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



 
                       FULL COMMITTEE HEARING ON

                      INCREASING ACCESS TO CAPITAL

                          FOR SMALL BUSINESSES

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



                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                            OCTOBER 14, 2009

                               __________

                               [GRAPHIC] [TIFF OMITTED] TONGRESS.#13
                               

            Small Business Committee Document Number 111-051
Available via the GPO Website: http://www.access.gpo.gov/congress/house




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                   HOUSE COMMITTEE ON SMALL BUSINESS

               NYDIA M. vela1ZQUEZ, 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                W. 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               W. 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, North Carolina, 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

vela1zquez, Hon. Nydia M.........................................     1
Graves, Hon. Sam.................................................     2

                               WITNESSES

Sarbarsky, Mr. Martin, CFO & COO, HR BioPetroleum, Inc., San 
  Diego, CA, on behalf of Biotechnology Industry Organization....     4
Zimmerman, Dr. Thomas G., Director, Osteopathic Medical 
  Education, Program Director, Osteopathic Family Medicine 
  Residency, South Nassau Communities Hospital, on behalf of the 
  American Osteopathic Association...............................     6
Fochler, Mr. Ryan P., President/Owner, Dog Paws 'n Cat Claws Pet 
  Care, Inc., on behalf of Comp oration for Enterprise 
  Development....................................................     8
Shay, Mr. Matthew, CEO, International Franchise Association......    10
Finch, Ms. Zola, Director of Finance, RMI CDC, Jefferson City MO, 
  on behalf of National Association of Development Companies.....    12
Sekula, Mr. Mark, Senior Vice President, Business Services, 
  Randolph-Brooks Federal Credit Union, on behalf of National 
  Association of Federal Credit Unions...........................    29
Galiette, Ms. Carolyn C., Senior Managing Director, Ironwood 
  Capital, on behalf of National Association for Small Business 
  Investment Companies...........................................    31
Dutch, Ms. Suzette, Managing Partner, Triathlon Medical Venture 
  Partners, LLC, on behalf of National Venture Capital 
  Association....................................................    33
Menzies Sr., Mr. R. Michael S. , President and CEO, Easton Bank & 
  Trust, on behalf of Independent Community Bankers of America...    35
Johnson, Mr. Cass, CEO, National Council of Textile Organizations    36

                                  (v)



                                APPENDIX


                                     Prepared Statements:
vela1zquez, Hon. Nydia M.........................................    46
Graves, Hon. Sam.................................................    48
Sarbarsky, Mr. Martin, CFO & COO, HR BioPetroleum, Inc., San 
  Diego, CA, on behalf of Biotechnology Industry Organization....    50
Zimmerman, Dr. Thomas G., Director, Osteopathic Medical 
  Education, Program Director, Osteopathic Family Medicine 
  Residency, South Nassau Communities Hospital, on behalf of the 
  American Osteopathic Association...............................    55
Fochler, Mr. Ryan P., President/Owner, Dog Paws 'n Cat Claws Pet 
  Care, Inc., on behalf of Comp oration for Enterprise 
  Development....................................................    59
Shay, Mr. Matthew, CEO, International Franchise Association......    63
Finch, Ms. Zola, Director of Finance, RMI CDC, Jefferson City MO, 
  on behalf of National Association of Development Companies.....    70
Sekula, Mr. Mark, Senior Vice President, Business Services, 
  Randolph-Brooks Federal Credit Union, on behalf of National 
  Association of Federal Credit Unions...........................    77
Galiette, Ms. Carolyn C., Senior Managing Director, Ironwood 
  Capital, on behalf of National Association for Small Business 
  Investment Companies...........................................    86
Dutch, Ms. Suzette, Managing Partner, Triathlon Medical Venture 
  Partners, LLC, on behalf of National Venture Capital 
  Association....................................................    92
Menzies Sr., Mr. R. Michael S. , President and CEO, Easton Bank & 
  Trust, on behalf of Independent Community Bankers of America...   100
Johnson, Mr. Cass, CEO, National Council of Textile Organizations   106

                                     Statements for the Record:
Clarke, Hon. Yvette D............................................   113
Corporation for Enterprise Development...........................   114

                                  (vi)



                       FULL COMMITTEE HEARING ON

                          INCREASING ACCESS TO

                      CAPITAL FOR SMALL BUSINESSES

                              ----------                              


                      Wednesday, February 11, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 11:30 a.m., in Room 
2360 Rayburn House Office Building, Hon. Nydia vela1zquez 
[chairwoman of the Committee] presiding.
    Present: Representatives vela1zquez, Dahlkemper, Schrader, 
Michaud, Altmire, Clarke, Ellsworth, Halvorson, Graves, Fallin, 
and Luetkemeyer.
    Also Present: Representative Moran.
    Chairwoman vela1zquez. Good morning. This hearing is now 
called to order. Whether we are talking about equity investment 
or traditional bank loans, access to capital has always been a 
major obstacle for small firms. Today that challenge is 
compounded.
    According to a July survey by the Federal Reserve, 35 
percent of domestic banks have tightened small business 
lending. Even loans through the SBA are down. For small firms, 
these declines are more than a simple setback. In fact, a lack 
of financing has forced many entrepreneurs to delay projects 
and put off investments. In some cases, it is limiting small 
firms' ability to create much needed jobs.
    For small firms, access to capital is access to 
opportunity, and it is clear that small firms are in need of 
both. That is why the bill we are examining this afternoon 
delivers critical small business funding.
    I would like to thank Representative Schrader, Chairman of 
the Subcommittee on Finance and Tax, for his leadership in 
moving this legislation forward. It is a bipartisan product, 
one that could not have come together without the work of eight 
different committee members, including two from the minority. 
Their efforts were instrumental in drafting a blueprint that 
accounts for every stage of the small business life cycle, from 
start-up to IPO.
    The small business start-up stage is especially critical to 
our economy. That is because new firms generate jobs and 
revenue where there once were none. But of course, 
entrepreneurs cannot create new positions and paychecks out of 
thin air. Start-ups require significant capital to get off the 
ground.
    Unfortunately, however, funding to these firms is 
declining. In the last quarter of 2008, it plunged $5.4 
million. The legislation we are discussing today will stem from 
those drop-offs by providing critical, early-stage capital. It 
not only greases the wheels for equity investment, but also 
expands SBA's microloan program.
    In doing so, it provides an additional $110 million for our 
smallest, most promising start-ups. Because small firms 
comprise 99.7 percent of all employer companies, that revision 
is more than an investment in small businesses. It is an 
investment in American job growth.
    Small firms' funding needs begin in the start-up stage. 
But, as any small business owner will tell you, they certainly 
do not end there. Even established firms require periodic 
capital infusions, particularly when it comes to enhancing 
their ventures.
    Today's legislation helps firms secure financing for new 
purchases. It also raises SBA loan guarantees, reducing risk 
for lenders. That is critical, because some banks are saying 
they will not loosen lending standards until the middle of 
2010, and that is at the earliest.
    For small firms that rely on loans, an eight-month waiting 
period could mean the end of their venture before it gets off 
the ground. That is why it is so important that we move forward 
with this legislation now. It will help small firms to purchase 
new equipment and inventory, and it would allow every business, 
regardless of industry, to hire new workers.
    At a time when our economy is struggling, it only makes 
sense to stabilize the small business community. After all, it 
was small firms that sparked a recovery during the downturn of 
the mid 1990s. For this reason, we want to be sure that 
entrepreneurs have the resources to weather more than just an 
economic storm.
    With important improvements to SBA's disaster loan program, 
we can protect the foundation of our economy, even in the event 
of catastrophe. Following a natural disaster, capital is 
nothing short of a necessity. But for many small firms, it is 
the only issue that matters at all, catastrophe or no 
catastrophe. In a hearing this Committee held last week, that 
fact became abundantly clear.
    This past Wednesday, our Committee met to discuss the state 
of small firms in the housing sector. We expected the 
conversation to focus on items like Section 179 expensing and 
the First Time Home Buyer's Credit. As it turns out, our 
witnesses had another, more pressing issue in mind: access to 
capital.
    One witness, despite owning a profitable venture, simply 
could not find a bank to finance his operations. As a result, 
his firm was forced to delay $1 million in contracts and 
ultimately lay off 10 workers.
    I wish I could say his story was so unique. But the truth 
is this sort of thing is happening every day, and we cannot 
afford to continue down this road. That is why this legislation 
is so vital. It will ensure small firms have access to the 
capital they need to keep operations running and the 
opportunity they need to grow our economy.
    With that, I would like to take this opportunity to thank 
all of the witnesses that are here today in advance for their 
testimony and will now yield to Ranking Member Mr. Graves for 
his opening statement.
    Mr. Graves. Thank you, Madam Chair, for holding this 
important hearing to consider legislative changes to the SBA's 
capital access programs.
    As I have mentioned before, access to credit and capital is 
critical to small businesses and to our American economy. 
During the past few years, we have seen the capital and credit 
markets fluctuate widely. Those changes are evident in the SBA 
Zone lending statistics.
    In fiscal year, approximately 90,000 loans, worth over $14 
billion, through the 7(a) lending program; in fiscal year 2009, 
those figures are 44,009 billion. Some might say that credit 
was too available in 2006 and 2007. Today the pendulum has 
swung completely in the opposite direction of credit and 
capital to unavailable.
    Clearly the economy must find an appropriate middle ground. 
In an effort to navigate an appropriate middle course, the SBA 
capital access programs can play a vital role. Those programs 
can fill gaps where conventional commercial credit and capital 
markets are not supplying funds to small businesses.
    Of course, those programs do no good if there are 
significant barriers to their utilization by lenders, 
investors, and small business owners. Bills being discussed 
today are designed to reduce impediments to their use by 
lenders, venture capitalists, and small businesses. This is a 
good start, and I hope to hear from our witnesses what 
additional changes are needed to unfreeze the capital and 
credit markets for small business owners.
    I am generally supportive of the bills before us today. I 
still have some concerns about some of the legislative 
proposals. I recognize that additional expenditures may be 
necessary to fix programs that are currently not functioning, 
but given the current budgetary constraints, the cost of some 
of the initiatives remain troubling.
    Furthermore, there may be some difficulties with 
implementation of some of the programs. I look forward to 
working with the Chairwoman and the rest of the Committee to 
resolve these issues in a bipartisan manner.
    It is important to recognize that the legislative actions 
we take in this Committee are only a component of a broader 
strategy needed to revitalize the small business economy.
    With over 25 million small businesses in this country, 
improving the capital access program of the SBA will not cure 
the credit and access ills through which the economy is 
suffering. It must recognize that overly restrictive regulatory 
policies must be corrected in order to swing the pendulum back 
to an appropriate middle ground for the country's capital and 
credit markets.
    Congress must also not adopt policies that zap confidence 
in small business owners to invest in the growth of their 
enterprises. In position of additional costs, whether it is 
through cap and trade legislation or increased taxes to 
reformed health care, will reduce confidence in small 
businesses to take the economic risks needed to grow their 
enterprises.
    If Congress takes an approach and approves access to 
capital and SBA programs, on one hand, and then turns around 
through increasing operating costs of small businesses, on the 
other hand, and Congress will have not accomplished a whole 
lot.
    Again I want to thank the Chairwoman for holding this 
hearing and our witnesses for being here today. I know you have 
taken time out of your busy schedules and in some cases 
traveled a long way. We appreciate that very much.
    Chairwoman vela1zquez. Does any member wish to be 
recognized for the purpose of making an opening statement?
    [No response.]
    Chairwoman vela1zquez. Okay. So it is my pleasure to 
introduce Mr. Martin Sabarsky. He is the Chief Financial 
Officer and Chief Operating Officer of HR BioPetroleum, a 
renewable energy technology company located in San Diego, 
California.
    Mr. Sabarsky is testifying today on behalf of Biotechnology 
Industry Organization. BIO is the world's largest biotechnology 
organization, with more than 1,200 members.
    Welcome.

