bofill.
    I just would like to address my first question to all the 
members of the panel. You were sitting there and you were 
listening to the previous witnesses, basically those 
representing financial services, banks and the credit unions, 
and what they are saying is that they have money to lend, and 
that by some metrics have actually increased their loans.
    And what I hear from you today, from this panel, is that 
that is not the experience that you have had. My question is do 
you think that the SBA should play a more direct role in small 
business lending either by refinancing non-SBA loans or making 
direct loans that could be sold to lenders?
    Any of the members of the panel, for any of the witnesses. 
Yes, Mr. Watters.
    Mr. Watters. For sure, the environment we witness is 
different than that which was described by the preceding panel. 
There is definitely a lack of financing available for my 
industry, for construction, every link of the chain of the 
construction cycle, from the contractor right down to we, the 
equipment distributor, and I would just say yes, 
wholeheartedly. If the SBA involvement as you just described 
can increase financing and credit availability to our industry, 
absolutely that would be a great thing.
    Chairwoman Velazquez. Mr. Bofill.
    Mr. Bofill. I agree with Mr. Watters that in my industry 
credit has shut down completely. It is very, very difficult not 
only to wholesale finance a boat, but the retail financing as 
well.
    In fact, between us when we were listening to statistics, 
it is like, boy, I will tell you what. That is not in my 
neighborhood, and it is not in anybody's neighborhood. So if 
there is anything that SBA can do to assist in any format, be 
it wholesale financing or retail financing, it certainly will 
be welcome because that is better than what we have now because 
what we have right now is almost nothing.
    Chairwoman Velazquez. Let me address this next question to 
Mr. Doerfler. A common failing in government investment 
programs is a tendency to focus on unrealistic metrics to 
determine a program's success. How should success in an 
investment program geared toward small, high growth companies 
be measured?
    Mr. Doerfler. Well, that is a great question. I mean, first 
off, this is a long-term bet, if you will. It is a long-term 
investment, and as I mentioned before, it takes about ten years 
for us to get to revenues and beyond that to really return what 
our investors expect from us.
    So you are not going to see any finance return in the short 
term. But there are some metrics, and I think they are industry 
specific. Certainly the creation of new jobs, the creation of 
payroll taxes, the ability to spend money and have indirect 
benefits to the economy.
    In my particular sector, it is the ability to use that 
investment as a catalyst for additional investment, which is 
very, very important. We are looking at issues, certain things 
like issue patents, clinical trials that have been started. All 
those things, I think, are industry specific. So I think that 
there are a lot of ways that we can identify these.
    Certainly in my State of Maryland, we spend a lot of time 
doing just that because we want to make sure that these funds 
are being used and they are being used properly and they are 
returning something to those who are providing those.
    Chairwoman Velazquez. Mr. Cohen, in the current recession, 
businesses of all sizes have been squeezed by the contraction 
in credit. We hear that. You witness it, and many companies 
that previously did not have access to SBA financing have shown 
interest in these programs.
    What steps should be taken to insure that these programs 
remain focused on the small businesses that they are originally 
intended to serve?
    Mr. Cohen. That is also a great question. All of your 
questions are great questions. I am not an economist, but my 
sense is that so much of the money that is being pumped into 
the economy is going into the mortgage sector and into the real 
estate sector and not that much is going into the small 
business sector.
    It seems to me that we need to find a way to dedicate a 
certain pool of funds to small businesses, especially small 
business start-ups and expansions of small businesses.
    And if I might tag onto the question you asked about how 
you measure the success rate, in the franchise businesses, we 
have lots of historical data and proof that the franchising 
model works, and so when considering a start-up franchise, we 
do have evidence to show that a particular model will work, a 
particular concept will work. And I think we should rely on 
those statistics when we are looking at making those loans and 
not so much on a sector which is sometimes done. I think the 
SBA rates sectors and says, ``Well, this sector is not as 
successful as others.''