                  STATEMENT OF MARTIN SABARSKY

    Mr. Sabarsky. Good morning, Good morning Chairwoman 
vela1zquez, Ranking Member Graves, members of the Committee, 
Committee staff, ladies and gentlemen. My name is Martin 
Sabarsky, and I am the Chief Financial and Operating Officer of 
HR BioPetroleum, a Hawaii-based biotechnology company focused 
on developing algae-based products such as next generation 
biofuels.
    I am privileged to be here on behalf of the Biotechnology 
Industry Organization, representing more than 1,200 member 
companies and nonprofit institutions in all 50 states that are 
involved in health care as well as agricultural, environmental, 
and industrial biotechnology.
    I am here to convey our strong support of the Small 
Business Early-Stage Investment Act of 2009. As indicated in my 
testimony submitted for the record, this bill addresses a 
longstanding problem in the biotechnology industry in which 
venture capital firms have become increasingly reluctant to 
fund promising early-stage research beyond the basic research 
stage and before the revenue generation stage.
    In the biotech industry, we refer to this phase as the 
Valley of Death, which sounds perhaps melodramatic but is a 
real dynamic that has been exacerbated greatly since the onset 
of the financial crisis last year.
    At the same time, advancing science through the Valley of 
Death has never been more important as we strive to create a 
Twenty-First Century economy, create new jobs, become more 
energy-independent, and develop promising biotech therapies, 
all of which are critical priorities.
    Part of the challenge in developing innovative new biotech 
technologies and products is that it is extremely time and 
capital-intensive. The substantial costs and time lines 
involved in drug development are well-known. Perhaps less well-
known, however, is that the pre-commercial development of 
advanced biofuel technologies is also a capital and time-
intensive process and is estimated to cost anywhere from $100 
to $300 million and take 5 to 10 years. My company, HR 
BioPetroleum, is but one small business in the emerging 
biofuels industry that has the potential to benefit from this 
important legislation.
    Studies have shown that successful development in America 
of biofuels, such as biodiesel from algae, could result in the 
equivalent of 7.9 million barrels of oil being produced per day 
by 2050, virtually eliminating our need for gasoline.
    The widespread use of biofuels could also reduce greenhouse 
gas emissions by 1.7 billion tons per year, equal to more than 
80 percent of transportation-related emissions in 2002.
    The benefits are clear. The early-stage research is 
promising. But, as we sit here today, the private equity 
capital to make new investments to drive these programs forward 
aggressively is largely sitting on the sidelines.
    In fact, in a recent press release, the National Venture 
Capital Association reported that venture funds raised in the 
third quarter of 2009 are at a 15-year low. Investments in 
clean technology companies, such as my own, were down 48 
percent in the first quarter of 2009 alone.
    My presently unsuccessful attempts to raise private equity 
financing for HR BioPetroleum over the past 12 months, despite 
a promising technology and significant corporate achievements, 
are instructive.
    By 2005, despite having no venture capital funding, my 
company had successful demonstrated a proprietary process to 
grow algae at an industrial scale in Hawaii. Based on these 
positive results in 2007, we were able to successfully enter 
into an industry-leading joint venture with Royal Dutch Shell 
called Cellana, the initial focus of which is to build and 
operate a new facility in Hawaii to demonstrate the economics 
of integrated algae production and algal oil production.
    In 2008, in large part on the strength of this joint 
venture, we signed memoranda of understanding with Hawaiian 
Electric, Maui Electric, and Alexander and Baldwin to develop a 
commercial algae facility on Maui. Despite these 
accomplishments, however, we were unable to complete a private 
equity financing that fell through a year ago this month as a 
direct result of the current financial crisis.
    Our subsequent attempts to attract additional venture 
capital investment have not yet borne fruit, due, I believe, to 
venture funds becoming even more hesitant to take technology 
risks within my industry at the same time that many of their 
traditional funding sources have backed off or backed out of 
venture investing.
    R&D programs through our Cellana joint venture continue, 
however, but most of our industry peers are not so fortunate. 
Many have less than 12 months of cash. And some have had to 
discontinue operations entirely. Hence, this pending 
legislation is even more critical to addressing the 
structurally inadequate funding environment that exists today 
and has for some time.
    Other complementary programs, such as the loan guaranty and 
grant programs through the Department of Energy and Department 
of Agriculture, are important adjuncts to this pending 
legislation, but these programs are simply not available to 
small businesses that don't already have the sufficient equity 
capital to satisfy the mandated cost-share or minimum equity 
requirements. This is a real Gordian Knot that can only be cut 
by providing additional equity capital to address this problem. 
as the pending bill would provide.
    In closing, to ensure that the U.S. remains the world 
leader in biotechnology research and development, investment in 
early-stage biotechnology companies needs to be fostered. BIO 
believes that providing incentives for additional investment in 
small biotechnology companies is the most effective approach 
for SBA to support these high-risk, high-reward companies.
    Thank you all for the opportunity to talk to you today 
about HR BioPetroleum and the promise of biofuels as well as 
how the Small Business Early-Stage Investment Act of 2009 could 
provide critical investment dollars required to develop biotech 
products that will benefit the public. I look forward to 
addressing any questions you may have.
    [The prepared statement of Mr. Sabarsky is included in the 
appendix.]

    Chairwoman vela1zquez. Right on target by 12 seconds.
    [Laughter.]
    Chairwoman vela1zquez. Thank you.
    Our next witness is Dr. Thomas Zimmerman. He is the 
Director of Osteopathic Medical Education and the Program 
Director of Osteopathic Family Medicine Residency, South Nassau 
Communities Hospital. Dr. Zimmerman is testifying today on 
behalf of the American Osteopathic Association, which 
represents more than 67,000 osteopathic physicians.
    Welcome.

                 STATEMENT OF THOMAS ZIMMERMAN

    Mr. Zimmerman. Thank you.
    Chairwoman vela1zquez, Ranking Member Graves, and members 
of the Committee, thank you for the opportunity to testify 
before you today. As an osteopathic physician Board-certified 
in family medicine, a health information technologies 
consultant, and a member of the American Osteopathic 
Association, I have witnessed firsthand the challenges facing 
our nation's physicians as pressure mounts for these practices 
to implement HIT systems in the coming years.
    Clearly, the incentives offered through the HITECH Act 
beginning in 2011 and the subsequent threat of penalties 
beginning in 2015 are expected to encourage many physicians to 
adopt electronic medical record systems.
    However, from my experience and that of most research, I 
find that the biggest stumbling block to EMR implementation for 
many physician practices is financing. For this reason, we wish 
to express our strong support for H.R. 3014, the Health 
Information Financing Act of 2009.
    The AOA represents 67,000 osteopathic physicians across the 
country. Our profession is unique in its focus on primary care, 
with approximately 60 percent of osteopathic physicians 
entering this field, the vast majority of whom practice in 
community-based settings.
    However, inequities in our current Medicare payment system 
have resulted in onerous financial burdens for these 
physicians, whose practices generally operate with one to six 
employees. While our members are eager to adopt more 
streamlined administrative and clinical systems, narrow profit 
margins and high overhead hinder investments in new 
innovations, such as health information technology.
    Many of these systems require a considerable amount of 
capital to purchase. The average cost to install an EMR system 
is $32,000 per physician according to an MGMA study. Other 
studies have placed this cost much higher.
    The funds provided in the American Recovery and 
Reinvestment Act earlier this year offer financial incentives 
that will facilitate the implementation of these systems. 
Because these incentives come on the back end, however, smaller 
practices are at a significant disadvantage.
    Under current law, we believe that the bulk of stimulus 
funds are likely to flow toward hospitals and larger 
specialized practices, ultimately making the rich richer while 
small practices work to build up the funds and infrastructure 
necessary to qualify.
    With the time line established through ARRA, it is our 
belief that only a small minority of small physician practices 
will qualify for the 2011 bonus. Additional government support, 
including the loan program in your legislation, would level the 
playing field, enabling and encouraging many more small 
practices to implement EMR systems.
    As you well know, the economic crisis in this country has 
hit small businesses particularly hard. Solo and small 
practices in the past often turned to home equity loans to fund 
business investments. With the current credit crunch, access to 
these loans is also severely limited.
    H.R. 3014 would grant physicians access to private lenders 
through guarantees issued by the SBA. We support the targeted 
nature of your proposal, which directs funds toward the 
specific equipment, training, and maintenance services 
necessary for our practices to meet the guidelines set forth by 
the Department of Health and Human Services.
    The AOA recognizes the promise of increased productivity, 
prevention of medical errors, reduction in health care costs, 
increased administrative efficiencies, decreased paperwork, and 
expanded access to affordable care offered by HIT. However, 
these benefits cannot be achieved until physician practices 
have clear guidelines from CMS as to the standards to ensure 
interoperability across systems.
    We expect these guidelines and the definition of meaningful 
use to be published by the year's end. But with just 12 months 
to purchase and implement a qualifying system, we believe that 
this time line is overly aggressive and inadvertently favors 
large institutions.
    The administrative costs associated with the adoption of 
HIT systems also present an obstacle for small practices. The 
initial transition period involves considerable time for both 
the physician and support staff, who may require outside 
training and consultants.
    During this time physicians often decrease patient load by 
up to 25 percent for several months. These increased training 
expenses combined with decreased revenue creates a formidable 
cash flow problem that many small practices may not be able to 
accommodate. The loan program in this legislation accounts for 
these factors by allowing the funds to be applied towards extra 
administrative costs.
    Ms. Chairwoman, your legislation paves the way for small 
practices to join larger institutions in implementing HIT 
systems that will improve the delivery of care across the 
spectrum of health care.
    We commend you on your recognition of the challenges facing 
our members and the sound policy you set forth in H.R. 3014. On 
behalf of the AOA and my colleagues, thank you for your 
efforts. And we look forward to working with you and your 
colleagues throughout this promising period of transition.
    [The prepared statement of Mr. Zimmerman is included in the 
appendix.]

    Chairwoman vela1zquez. Very good. On time. Thank you, Dr. 
Zimmerman.
    Our next witness is Mr. Ryan Fochler. He is the President 
and owner of Dog Paws n' Cat Claws Pet Care, a small business 
located in Arlington, Virginia. Mr. Fochler is testifying today 
on behalf of Corporation for Enterprise Development. CFED is a 
leading public policy advocate that helps federal, state, and 
private sector leaders move the nation towards a more equitable 
and inclusive economy.
    Welcome.

                   STATEMENT OF RYAN FOCHLER

    Mr. Fochler. Thank you very much, Chairwoman vela1zquez, 
Ranking Member Graves, and the entire Committee for inviting me 
here today to provide this important testimony about the SBA 
microloan program and H.R. 3737.
    My name is Ryan Fochler. And in 2004, I became the owner of 
Dog Paws 'n Cat Claws Pet Care in Arlington, Virginia. As you 
all know, small businesses are the backbone to our economy.
    Dog Paws 'n Cat Claws employs 30 employees in the D.C. 
metro area. And we provide services for more than 1,800 clients 
and their pets, including home visits when they are out of town 
or away at work. We also house a 7,000 square foot doggie day 
care facility located in Arlington.
    The pet industry accounts for more than $43 billion a year 
in economic activity and experienced a growth rate of more than 
5.5 percent, despite the recession. And it continues to show no 
signs of slowing down. In fact, it continues to expand across 
multiple industries.
    For example: car companies now offer a full line of dealer-
installed pet accessories, new airline companies have taken off 
with the sole purpose of transporting animals in pressure and 
temperature-controlled cabins, and many chain hotels have 
adopted pet-friendly policies, which is why you may be asking 
yourself, if the pet industry is so fantastic, why is Ryan 
here? To answer that question, because despite a credit score 
of more than 720 and an average growth in sales of 168 percent 
over the first 3 years of my stewardship, Dog Paws would not be 
here where it is today without the SBA microloan program.
    In recognition of that fact, I am also here to thank this 
Committee for their work on improving the microloan program and 
to make suggestions for future changes to the program so that 
that it can continue to help entrepreneurs like myself.
    I am very excited about some of the changes proposed in 
H.R. 3737, including improving borrower education; opening the 
door to more flexible, responsible microloan products; 
expanding eligibility requirements to increase the presence of 
microloan intermediaries across the country; and increasing the 
amount of money that an intermediary can borrow from SBA in 
order to reach more small businesses.
    I know that there are many more entrepreneurs like myself 
that were told no by banks every single day. All of these 
factors will contribute to making another entrepreneur's 
microloan experience even more positive than mine, which came 
at a crucial time for my business.
    In 2007, because of our constant growth, I felt it was time 
to pursue my larger dream of the company to expand beyond dog 
walking and create a holistic training, day care, boarding, 
grooming and retail facility for people and their pets in my 
community.
    In December of 2007, I was pre-approved for an SBA express 
loan from Provident Bank, which gave me the green light to 
finalize our space and move forward with opening our store. 
Within two months, our retail store was experiencing both 
commercial and media success. We have been nationally 
recognized as a green retail establishment.
    Unfortunately, shortly thereafter, the credit crisis hit in 
full force. To be specific, despite having never made a 
delinquent payment, our available credit was slashed from over 
$56,000 to approximately $1,000 without warning. I felt sick to 
my stomach. We had grown from at that point 7 employees to over 
20 at that point.
    This severe and in my opinion unwarranted reduction in my 
credit made it nearly impossible for us to order new product 
for our retail store. It also created a horrible domino effect. 
The drastic lowering of my credit lines resulted in a much 
higher debt to available credit ratio. Now, instead of using 
about 50 percent of our available credit, we were at 90 percent 
of our available credit, which made us look like much riskier 
to banks.
    My credit has since taken a nosedive, not because bills 
weren't paid but because I was told, ``You have been a good 
customer up until this point, but there is no guarantee that 
you will be in the future.''
    I spent the next three weeks visiting what I felt was every 
single bank in the D.C. metro area. I was turned down time and 
time again by large and small banks alike. Many of the loan 
officers that I met with sympathized with my situation and told 
me that I had easily qualified before the financial crisis. But 
with the decline in my credit score, I could not get a loan 
from banks themselves that probably received bailout funding.
    This is when I learned about the SBA microloan program and 
the Latino Economic Development Corporation. They took a look 
at our books, our history, year-over-year sales, and employment 
growth, our 100 percent positive credit card payments, and lent 
us $20,000 in working capital.
    I also got something else from LEDC: quality, in-depth 
technical assistance for my business. Banks give loans and send 
payment invoices. Micro lenders like LEDC do much more.
    LEDC, with all of their technical support, set Dog Paws up 
for success. They have ongoing one-on-one support, group events 
and training. They think of us when they meet new business 
owners and potential clients.
    Because of the over 100 hours of technical assistance I 
have received from the microloan program at LEDC, I am a better 
businessman, and my company is continuing to grow at a 
sustainable rate.
    Despite the tremendous help that we received from LEDC, Dog 
Paws continues to seek capital we need to reopen our retail 
center. We have approximately 1,000 square feet of empty space 
that current employees, like my manager, who was laid off from 
Fannie Mae, and potential employees, who were laid off from 
Bank of America, could go to work right away.
    But without the availability of the SBA microloan program 
and SBA lending programs, Dog Paws 'n Cat Claws would not exist 
as it does today. We would most likely have not been able to 
create 23 new jobs over the past year and a half. We would not 
be trying to figure out a way to get our retail center reopened 
to create more full and part-time jobs. We would not be able to 
outsource new trainers, groomers, consignment stores, et 
cetera.
    Before I finish, I want to suggest a few more changes to 
the microloan program that I know will help entrepreneurs down 
the road. By increasing the microloan program to $50,000 to run 
a successful small business, especially a retail business, 
larger amounts of capital are essential for ordering product. 
Do whatever you can to continue expanding this program. Believe 
me, the need is out there.
    Microloan Intermediaries like LEDC do not have the 
marketing and advertising muscle that banks and even credit 
unions have. If they did, I certainly would have knocked on 
their doors earlier.
    Small businesses are currently acting as a backstop for the 
economy and the bailout. Despite the limited available credit, 
many of us are still finding ways to grow. We are somehow 
managing to create jobs while companies that are subsidized by 
the government or even received bailout funds continue to lay 
off employees.
    Thank you for this opportunity to testify here today. I 
look forward to answering any questions that you may have.
    [The prepared statement of Mr. Fochler is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Mr. Fochler.
    Our next witness is Mr. Matthew Shay. He is the CEO of the 
International Franchise Association, one of our nation's 
largest business associations, with more than 10,000 members.
    IFA represents members in every aspect of the franchise 
community and across the nation.

                   STATEMENT OF MATTHEW SHAY

    Mr. Shay. Chairwoman vela1zquez, thank you very much for 
the introduction and Ranking Member Graves, members of the 
Committee. It is a pleasure to be here today to applaud your 
efforts to restore the access of credit for small businesses 
and, in particular, to urge our strong support for the Small 
Business Credit Expansion and Loan Market Stabilization Act.
    I am Matt Shay, President and CEO of the IFA, headquartered 
here in Washington, and very privileged to represent our 1,200 
member companies who create small businesses across this 
country.
    And you have got my written remarks. And so, rather than go 
into detail on those, what I would like to do is just try to 
make three points with you and emphasize those: first, that, no 
matter what you have heard, the credit crisis affecting small 
business and franchise businesses, in particular, is severe and 
becoming acute and more so every day; secondly, that the 
extraordinary nature of this crisis in our view requires the 
Congress, the administration, and the SBA to take extraordinary 
measures.
    And, third, and I think maybe most importantly, we feel 
very strongly that a renewed emphasis on access to credit for 
small business and the facilitation of loans for small business 
can help lead our nation back into a period of sustainable 
economic recovery and, to put a fine point on that, to create 
jobs. And I think that that is what we all are most concerned 
about today, is the creation of jobs. And we really believe 
that a renewed emphasis on access to loans for small business 
will help us achieve that.
    We think franchising is a particularly apt prism through 
which to look at the impact of the credit crisis on the small 
business community. There are franchise businesses operating in 
virtually every sector of small business. And because of the 
nature of the way in which small business franchises are 
regulated, the way they register at the federal and state 
level, the way information is reported to the franchisors, it 
is much easier to monitor and analyze the impact of this credit 
crisis on franchise businesses generally than it is on 
independent businesses in particular.
    Our research and the experience that we have with the 
PricewaterhouseCoopers, who have conducted a number of research 
projects for us demonstrate that there are more than 900,000 
franchise businesses operating in the United States today. 
Those businesses create jobs for 21 million Americans and 
generate more than $2.5 trillion of total economic output. And 
to put that in perspective, that is 15 percent of the private 
sector workforce and 12 percent of total GDP, or total economic 
output. So it is a significant and growing component of the 
nation's economy.
    Further, we have been able to demonstrate through this 
research that over the last five or six years, franchise 
businesses have outperformed non-franchise businesses operating 
in similar industries. So franchise business is a more 
efficient way to create jobs to invest capital and ultimately 
to drive growth in our economy.
    Over the last several years, franchise businesses grew by 
40 percent, when non-franchise businesses in the same sector 
grew at approximately 25 percent. So we know that investing in 
a franchise business, providing capital and access to credit 
for those businesses, has a huge positive impact on job 
creation.
    The experience that our members have is that lending has 
essentially ceased. All the companies that were lending to 
franchise businesses, CIT, Wells Fargo, GE Capital, are 
basically out of this market now. And it's also our experience 
that there are thousands of deals literally sitting on the 
sidelines: entrepreneurs that have signed contracts that have 
paid franchise fees who are unable to access capital they need 
to start those businesses.
    We would make four basic suggestions to the Committee about 
things you could do that would be very beneficial to our 
members and we think the small businesses generally.
    First, increasing the guaranteed loan amount from $2 
million to $5 million would have an immediate impact on the 
ability of franchisees to grow and create jobs.
    Secondly, adopting a market-based approach to the loan 
pricing for SBA loans we think would help supply and demand, 
find a proper equilibrium, which we don't think exists today. 
There is over-demand and under-supply, and we think that is 
because there is disincentive created by the policy decision to 
set rates at a certain level.
    Third, we believe there are some things that can be done in 
terms of regulations we could adopt that would put emphasis 
back on making loans available to small business start-ups 
through the 7(a) program, as opposed to other ways in which 
this program has been utilized over the past year. We think, in 
particular, refinancing of real estate has artificially 
indicated that there is a heavy usage here when the money is 
not really going where it needs to go, which we think, really, 
are the small business start-ups.
    And then, fourth and finally, we think the audit standards 
are creating a level of uncertainty for lenders that are 
creating some disincentives for them in terms of their ability 
to rely on the guarantee that an SBA loan will, in fact, be 
backed up should things not work out the way we all hope they 
do.
    So we applaud the Committee's efforts. We appreciate the 
things you are doing. And we stand ready to work with you to 
adopt these changes. Thank you very much.
    [The prepared statement of Mr. Shay is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Mr. Shay.
    Our next witness is Ms. Zola Finch. She is the Director of 
Finance of RMI CDC, a small business-certified development 
corporation based in Jefferson City, Missouri.
    Ms. Finch is testifying today on behalf of the National 
Association of Development Companies, the leading trade 
association of certified development companies, which 
administer the SBA 504 CDC program.
    Welcome.