    But I think if we pull out and say, ``Well, gee, when that 
sector is franchised, it is far more successful.''
    Chairwoman Velazquez. Thank you.
    I have my last question to Mr. Doerfler. Much of the 
success of the SBIC debenture programs has come from the fact 
that losses in the program are low. If a new investment program 
were to focus on early stage and high growth companies, how can 
we manage the risk of losses and provide some assurance that 
government leverage will be repaid?
    Mr. Doerfler. So the debenture program is a loan program, 
and it is my understanding we are not part of that because I 
think it is toward revenue producing companies or companies 
that are relatively low risk.
    If you are looking at something like the participating 
security program, the old SBIC program and trying to figure out 
something new to do with that, it is defunct now. We think that 
it could be very, very important. But I recommend, we recommend 
that we align ourselves with the really talented investors.
    There is a group of investors out there that really know 
our sector extraordinarily well. They have been through many 
cycles. They are very experienced, and aligning ourselves, 
aligning SBA funds with those investors, either as limited 
partners or as grant mechanisms so that the companies that 
receive investments from these qualified investors can get 
grants from the government, and those grants can be paid back 
by royalties; they can be paid back by if the company is 
acquired or an IPO.
    So there is certainly a number of ways to that, but, again, 
I think aligning it with smart investors who really do know the 
sector.
    Chairwoman Velazquez. Okay. Thank you.
    Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Madam Chair.
    Mr. Bofill, you had a lot of great examples of things that 
you felt we could do, improvements in the SBA program. Do you 
have any other ideas for what is existing in the program now? 
Do you have any ideas or suggestions of things we could add to 
it that would be important or could make it more beneficial?
    Mr. Bofill. The goal for me being here today was to back 
the decision of the SBA to get into marine floor planning. The 
way it stands right now as it is written is that it is only 
good for one year. So we need to expand that to permanency.
    And the whole goal of the SBA backed loans or guaranteed 
loans is to attract banks, regional banks into the floor plan 
business, and that will only be done with permanency and with 
more dollars without the $2 million cap that is on there 
presently. And that will benefit both the banking industry as 
well as the dealerships.
    Mr. Luetkemeyer. Okay. Mr. Watters.
    Mr. Watters. I guess I am not really sure of the exact 
process the SBA could do to solve the problem. I think part of 
the problem is that there is a pendulum, and we have had an era 
of loose credit, and now we are in this new era of tight 
credit, and I think the pendulum has swung way too far. It is 
overly tight, constricting all of these markets.
    So I guess I would love to see a way that the SBA could 
entice banks to try and push the pendulum back a little more 
center. There are good quality credit, quality companies that 
are being denied credit or being forced to pay too much money 
for their interest rates. Is there a way that SBA could create 
a program that would encourage banks to be a little more 
realistic?
    You know, that was also mentioned in the preceding panel, 
how the regulators who are going to be coming out and creating 
this environment, the culture of the banks to be very, very 
concerned and afraid about everything they are doing.
    So some type of program that would encourage banks to 
become a little more reasonable.
    Mr. Luetkemeyer. Okay. Mr. Cohen.
    Mr. Cohen. I keep coming back to the two points that are 
key to me, and one is the valuation of businesses and the 
treatment of goodwill, and just to give you an example of how 
that affects me as a small business person, if I want to 
acquire another outlet from another franchisee with the 
expectation that I can improve that business, I am limited in 
how much SBA money I can borrow because my business is not 
capital intensive in terms of the investment going in.
    So if I have 100,000 or $150,000, to use the higher number, 
$150,000 in equipment, fixtures and furniture on the books, but 
the cash flow of this business is $200,000, and then I am going 
to use a multiple of cash flow to purchase or sell that 
business, which is very common in our sector, and the multiple 
in our sector would be four to five. So you would be 
conservative and say four. This business is worth $800,000. But 
I have only $100,000 or $150,000 in assets on the books. So the 
book value is low, but I have $650,000 difference that is going 
to go to goodwill.