                    STATEMENT OF ZOLA FINCH

    Ms. Finch. Thank you.
    My name is Zola Finch. And I am past Chair of NADCO. I am 
pleased to provide a statement today about the Committee's 
proposal to improve access to capital by small businesses.
    I would like to thank Chairwoman vela1zquez, Ranking Member 
Graves, and the entire Committee for their continued support of 
the CDC industry and the 504 program. The Committee has worked 
closely with SBA and our industry to ensure the availability of 
this program to small businesses for many years.
    First, I would like to discuss the need to reduce the cost 
of the 504 program. SBA has informed us that its 2010 budget 
increases the cost of the 504 program by 38.9 basis points. 
This is due to at least two factors in the SBA's econometric 
subsidy model. The first factor is the national unemployment 
rate, and the second factor is the forecast of the 504 default 
rate.
    With both of these factors being impacted by the current 
recession but their real effect is expected to be short-lived, 
we ask the Committee's support of an appropriation sufficient 
to offset this fee increase for the next two years.
    Small businesses are finally returning to a growth mode, 
which means improved cash flow, but why use that to pay 
increased program fees? We request this to be taken up as soon 
as possible in order to eliminate the impact of the subsidy fee 
increase on our borrowers for F.Y. 2010. It does not seem right 
in this economy to provide small businesses feverly from the 
stimulus bill in February of 2009 and turn around and increase 
their cost of borrowing in October of that same year.
    The Committee has worked hard to enhance the 504 program to 
put more fixed asset financing and working capital in the hands 
of small businesses hard pressed by this recession. With that, 
it is clear that many small businesses either need access to 
larger guaranteed loan amounts or have already used up their 
allocated maximum for 504 under the current law.
    The current restrictions can be addressed first in three 
ways. First, increase the maximum 504 loan amount beyond its 
current limit of $1.5 million; second, allow a borrower to 
maximize their use of both 504 and 7(a) loan limits; and, 
third, eliminate the regulation that restricts business owners 
with higher net worths from participating in 504 projects.
    The Committee has recognized the need to reduce loan losses 
with more effort devoted to loan liquidations and recoveries. 
At Congress' direction several years ago, SBA created a new 
regulation that enabled taking advantage of the recovery 
expertise within the CDC industry. Many CDCs already perform 
such tasks for the loan programs they administer. They have 
simply not been given the ability and freedom by the SBA to do 
this on a broad scale for 504. NADCO believes that losses can 
be reduced if CDCs are allowed to perform recoveries in these 
settlements of loan guarantees of 504 projects.
    The Committee has created other program changes to reduce 
losses. Under the proposed field, you will make the program 
more flexible by allowing higher owner equity injections, which 
will reduce the high cost of first mortgages.
    Second, use of the PCLP program may be expanded by making 
the pilot amortization program permanent for calculations of 
the PCLP reserves.
    And, third, the Committee will improve servicing of 
defaulted 504 loans by directing the administration to continue 
loan accounting for default through its own highly automated 
central servicing agent. This will result in much improved loan 
servicing by providing better information to the CDC's handling 
those loan defaults.
    Finally, the Committee is addressing the need to make the 
SBA programs more relevant and productive. Loan volume for both 
504 and 7(a) programs has improved slightly since passage of 
the Stimulus Act, but many of those benefits have not yet been 
implemented by SBA. Both programs are down over 40 percent from 
levels two years ago.
    The 504 program is over 20 years old with an environment of 
restrictive and overbearing regulations, which has evolved 
within the federal bureaucracy. With this new administration 
and the fresh thinking under senior policy-makers, NADCO sees 
an opportunity to break out of the old program structure and 
establishment. We see the chance to work with this new 
leadership team and with the new Congress to expand the 504 
program benefits to more borrowers.
    NADCO believes that the first step in this process of 
expanding and enhancing the 504 program is to clarify the 
structure of CDCs that deliver the program and ensure an 
enhanced level of service by the CDCs. The Committee has 
developed several program changes that will increase the focus 
of the CDC industry on community development through our 
nonprofit organizations in the future.
    Working together, we must be more creative and flexible in 
servicing the needs of not only existing small businesses but 
also in providing financing to new industries. We must tear 
down the walls of arcane, irrelevant, and restrictive 
regulations that create unnecessary barriers to reaching the 
industries of the Twenty-First Century economy.
    SBA has become one of the largest economic development 
agencies in the federal government. By leveraging its guarantee 
authority using lending partners, SBA has directly assisted the 
creation of over 5 million jobs through more than $200 billion 
in 504 first mortgages, 504 debentures, and 7(a) bank loans. 
Very few agencies can claim this kind of record and 
accomplishment and impact on our economy.
    But, 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 
with farsighted market-driven lenders to eliminate those overly 
restrictive regulations and create the financing and economic 
development program so vital to America's future in a 
competitive world.
    Small businesses that are agile and forward-thinking will 
lead us out of this recession. Let's help them to do it now. 
And by working together, we can put America back to work. Thank 
you.
    [The prepared statement of Ms. Finch is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Ms. Finch.
    Mr. Sabarsky, the proposed small business early-stage 
investment program has a specific focus on delivering capital 
to small businesses in some of the most capital-intensive 
industries, like biotech, clean energy, and life science. Can 
you discuss some of the policy justification for the program 
focused on these industries?
    Mr. Sabarsky. Yes. Thank you, Madam Chairwoman.
    So I think this is a sort of two-part question. The first 
answer to the question gets to the policy justifications for 
the targeted industries, as specified in the pending 
legislation. Particularly when it comes to biotechnology, clean 
technology, I think you see possibly the greatest combination 
of need for capital, especially in the current crisis that we 
are facing, as well as the potential for subsequent investment 
and job creation coming in from the combination of the public 
sector and private sector funding, which I am assuming and 
hoping will be available once sufficient risk is taken out of 
the biofuels development and biotech development processes.
    I think, in particular, talking about the biotech industry, 
this program would leverage America's existing strengths in 
technology generally and biotech, in particular, as we move to 
an increasingly knowledge-based economy here in the Twenty-
First Century.
    It also in the case of biofuels would have the impact of 
bringing manufacturing and energy production into the U.S. and 
away from other parts of the world, whether it is OPEC 
countries or others, that may not be so friendly. So from an 
energy security standpoint, I think that has value as well.
    Now, there is also a question about why target small 
businesses, early-stage companies. I think Congress and the 
administration and prior Congresses have indicated through 
things like the stimulus bill, through preexisting grants and 
loan guaranty programs, renewable fuel standards, and other 
regulations and tax policy a strong national priority for 
developing biofuels, alternative energy of renewable 
technologies, energy technologies generally. And so there is 
already a serious policy commitment at the national level to 
support the advanced biofuel industries that I am working on.
    Once that is done, though, one has to ask the question, are 
small businesses able to compete on a level playing field for 
some of the larger dollars that are really necessary to field a 
large demonstration facility to prove the economics of biofuels 
production as one example?
    And right now what we are seeing through DOE and DOA 
programs, be they the grant programs or the loan guaranty 
programs, is small companies simply can't play in that 
environment because you can't even get an application together 
that satisfies DOE's or DOA's requirements based on out-of-
pocket expenditures that are required, which are substantial, 
sometimes mid to high six figures.
    But the most important impediment is that you can't show 
the 20 to 50 percent cost share required on the grant side or 
the minimum equity required on the guaranty side to actually 
field your plant should you get the award.
    Chairwoman vela1zquez. Mr. Sabarsky, can you tell us what 
is the average return on equity for early-stage--
    Mr. Sabarsky. Early-stage investment?
    Chairwoman vela1zquez. Yes.
    Mr. Sabarsky. Well, and maybe the panel coming next would 
be more appropriate. I am not a venture capitalist. I do not 
play one on TV. But as I talk with them, they talk about a 25 
to 40 percent year over year that they target. And this is 
obviously a very high return to indicate that there is a high 
risk. And, as the venture capitalists will tell you, out of 
every 10 investments, maybe 1 or 2 will actually produce a 10x 
return to their investment, which helps to take care of the 
ones that don't return anything or you basically get back your 
money and that is it.
    Chairwoman vela1zquez. Okay. Thanks.
    Mr. Shay, in your testimony, you emphasized the continued 
need for credit, especially among start-up businesses. Do you 
believe that lenders overemphasize more profitable loans, like 
loans to establish businesses with larger, greater needs, 
credit needs? Do these larger loans contribute to the credit 
shortage for start-ups that we are seeing at this point?
    Mr. Shay. Well, I certainly think in a competitive 
marketplace, capital hopefully, being agnostic, is going to go 
where it can, where it believes it is going to get the greatest 
return. So as the sources for loans to small businesses have 
dried up, the existing capital is either sitting on the 
sidelines or it is going to other places, larger loans.
    There is a segment of our membership, about 400 member 
companies, that have investment levels, start-up investment 
levels, of between three-quarters of a million dollars and $2 
million. Given the current loan limits on an SBA guaranteed 
loan of $2 million, those franchise investors essentially hit 
the limit with their first store.
    So for the people that are trying to expand to multi-unit 
status two or three stores, which is really what they need in 
order to be profitable in many cases, the challenge that those 
people face--and that is really the sweet spot, those 400 that 
have those size businesses--they have exhausted the possibility 
of financing and capital with the first store.
    So yes, we see a big challenge. And, you know, I can't 
point fingers at what is creating the real bottleneck. Is the 
capital going somewhere else, bigger loans or not? But we would 
not consider a loan of $750,000 to $2 million to be an 
extremely large loan. That is a very competitive loan for a 
small business. And it is tough to find.
    Chairwoman vela1zquez. It is less risky for a bank to lend 
to other, more established businesses than going and lending to 
start-ups.
    Mr. Shay. Right. And certainly our view is that a franchise 
fits that category of an established business because you have 
got a track record and a history. And, again, not wanting to 
distinguish between franchise businesses and a typical 
independent start-up because we think all independent 
businesses are great. We just happen to favor the franchise 
model.
    But yes. There is no question, though, that lenders, 
bankers, nonbank lenders look at a franchise. And when they see 
a business plan developed by a franchise system, that gives 
some comfort that there is going to be sort of some full faith 
and credit there, as opposed to someone that walks in off the 
street and doesn't have that experience or doesn't have those 
kinds of resources at their disposal.
    Chairwoman vela1zquez. Thank you.
    Dr. Zimmerman, the proposed health IT loan program, would 
you say that the proposed health IT loan program be duplicative 
of the SBA's existing loan programs or are there factors that 
distinguish this program?
    Mr. Zimmerman. No. I don't believe that the proposed 
legislation does duplicate existing resources through the SBA. 
With the proposed legislation, the fact that there is up to a 
three-year deferment on the payment of interest before the 
payback begins decreases the cost of this loan greatly and 
makes it a lot more attractive for small practices to consider 
implementing the HIT technology.
    A lot of these cost savings sided with electronic medical 
record systems, even in the federal Stimulus Act, come from 
savings and not actual revenue. So it is very important to see 
reductions in cost at the front end and not saying, ``Well, ten 
years from now, this is how much money you will save.'' The 
physician is a business. And they need to see what the 
difference in the overhead, my cost right now, out of pocket is 
going to be. So no, I don't believe it is duplicative.
    Chairwoman vela1zquez. We hear that the cost for 
implementing IT will be like $100,000 per practice. Do you know 
what will be the cost savings once the IT has been implemented?
    Mr. Zimmerman. A lot of times it depends on how well the 
practice is actually running with the EMR system. And a lot of 
it has to do with how well the practice has been run before the 
system is implemented. If they have a good paper system, if it 
is an efficient office, they will see a lot more savings and 
increased revenue with the EMR system.
    I believe some studies cite anywhere between $10,000 to 
$20,000 per physician in cost savings. And if you look at the 
average cost of an implementation, a lot of times that comes 
out to about a six to eight-year period before you have a 
return on investment depending on the size and cost of the 
system.
    Chairwoman vela1zquez. Thank you.
    Mr. Fochler, in the proposed legislation or the draft 
legislation that we have before us, we are allowing for the SBA 
to use the surplus to reduce the cost of loans for borrowers in 
the microloan program. The microloan program has been 
criticized for the interest rate, the high interest rate the 
borrowers pay.
    Would this put more money into the hands of small 
businesses, like yours?
    Mr. Fochler. Yes. I think anything to improve the microloan 
program, especially, you know, it is much higher interest 
rates, but at the same time, it is more competitive than credit 
cards. And at least it is accessible, even though it is 
limited.
    So I think it definitely could improve and ultimately get 
more money into the hands of small business owners that are 
struggling to grow. Even though we seem to find ways to do it, 
it is just very stunted growth. Anything could definitely be a 
huge improvement to helping the microloan program.
    Chairwoman vela1zquez. Thank you.
    I have more questions. And I will come back at the second 
round. So now we will recognize Mr. Graves.
    Mr. Graves. Thank you, Madam Chair.
    Mr. Shay kind of answered my question to an extent. But I 
am on the Ag Committee. And the USDA has a guaranteed loan 
program with limits up to $25 million. My question is, you 
know, should the capital access programs in the SBA be modified 
to higher limits?
    And, as I stated, you already kind of answered that, but I 
would like to get an answer from all of you on that. Obviously 
the limits are much different under the SBA. And I would be 
very curious how much that would help.
    Mr. Sabarsky. Thank you, Congressman.
    So the limits are important for folks in the early-stage 
biotechnology industry. Though I think the structure of the 
loan guarantees or grants through the Department of Energy or 
Department of Agriculture are the bigger issue, that would be 
helpful to increase the limits.
    I think the main benefit that I would like to see as a 
separate proposal perhaps that we could talk about later would 
be the ability to bootstrap a grant or award such that you 
wouldn't have to demonstrate your ability to come in with a 
minimum equity or the cost share components until after you 
have been awarded the dollars for the innovation for the 
ability to deploy technology that is considered to be important 
and then go out and raise the private dollars required to do 
that.
    Right now it is a catch-22. And it literally is keeping 
companies like mine out of the prices altogether versus other 
larger companies that may be dabbling in the science that we 
are doing or much smaller companies that are earlier-stage even 
than we may have gotten lucky with the funding shortly before 
the crisis that we are in right now.
    And I am not sure that that is the way the Congress 
intended the selection process for these programs to work. I 
think they assumed a well-functioning capital market, which 
capital markets are anything but well-functioning at the 
moment. That is my perspective.
    Mr. Graves. Mr. Zimmerman?
    Mr. Zimmerman. Thank you.
    For the sake of physician practices, I believe that the 
current limits are adequate. If you take into consideration for 
anywhere from a 3 to 6-physician practice, the average cost of 
an implementation might run between $120,000 to $250,000, I 
think the limits are adequate to help incentivize action.
    If you look at hospitals, on the other hand, their costs 
will obviously be much, much higher. But that is out of the 
realm of 3014.
    Mr. Graves. Mr. Fochler?
    Mr. Fochler. Yes. I think Mr. Shay made a great point. We 
are a small business looking to expand and grow. We have a lot 
of communities that have asked us to open up our store in some 
of the new developments that are out there. But I have 
personally hit my cap. I can't go back to get any more loans 
because the microloan has lent me all the money they can at 
this point. So Mr. Shay made a great point.
    Yes, we do need to work with our business model to grow, 
sustain, to increase more jobs. You know, we are stuck exactly 
where Mr. Shay said. So the increase will be tremendous.
    Mr. Graves. Go ahead, Ms. Finch.
    Ms. Finch. Under the 504 loan program, yes, an increase in 
the guaranteed amount would be tremendous because within the 
CDC industry, we have multiple borrowers. And they come to us. 
And they have done a 504 with us. And they want to do another 
location and do a real estate deal in another location. And 
they have maxed out.
    So we would be able to do multiple deals under 504 or, as 
Mr. Shay stated, if you are a franchise and you have got a big 
storefront, you have maxed out on 504, you cannot do another 
storefront under 504 under the limitations.
    And, even with a manufacturing company at $4 million, you 
know, another location, they are maxed out at $4 million. And 
we are unable to help them with 504. So the increase in the 
guaranteed loan amount would be very, very helpful under 504.
    Mr. Shay. Mr. Graves, could I just elaborate?
    Mr. Graves. Yes, absolutely.
    Mr. Shay. Just one further thought on that. I mentioned 
earlier the study that we did with PricewaterhouseCoopers that 
analyzed the economic impact of franchise businesses in this 
country and those 400 that have the investment levels of 
$750,000 to $2 million.
    We did some more analysis of the kind of growth rates that 
those companies experienced in the last decade. And it was six, 
seven, eight percent growth per year. And if we could get 5 
percent growth going even for the companies of this size, our 
estimates are that over the next 12 to 18 months, we would 
create more than 600,000 new jobs just by making that capital 
available to the people that hit the cap at $2 million.
    So when I said in my earlier remarks that from our 
perspective, the most important aspect of increasing the loan 
guarantee amount is the job creation aspect, that is really our 
view, that if we can get access flowing to these companies and 
we grow 16,000 or 18,000 new businesses and they employ 15 to 
20 people apiece, all of which are pretty conservative 
estimates based on past experience, that is well over half a 
million new jobs created out of this sector of the economy just 
from increasing the amount from 2 million to 5 million.
    Chairwoman vela1zquez. Ms. Dahlkemper?
    Ms. Dahlkemper. Thank you, Madam Chair. Thank you to the 
experts here on the panel for coming today and joining us and 
giving us your guidance and expertise.
    Dr. Zimmerman, yes, I have a question for you regarding the 
HIT loans. If you could expand a little bit more on the three-
year deferment period and how you think that will be important 
for smaller practices going forward?
    And if you have any thoughts or evidence on what you think 
will be the financial return when you implement that and how 
you can use that, then, of course, to repay the loan? I mean, 
do you think there will be that savings that is necessary with 
this three-year deferment to be able to then repay the loan?
    Mr. Zimmerman. I think so because if you look at most 
implementations, it takes about 6 to 12 months before the 
practice starts to get back up to the original level of 
productivity. So if you figure in a year of that decreased 
productivity getting back to baseline and then beyond that 
starting to generate more revenue, whether it be through cost 
savings and decreased cost of transcription, ability to see 
more patients per day, increase efficiencies in the office, 
decrease staff costs, by that point, by the second and third 
year, you are starting to generate more income, which would be 
able to start to pay off the cost of the loan.
    So for that three-year period to have a free, you know, a 
no-cost source of capital where you are not paying interest, I 
think that would be very beneficial for the practice.
    Ms. Dahlkemper. So the three-year time period you think is 
adequate--
    Mr. Zimmerman. I think so.
    Ms. Dahlkemper. --in terms of being able to get the returns 
that you need?
    Mr. Zimmerman. Yes.
    Ms. Dahlkemper. Okay. Thank you.
    Mr. Sabarsky, yes, I wanted to ask you if you could 
elaborate maybe on why you believe the conventional markets are 
not meeting the needs currently for early-stage and high-growth 
business as yours. What do you see is the biggest hurdle at 
this point?
    Mr. Sabarsky. Well, the biggest hurdle right now beyond 
just the lack of--it's a question of, why are the dollars not 
there, even though the dollars are there for later-stage 
investment?
    This is a phenomenon that we of the biotechnology industry 
have seen for the better part of 20 years. We have also seen 
it, frankly, with the pharmaceutical companies, who would 
prefer to pay more for later-stage products that have less 
risk.
    So on the curve of risk and return, at least the pharma 
companies had decided to pay more for less risk. I think the 
challenge right now as I interface with venture capitals--and 
there is a panel coming up next--is the venture capitalists 
that I have talked to seem to want to have the same type of 
return, but they are less willing to take the risk.
    And the challenge that I face is that folks on the angel 
investing side, the sort of high net worth individuals, friends 
and family, have a very limited ability to invest maybe single-
digit millions, $2 to $4 million, really, at most. And 
traditionally venture capitalists picked up the slack until 
more mature private equity has then come in. And so there is a 
sort of stair step.
    It is interesting as part of the financial crisis, this 
dynamic has been exacerbated. And I don't have great rationale 
to explain why venture capitalists have changed their models. I 
have a couple of venture capitalists actually telling me that 
they are shifting their model to actually invest in public 
securities, so not even private securities. So that may be 
something that other panelists could speak to.
    It is a mystery to me why this is the case, but it is a 
continuation of a dynamic that we have observed for some time 
now, Congresswoman.
    Ms. Dahlkemper. Thank you. Thank you. I appreciate that.
    I yield back.
    Chairwoman vela1zquez. Ms. Fallin?
    Ms. Fallin. Thank you, Madam Chairman. I appreciate all of 
you coming today and giving testimony. We certainly want to do 
all that we can to help your businesses grow and create access 
to capital. I have a couple of questions.
    We keep hearing about banks and the money that is available 
to be lent to the small businesses. And even this week, there 
were numerous reports of a lack of available credit and 
capital.
    Can you tell us why you think there is a disconnect between 
the assertations that credit is available while still small 
businesses claim they cannot get the credit and the available 
credit is being slashed? Can you tell us what some of those 
barriers are and if you are seeing that in your individual 
industries?
    Mr. Sabarsky. Congresswoman, I will sort of defer to the 
rest of the panelists here. In the biotech industry, especially 
at the small business level, generally it is not available. So 