    I would not be able to use the SBA right now to qualify for 
that. The other part of it that would be important to me would 
be increasing the loan amounts because in franchise businesses 
we find that 50 percent of franchise businesses are owned by 
multi-unit franchisee. So I have an opportunity right now to 
acquire two other franchisees in my state, both of whom are 
ready to retire, neither of who wants to expand their business. 
I see great growth potential in both of those markets, but it 
will take my ability to borrow three to $5 million to do that.
    So I cannot qualify under the current SBA standards to get 
those loans and get that assistance.
    Mr. Luetkemeyer. Thank you.
    Mr. Doerfler.
    Mr. Doerfler. So valuations based on high growth, high 
return businesses are difficult because the normal measures, 
cash flow or hard assets just are not in these businesses. 
Again, we are looking at negative cash flows for a number of 
years, and we are looking at intellectual property which is 
very hard to value.
    So, again, if SBA could align itself with private equity 
investors who have expertise in evaluating and valuing those 
assets and those assets are intellectual property and clinical 
programs, that would be a great benefit for the biotech 
industry.
    Mr. Luetkemeyer. Very good. Thank you.
    Chairwoman Velazquez. Mr. Schrader.
    Mr. Schrader. Thank you, Madam Chair.
    I do not guess I have a lot of questions. Both panels were 
very, very good. Sorry I could not be here the whole time, as 
Chair of the Subcommittee on Tax and Finance and the lending 
programs, in particular, we are very interested in the comments 
that have been and the juxtaposition between one panel and the 
other.
    And to that end it would really be helpful for me and my 
Subcommittee if we could get a number of examples from members 
of your different associations, particularly that have had good 
credit, have been making payments, that now cannot get their 
loans or their credit lines or whatever reauthorized, you know, 
with various types of institutions because I have had somewhat 
the same feedback from my banking community, what seemed to be 
trying to do the right thing.
    So some of it is the regulators, in deference to the banks. 
I mean, the regulators have come down pretty hard, I think, and 
made it very difficult for them with their reserve requirements 
that have gone up to do the right thing, but to me that is 
something that our panel, our Subcommittee, if you will, could 
get into and from the SBA aspect maybe create some new 
opportunities.
    But I need some examples. So if that is a possibility, you 
know, several examples from each one of you would be very, very 
helpful for my staff, who has been here the whole time, to use 
and help create perhaps the right atmosphere to get things 
going back again.
    So that's all I request. I yield back, Madam Chair.
    Chairwoman Velazquez. Thank you.
    Mr. Watters, I would like to ask you. The Small Business 
Administration spent much of last month working on a new 
program to provide floor plan financing for title inventory. So 
will; this program have any appreciable effect on the ability 
of your business or your customers to access credit?
    Mr. Watters. Probably not. It is really kind of a technical 
issue. Our equipment that we sell is non-titled. So if your 
program is directed at titled equipment only, titled vehicles 
only, then we would not be able to partake or benefit from that 
program.
    Chairwoman Velazquez. What about you, Mr. Cohen?
    Mr. Cohen. I would be in the same category. It probably 
would not be of any benefit to me in my line.
    Chairwoman Velazquez. Mr. Bofill?
    Mr. Bofill. That is exactly what we are looking for because 
all boats, motors, and trailers are titled.
    Chairwoman Velazquez. Okay. Well, gentlemen, we are 
listening, and of course, this is the first step in the 
legislative process where we are assessing how can we improve 
the existing programs, especially the loan business program 
under SBA. How can we make the changes to make them more 
efficient and to respond to the new reality and the economic 
climate that you are all facing today.
    With that I ask unanimous consent that members will have 
five days to submit a statement and supporting materials for 
the record. Without objection so ordered.
    This hearing is now adjourned.
    Thank you.
    [Whereupon, at 3:00 p.m., the Committee was adjourned.]

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