it is all equity financing. But the other businesses here 
clearly could be benefited by the financing. So I will yield to 
them.
    Mr. Zimmerman. Thank you.
    From my experience from informal research with banking 
personnel and physicians, they find it increasingly hard to 
qualify for any funding in the past, where having a credit 
score of 720 or above meant you got a very good rate, now it 
means the difference between getting a loan at all or not.
    I have heard of several physicians who have had accounts 
with banks where they have had $2 or $3 million in savings with 
that bank or different funds. And in the past, where the bank 
would say when the physician would ask for a line of credit or 
a letter of credit, it would be a matter of just the procedure 
of printing out the letter, at this point now they are saying, 
``No. I don't think we can do that at this time.'' And there is 
no rhyme or reason. I am not an economist, but on the street, 
this is what people are experiencing.
    Ms. Fallin. Okay. Thank you.
    Go ahead.
    Mr. Fochler. Thank you.
    Yes. I actually firsthand dealt with some of this in my 
testimony, as I mentioned, going into multiple banks in the 
D.C. metro area, you know, with a credit score of above 720.
    A lot of them have gone. They aren't even looking at our 
growth rate. They aren't considering that. It is mainly based 
on I have to come up with the amount of equity to match the 
loan that I need. If I was in that position, I probably 
wouldn't be at that bank in the first place if I had that kind 
of available equity.
    So that is the really challenging part for us is even the--
what is really frustrating is when I work with some of these 
branches, the branch manager is actually very surprised I get 
turned down.
    At an average growth of over 168 percent since I have been 
the owner per year, to not have that in consideration is very 
frustrating. And this year we are even showing a higher growth 
than that at this point. And still I could be growing, creating 
much more jobs. So it is frustrating to hear that there is 
available credit. But I am not seeing it firsthand.
    Thank you.
    Mr. Shay. In the franchise context, I think the experience 
has been that, whereas, the loan officers over the recent 
history kind of held the decision-making authority over which 
loans got made and didn't get made, the pendulum has swung in 
the direction of the underwriters. And so the underwriting and 
the loan restrictions that go along with these loans I think 
from our perspective are driving the decision.
    And, you know, you can't blame the banks. And certainly we 
don't for the position they are in between shareholders and 
regulators saying, ``Don't make bad loans'' and the business 
community saying, ``We need access to credit.'' But, for 
example, the loans that were available to franchises several 
years ago, 18 months ago, for a relatively more modest equity 
up front, 20 percent equity maybe or in some cases plus or 
minus, now those loans are available at 50 percent equity. So 
the restrictions are very significant. And they are just not 
available.
    I mentioned to Ranking Member Graves, the other Ranking 
Member Graves, earlier--
    (Laughter.)
    Mr. Shay. --that we had a visit with the CEO of one of our 
member companies here doing the rounds in the last several 
months. And his situation is he has got 2,000 franchise 
licenses sold, contracts signed, franchise fees paid. And those 
2,000 franchisees are unable to obtain the financing necessary 
to open those stores. And this is a well-known franchise 
system.
    So, even for the well-known, well-established systems, if 
it is a problem when Wells Fargo and CIT and GE Capital and the 
others are just completely out of the franchise space, then we 
are really in a difficult position.
    Ms. Fallin. Okay. Thank you.
    Anything you want to say?
    Ms. Finch. Sure. Within the 504 industry, last year our 
total loan volume was down, you know, 30 or 40 percent. And 
even though the bank only has to do 50 percent of a project 
with the 504 behind it, they did not even want to pursue that. 
So the credit was that type.
    Within the last two to three months, we are seeing where 
banks are starting to at least entertain doing 504s and doing 
50 percent mortgages along with us to where during the month, 
just a few weeks of October, we have seen an uptake of about 10 
percent from where we were up from last year. So the banks are 
starting to get a little more comfortable at least doing a 504 
with a 50 percent mortgage. So there is a slight uptake.
    Ms. Fallin. That is some good news.
    Ms. Finch. Some.
    Ms. Fallin. Well, thank you very much. Thank you, Madam 
Chair.
    Chairwoman vela1zquez. Mr. Michaud?
    Mr. Michaud. Thank you very much, Madam Chair, Mr. Ranking 
Member, for having this hearing on increased access to capital 
for small businesses.
    I have talked to a lot of small businesses back in my home 
State of Maine. They, too, have a problem with accessing 
capital with the credit crunch. I know the financial stimulus 
package is supposed to help with the credit, allowing 
businesses to be able to get the financing they need.
    I have also talked to actually many credit unions, who 
actually have capital money or money that they would actually 
like to lend small businesses. But, unfortunately, there is an 
arbitrary limit set on credit unions of what they can lend for 
businesses.
    My question to each of you is, would you be supportive if 
Congress actually increased that or removed that arbitrary 
limit so credit unions actually can allow access to capital for 
small businesses?
    Mr. Sabarsky. Congressman, I will start over here. And I 
guess I will answer more as a member of the San Diego County 
Credit Union. I would be supportive, even though it would put 
our capital at risk, mainly because we understand that without 
access to capital, local, regional, national development just 
is stunted and, therefore, everything that flows from that, 
lack of job creation, as we see here, the local business, and 
all of the dollars that don't go to employees, don't go to 
everybody that those employees then would hire.
    And so I think we are strongly supportive of that, even 
though as a business, it would be unavailable to me. I still 
think that as members of the broader community, we are very 
supportive of that.
    Mr. Zimmerman. I think any measure to increase availability 
of lower-cost loans would be of great advantage to physicians, 
especially graduating residents from residency programs as they 
might go out to start up their own private practices. Most 
times the credit unions do provide more economical sources of 
capital. So I would support that.
    Mr. Fochler. Also as a member of a credit union, I would 
support it as well. I feel like also with the credit unions, 
sometimes I have been able to get a little bit more support, a 
little bit more technical assistance. I feel like they are 
there to really go above and beyond that I haven't seen from 
some of the major banks. So I think that would be phenomenal to 
do something like that.
    Mr. Shay. Without weighing in on the position that might be 
taken by the credit unions and their members, notwithstanding 
those that are here today, I think our folks certainly would be 
supportive of anything that we could do that would give access 
to more credit. So this is one of those things that can be 
achieved. I don't think any of our people would argue with it.
    Ms. Finch. If it is going to help the small business 
industry.
    Mr. Michaud. Well, thank you very much for answering that 
question. And also thank you for your testimony today because 
this a very important issue when small businesses are the 
backbone of our economy. And I think we have got to do 
everything that we have to do to make sure that they survive 
and thrive and grow. And that's why I thought it was amazing 
that artificial limit is set in statute. And we ought to 
definitely look at that. So thank you for your response.
    I yield back, Madam Chair.
    Chairwoman vela1zquez. Thank you.
    Mr. Luetkemeyer?
    Mr. Luetkemeyer. Thank you, Madam Chair.
    Yes, I often think of our Ranking Member as the phantom. 
That is our nickname for him. Now you see him. Now you don't. 
Now we see him. But thank all of you for being here today.
    I am rather curious. I know that we are talking about 
access to capital here. And one of the things that I think is 
important as we evaluate some of the SBA programs here is our 
access to those as well.
    What percentage of your members or do you have an idea of 
the participation that you have by your membership in SBA 
programs and how successful it has been? We can start with Mr. 
Sabarsky.
    Mr. Sabarsky. Sure. Thank you, Congressman.
    I think, in particular, the SBIR program the Committee must 
be well-aware of is probably the most used in the biotechnology 
and pharmaceutical industry. I think that has been a very 
successful program.
    I think the only issue, if you will, that we might have 
with it is that the dollar limits obviously tap out fairly 
early in the process for anything that is considered capital-
intensive. But it is an excellent method to develop initial 
proof of concept and get you at least to the beginning phases 
of what we call the Valley of Death.
    Mr. Luetkemeyer. Can you give me an idea, do you have an 
idea of the percentage of your members' participation? And if 
so, is it going up as a result of the lack of access to 
capital? Are you seeing more participation as a result of the 
constriction by the standard credit markets?
    Mr. Sabarsky. And we could follow up with BIO staff later. 
I suspect it is a very high percentage. Probably when you 
consider the small business segment of the larger biotechnology 
industry, it is probably north of 50 percent. They tend to be 
fully funded. Sometimes you even get overhead as well. So they 
both get the research done and help keep the lights on.
    So I think they are very important programs and would 
strongly support their continuation and even expansion beyond 
the current limits under current law.
    Mr. Luetkemeyer. Very good. Thank you.
    Dr. Zimmerman?
    Mr. Zimmerman. Thank you.
    I am actually not aware of the AOA's membership's actual 
involvement in the SBA program, but my understanding with this 
proposed legislation, it would greatly increase the access to 
those guaranteed loan programs.
    Mr. Luetkemeyer. Okay. Perfect.
    Mr. Fochler?
    Mr. Fochler. My experience with some of the business-to-
business groups that I am with, I don't know the exact 
percentage, but I also don't know of any other small business 
that doesn't have a loan somehow tied to the Small Business 
Administration. So I would say I don't know the percentage, but 
it is extremely high. Every loan that we do have is somehow 
tied to a Small Business Administration loan.
    Mr. Luetkemeyer. Okay. Have you seen an increase in the 
request or utilization of SBA loans as a result of the 
restriction that we are having right now?
    Mr. Fochler. It is hard to tell. I mean, I can't even 
request any more because I have used what I can. So it is not 
even an option for me to go back and even request anything 
else. So I am just at that point where I can't request 
anything.
    Mr. Luetkemeyer. Okay. Very fine.
    Mr. Shay?
    Mr. Shay. I can't give you specifics on how much it has 
increased, but clearly among our membership, the usage of SBA 
loans has increased dramatically because the other sources are 
essentially all gone now. So as these private lenders have 
disappeared or pulled back from the market, there really isn't 
anywhere else to go for many of these companies.
    I know the SBA can track what portion of the loan portfolio 
is related to a franchise business. And I suspect that we could 
also extract through our research partner information related 
to the number of franchise companies that use SBA loans and 
what that incident is.
    But there is no question, just even anecdotally, that that 
number has increased dramatically over the course of the last 
year, just because those other sources are no longer there.
    Mr. Luetkemeyer. Very good.
    Ms. Finch?
    Ms. Finch. Well, since I am here representing NADCO of 200 
members plus and we administer the 504 and deliver the 504 loan 
program, we are all very successful at that.
    [Laughter.]
    Mr. Luetkemeyer. A fairly good answer from you.
    Ms. Finch. However, as you will know, our loan volume is 
down due to decrease by our lending partners working with us 
and the access to capital for small businesses, but we are all 
very successful.
    Mr. Luetkemeyer. Thank you.
    I will yield back my time. Thank you, Madam Chair.
    Chairwoman vela1zquez. Thank you.
    Ms. Halvorson?
    Ms. Halvorson. Thank you, Madam Chairman. And thank you all 
so much for being here.
    I just think that this is very important because everywhere 
I go, the first thing I hear from every business person I talk 
to, no matter where I go, is access to credit and access to 
capital from whatever business person I am talking to. My 
husband and I own two businesses. And everybody I know owns 
something. And they can't get credit.
    You know, Mr. Shay, you talk about the fact that you say 
that the 7(a) loan program should go from 2 million to 5 
million. Is that what you say? I don't disagree. I know I am 
sponsor of the bill to increase it from 2 to 3 million. It is a 
start.
    However, the people who are opponents of that say that the 
SBA would have to take on too much risk and then now we are 
giving, you know, maybe big business too much opportunity to 
get into having a small business. Then we are taking away from 
what this truly is for.
    What do you say to that?
    Mr. Shay. Well, our perspective is that when you are 
talking about a loan amount of 750 to 2 million--and I 
reference that a couple of times--we have got 400 members that 
fit in that category. And those people are out creating jobs.
    And, to the Chairwoman's point, there are businesses that 
operate with a business plan and a recognized trademark and a 
brand name. So the risk is relatively less when compared to a 
pure start-up business.
    Our focus is on creating jobs for the economy. And we think 
that if this is a demonstrable way in which we can do that, 
that it would be--``irresponsible'' is maybe too strong a term, 
but if there is an opportunity here for job creation, that we 
should do it.
    And if there are outrageous numbers of failures for some 
reason, then we can revisit the issue. But in the short term, 
these businesses really have nowhere else to go. And the SBA is 
a lender of last resort. And so we want to get people back to 
work and get the economy moving. And we think this is a 
responsible way to try to do that.
    Ms. Halvorson. Thank you.
    Because it is something that we are all still talking 
about. So I encourage the input. And I am still getting plenty 
because I don't disagree with you.
    Ms. Finch, could you help me clarify? You were saying that 
together we can fix some of this bureaucracy within the 
clarification of some of the paperwork. I know you used the 
words that we need to be ``creative and flexible'' and that it 
is too ``arcane and restrictive.'' But I didn't hear what we 
need to do.
    So if you could help me just answer some of the things of 
what we need to do with being creative and flexible and not so 
arcane and restrictive.
    Ms. Finch. Well, the paperwork under a 504 loan has 
increased from this size to this size over the last 20 years. 
One of the things that is restrictive is that we look at net 
worth and profit after tax. And those figures could be 
increased to allow more--and they are still small--would still 
allow more small businesses into our program. That could be 
increased definitely.
    Personal resources test is something that I think can be 
viewed. That is a new regulation that had come into play about 
three or four years ago. And people that have large net worths 
or have accumulated money over the years are penalized from 
using our program basically because they have larger liquid 
assets. So that could be either done away with or some sort of 
limitation possibly, but that could easily be done away with.
    It is the little things that have crept into our program 
that have made it much more difficult for small businesses to 
become eligible.
    Ms. Halvorson. Okay. And just so you know, this 
administration has a great technology department. And because 
of so many of us who want to decrease bureaucracy, we have now 
created--and if any of you out there have done FASFA forms for 
student aid, I used to do three a year. And they are very 
awful.
    Now they will be done almost with the click of one click. 
So we are hoping that with a lot of your input, we will be able 
to do the same thing with this. We have the technology we need 
to use these experts that we have in this administration to do 
that.
    So I look forward to working with all of you on that.
    Ms. Finch. Great. Thank you.
    Ms. Halvorson. Thank you.
    I yield back, Madam Chairman, unless, sir, you have 
something to add? Please? Go ahead.
    Mr. Fochler. I just wanted to say, too, from my experience 
with some of these requests of raising some of the limits, 
doing some research and development on the microloan programs, 
I mean, it is really phenomenal the way they give extra 
technical support to make it a lot less risky. They teach us.
    As Mr. Shay was saying, a lot of the franchises out there, 
they are still small business owners. They are taking a lot 
less risk, but at the same time we could all use some extra 
technical assistance. And these microloan programs are I think 
a great system to kind of take a look at for increasing some of 
these other programs as well.
    Ms. Halvorson. I absolutely agree. And we need to find that 
happy medium. So thank you all so much for everything.
    I yield back, Madam Chairman.
    Chairwoman vela1zquez. Mr. Schrader?
    Mr. Schrader. Thank you all for your generally positive 
comments on the new Investment and Financing Act of 2009. 
Hopefully this is a beginning. And certainly while we would 
like to do more, we are constrained, like many businesses, in 
terms of how much money we can actually spend at any given 
point in time. So a lot of your suggestions I think fall on 
very receptive ears. And hopefully going forward and as, Lord 
willing, our economy recovers, we will be able to make some 
additional investments.
    I was interested a little bit in, Mr. Shay, your comments 
about the real estate portion of what SBA is doing and how that 
we may be overemphasizing that, on one hand, and maybe the 
market interest rates might be more. Can you elaborate on that 
a little?
    And then I would like Ms. Finch's response to that if that 
is okay.
    Mr. Shay. Sure. And I don't want to pick any fights with 
anybody, but one of the things that we think would make sense 
to put the emphasis where it ought to be in terms of the 7(a) 
program would be to look at the amortization periods and say, 
for example, a loan that is going to amortize over a period of 
15 years or longer, that there ought to be borrower fees 
associated with that and for a loan that is going to amortize 
over a period of 15 years or less--I guess it can't be 15 years 
or more but split the difference. For the shorter-term 
amortizing loans, we ought to reduce lender fees for those.
    I mean, the goal ought to be to create incentives for the 
money to go to the places that are really going to help start-
up businesses, as opposed to a longer-term amortization. And a 
small business is not a 30-year amortization or an 18-year 
amortization. A small business is a start-up if they need an 
injection of capital for 18 months or 12 months or 2 years or 
something like that.
    So whatever we can do to sort of reset some of things that 
would emphasize or create incentives for the capital to flow to 
the start-up side, from our perspective, that makes sense.
    Now, obviously other people will have other perspectives 
for totally legitimate reasons, but that is our view of one way 
in which you might do that.
    In terms of the market rate on the interest charges--and I 
am not sure if you were alluding to that as well. I mentioned 
that. It is in our written submission. In that area, clearly 
from what everyone here has said, I think, the demand for 
access to capital exceeds the current supply or if not the 
supply--and I think maybe it doesn't exceed the supply because 
we know the balance sheets look pretty healthy in a lot of 
places, but it exceeds willingness to lend.
    And so the question is not so much how we create more 
supply. The question is how we create incentives to lend. And 
incentives to lend, back to the observation that capital is 
agnostic, I mean, capital will go where it is going to achieve 
the greatest return on investment.
    And so if there are lenders out there that look at 
opportunities to make loans and say, ``If it is an SBA loan, I 
can earn six and a quarter. And if it is a loan somewhere else, 
I can earn eight or nine percent,'' then they are not going to 
do an SBA loan. And we can't blame them for that.
    So our view would be if there is an opportunity to strike 
more of a balance there between the interests of lenders and 
borrowers, recognizing this is a government agency and--
    Mr. Schrader. You have got some borrowers that are actually 
lending at eight percent? I don't have many in my area, but I 
appreciate.
    Mr. Shay. Yes. I think that in some places, it happens. And 
Ryan talked about that. It is still better than a credit card. 
So, I mean, if you are really desperate for capital and you 
have got a great idea, you will pay whatever you have to pay. 
And I think a lot of lenders don't want to do deals at six 
percent if they can do a better deal somewhere else.
    Mr. Schrader. Ms. Finch, comment?
    Ms. Finch. When the American Recovery Act was passed and 
the money was available to pay fees under our program, it did 
increase our loan activity. It was a real incentive for 
businesses who maybe stepped back and were thinking twice about 
expansion, saw this as an incentive of, well, maybe this is a 
good time to expand because I can have the savings on the up-
front fees. So they would go ahead and do their expansion. I 
feel that is money well spent.
    As I stated in my testimony, though, beginning October 1, 
our subsidy rate went from zero to 389. I think that increase 
in fees is going to eat away at small business' cash flow that 
if they were to apply for a 504 loan, if that fee were to be 
paid for and that would be a savings to them, that that would 
be also another incentive for them to use the SBA 504 program.
    So I think there are ways to use money smartly and more 
effectively, more cost-effectively, to help give an incentive 
to small businesses to use our types of programs.
    One thing I will also mention is under 504, if you are a 
small business start-up, you are required to put in 15 percent. 
Otherwise, under 504, you could get in for 10 percent if you 
are an existing business.
    That is a requirement, and I believe that is statutory. So 
if that barrier were taken away and it was more of a credit 
decision as to who should put in 10 percent and who should put 
in 15 percent, that barrier being taken away could help be a 
stimulus to small business expansions and start-ups.
    Mr. Schrader. Thank you both very much.
    I yield back.
    Chairwoman vela1zquez. Thank you.
    Ms. Finch, correct me if I am wrong, but I think you 
mentioned that since October, your lending partners have 
increased lending activities by ten percent?
    Ms. Finch. In my particular--
    Chairwoman vela1zquez. Yes.
    Ms. Finch. In my state, yes.
    Chairwoman vela1zquez. I am glad to hear that. However, 
many analysts have voiced concern that a collapse in commercial 
real estate is yet to come. And the focus of CDC's 504 is 
basically financing on real estate projects.
    So does the proposed legislation contain the necessary 
tools to control rise in costs and address the potential for 
increased losses in the program?
    Ms. Finch. I believe it does in that it also, then, gives 
CDCs the ability to try and recover on their 504 loans. We have 
the authority, but we don't have policies, procedures in place 
for us to be able to do that on our own.
    And CDCs have been doing this in many other programs that 
they administer. So by giving us the ability to try and 
recover, liquidate and recover, on our own loans, I think that 
is a very important aspect.
    Living in Missouri, I know what my market is. I know how to 
liquidate a property and try and maximize my recoveries. And 
right now we are partnering with the SBA in doing that. But I 
think if we were given the ability to have more freedom to do 
that, I think that is going to be very helpful.
    Chairwoman vela1zquez. Okay. Thank you.
    Mr. Graves? You don't. So let me take this opportunity 
again to thank you all. And you are all excused. Thank you.
    Ms. Finch. Thank you.
    Chairwoman vela1zquez. I will ask the members of the second 
panel to please come forward
    Mr. Schrader. [presiding] I would like to welcome the 
second panel to the Committee here today, look forward to your 
testimony. And we will start with Mr. Sekula.
    Mark Sekula is the Senior Vice President of Business 
Services of the Randolph-Brooks Federal Credit Union, one of 
our nation's leading credit unions, serving more than 300,000 
members, many of whom have served in our armed forces, I 
understand.
    Mr. Sekula is testifying on behalf of the National 
Association of Federal Credit Unions, the leading trade group 
for our nation's federal credit unions.
    Welcome.

                    STATEMENT OF MARK SEKULA

    Mr. Sekula. Thank you.
    Good afternoon, Chairman Ranking Member Graves, and members 
of the Committee. My name is Mark Sekula, and I am testifying 
today on behalf of the National Association of Federal Credit 
Unions, NAFCU. I serve as the Senior Vice President for 
Business Services for Randolph-Brooks Federal Credit Union, 
headquartered in San Antonio, Texas.
    This June Randolph-Brooks Federal Credit Union was 
recognized by SBA Administrator Karen Mills as the SBA 2009 
credit union lender of the year. We were also ranked as the 
fifth largest SBA patriot express lender in the United States 
with year-to-date volume for 2009 with 133 loans for 
approximately $8 million. Randolph-Brooks is also ranked as the 
number one SBA lender in the 55 counties in our SBA district 
for 2009.
    Randolph-Brooks started its business program only five 
years ago. And today we have over 16,000 business accounts. We 
only started SBA lending a little over two and a half years 
ago, at the request of our members. And we currently have 414 
loans for about $20 million. We grew 13 million of that from 
2008 to 2009 as businesses turn to us for credit after losing 
other sources.
    Through fiscal year 2009, which for the SBA runs from 
October to September, we generated 153 loans, for 8.9 million, 
and helped create 396 jobs and retain 799 employees.
    It is also widely recognized that credit unions did not 
cause the current economic downturn. However, we believe we can 
be an important part of the solution. Credit unions have fared 
well in the current environment and, as a result, may have 
capital available.
    Surveys of NAFCU member credit unions have shown that many 
are seeing increased demand for mortgage and auto loans as 
other lenders leave the market. A number of small businesses 
who have lost important lines of credit from other lenders are 
turning to credit unions for capital that they need.
    Many small business owners are members of credit unions 
around the country and rely on our services to help make their 
small businesses successful. Our nation's credit unions stand 
ready to help in this time of crisis and, unlike other 
institutions, have the assets to do so. Unfortunately, an 
antiquated and arbitrary member business lending cap prevents 
credit unions from doing more for America's small business 
community.
    The current economic crisis has demonstrated the need to 
have capital available to help our nation's small businesses, 
especially in troubling times. Many credit unions have the 
capital other lenders cannot provide but are hamstrung by this 
arbitrary limitation. It is with this in mind that NAFCU 
strongly supports the passage of H.R. 3380, the Promoting 
Lending to America's Small Business Act of 2009.
    Introduced by Representatives Kanjorski and Royce, this 
important piece of legislation would raise the member business 
lending cap to 25 percent while also allowing credit unions to 
supply much needed capital to under-served areas, which have 
been among the hardest hit during the economic downturn.
    NAFCU strongly supports the reintroduction of the Credit 
Union Small Business Lending Act, which was first introduced by 
Chair vela1zquez in the 110th Congress. We also support the 
legislation currently before the Committee, H.R. 3723, the 
Small Business Credit Expansion and Loan Market Stabilization 
Act of 2009. We believe that this legislation takes important 
steps toward improving the SBA and its 7(a) loan programs and 
will help credit unions do more with the SBA.
    When I cover this bill in more detail in my written 
testimony, an important aspect of this legislation is a 
continuation of the program started under the American Recovery 
and Reinvestment Act of 2009, including a continuation of the 
90 percent guarantee on SBA loans and the lower fee structure. 
The continued guarantee is particularly helpful for credit 
unions as the guaranteed portion of the SBA loans does not 
count against the arbitrary member business lending cap.
    We also applaud the provisions that would assist small 
lenders that do not participate in the preferred lender program 
and that would have the SBA provide training to smaller 
lenders.
    Finally, we believe the capital backstop program 
established in this bill could be an important tool in allowing 
credit unions to get capital to small businesses in a time of 
need as the SBA would handle much of the administrative work in 
such a circumstance.
    In conclusion, the current economic crisis is having an 
impact on America's credit unions, but we continue to provide 
excellent service to our members. Credit unions stand ready to 
help our nation and our nation's small businesses recover from 
the current economic downturn. Legislation, such as H.R. 3723 
and the Promoting Lending to America's Small Businesses Act, 
H.R. 3380, would aid credit unions in their efforts to help our 
nation's small businesses.
    I thank you for the opportunity to appear before you today 
on behalf of NAFCU and would welcome any questions that you may 
have.
    [The prepared statement of Mr. Sekula is included in the 
appendix.]

    Mr. Schrader. Thank you very much.
    Let's go to Ms. Carolyn Galiette, Senior Managing Director 
of Ironwood Capital located in Avon, Connecticut. Ms. Galiette 
is testifying today on behalf of the National Association for 
Small Business Investment Companies, one of the oldest 
organizations of venture capitalists in the world and leading 
trade organization for small business investment companies.

                 STATEMENT OF CAROLYN GALIETTE

    Ms. Galiette. Thank you, Representative Schrader, 
Representative Graves, and members of the Committee. Thank you 
for the opportunity to appear before you today. Your dedication 
to the small business community is appreciated by all of the 
small business investment companies that I represent and by all 
of the small businesses that we support.
    My name is Carolyn Galiette. I am a senior managing 
director and co-founder of Ironwood Capital, an investment 
management firm located in Avon, Connecticut. Over the past 
eight years, Ironwood Capital has become a staunch supporter of 
the SBIC program. We manage three SBICs, the first of which was 
licensed on September 7th, 2001 and the third of which was 
licensed in June of 2007.
    We, like many other SBICs, have managed through turbulent 
times but have remained steadfastly focused on the objectives 
of the SBIC program to provide patient capital, operating 
advice, and market experience to eligible small businesses to 
generate a return for our limited partners through the success 
of these small businesses and be thoughtful stewards of the 
taxpayers' money, which lends capital to our funds.
    We fill a capital need that is unmet by other financial 
institutions, including banks which provide SBA-guaranteed 
loans. To date we have invested in 53 small businesses in 
places ranging from Moline, Illinois to Winterville, North 
Carolina and to Brooklyn, New York. We also travel to invest in 
smaller cities, such as Hockley, Texas; Fitzgerald, Georgia; 
and Middleburg, Pennsylvania, places that are often overlooked 
by other capital providers.
    Our partnership with the SBA has enabled our portfolio 
companies to create approximately 4,500 jobs and to increase 
revenues in these companies by over 50 percent on average. 
Moreover, we have accomplished all of this while making 50 
percent of our investments in companies owned and managed by 
women and minorities and businesses located in and employing 
residents of low and moderate-income communities. We have 
provided capital where larger, more established financing 
sources would not, some of which are the very lenders and 
investors who recently received TARP financing.
    The SBIC Debenture program is an incredible resource for 
small businesses and the taxpayer. This program is truly 
market-driven and operates at a zero subsidy rate, requiring no 
appropriations. Unfortunately, despite the efficiency of the 
SBIC credit facility, the program is dramatically under-used, 
due in large measure to the cumbersome and time-consuming 
process of obtaining a license and operating within the 
guidelines of the program. Fiscal year 2009 used only about 20 
percent of the program's $3 billion in capacity, denying 
domestic small businesses over $2 billion in growth capital.
    The SBIC Modernization and Improvement Act creates a 
streamlined licensing process that enables well-performing 
SBICs to establish follow-on funds in a timely manner, thereby 
avoiding a waiting period of one year or more that currently 
plagues the process. In fact, it took us 11 months to get our 
second fund license, 9 months to get our third fund license, 
and another 7 months on top of that to complete the FBI checks.
    At the same time, the proposed legislation retains the 
rigorous underwriting process currently in place for new 
managers. Moreover, by increasing the borrowing ceiling on 
families of funds in good standing, the bill creates the 
ability to keep successful SBIC operators in the program.
    Without these changes, these growth constraints will, 
unfortunately, preclude our next fund from being an SBIC, a 
prospect that disappoints me and an outcome which will likely 
affect many of our similarly successful peers. It would be a 
terrible waste to push aside fund managers, who have proven to 
be experts at empowering and in growing small business.
    The bill needs a few technical adjustments, but otherwise 
it is a very solid piece of legislation whose passage we 
consider to be time-critical. Because it enhances a successful 
existing program, it could be implemented expeditiously and 
actually be utilized to deploy needed capital to small 
businesses early in 2010.
    I strongly encourage all of you to move this bill forward 
as quickly as possible. Similarly, the Small Business Early-
Stage Investment Act addresses a critical need for small 
business equity capital.
    We believe several technical changes should be included in 
order to ensure the long-term success of this new program. 
These improvements include the licensing by SBA of early-stage 
program participants and the broadening of the program, to 
include industries, such as manufacturing and industrial 
technology, industries which lie beyond the Silicon Valley 
companies that will likely constitute the current focus of the 
bill.
    In addition, there are a number of other provisions that 
have served the SBA well, which we advocate should be added to 
this program. We seek legislation that benefits not only our 
members but, equally importantly, policies that benefit the 
U.S. taxpayer and the small businesses we serve because without 
all of these constituents, we cannot succeed.
    The SBIC program marries individual entrepreneurship with 
government assistance in a way that is productive for all and 
which is absolutely crucial to our nation's economic growth.
    Thank you for the opportunity to speak to you today and 
your support of small business.
    [The prepared statement of Ms. Galiette is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Ms. Galiette.
    Our next witness is Mr. Michael Menzies. He is the--oh, I 
am sorry. I am sorry. Suzette Dutch--I am sorry--is the 
Managing Partner with Triathlon Medical Venture Partners in 
Cincinnati, Ohio. This is a venture-based venture capital firm 
that invests exclusively in the life sciences.
    Ms. Dutch is testifying today on behalf of National Venture 
Capital Association, which represents the U.S. venture capital 
industry, with more than 450 member firms.

                   STATEMENT OF SUZETTE DUTCH

    Ms. Dutch. Thank you, Chairman vela1zquez, Ranking Member 
Graves, and members of the Committee. My name is Suzette Dutch, 
and I am co-founder and Managing Partner with Triathlon Medical 
Ventures, an SBIC based in the Midwest that invests exclusively 
in life science funds.
    By virtue of our regional presence and $105 million in 
capital funding, we are one of the leading sources of early-
stage life science investment in the Midwest.
    In addition to having been a venture investor since 1987, I 
am also a member of the National Venture Capital Association. 
And it is my privilege to be here today on behalf of the 
venture capital industry to support the Small Business Early-
Stage Investment Act of 2009.
    We believe this bill presents a tremendous opportunity to 
fund more of the most promising small businesses in our 
country. The venture industry has consistently supported the 
notion that significant value can be created when government 
and the private sector work together. The intent of this 
program appears to do that and to be beneficial to regions of 
the country that today are under-served in terms of access to 
capital.
    There have traditionally been limited funding sources for 
ventures which carry significant entrepreneurial and 
technological risk. The current economic climate makes even 
traditional institutional investors slow their commitments to 
this asset class and makes the need for public collaboration 
more critical to these engines of future economic prosperity.
    Given the risk of failure and the lack of collateral in 
their early years, these start-up companies are not able to 
qualify for traditional commercial loans, nor are they 
appropriate for the SBA's Debenture Program as the long time 
until profitability prevents them being able to support a 
current interest payment portion.
    Appropriately, the expertise to select and nurture these 
investments keeps other alternative providers, such as buyout 
shops and hedge funds, away and leaves it to venture 
capitalists to fund these companies. The program would bolster 
the country's ability to offer promising companies a better 
chance to grow and thrive at a time when we need more jobs and 
stronger economic growth.
    Implementing this program through established venture firms 
recognizes that intelligent investing and measured risk taking 
requires more than money, requires expertise and guidance from 
professionals who understand the industry's competition and 
strategic landscape into which these start-ups are operating 
and who have the networks of relationships to assist the 
companies as they grow.
    While venture capital is a national industry with venture-
backed companies in every state, there is a concentration on 
the coasts. This program, as structured, will benefit other 
parts of the country where this is needed.
    For example, in Ohio, where my firm is headquartered, 
venture capitalists invested $39 million in 17 companies in the 
first half of '09 compared to $3.4 billion invested in 476 
California companies during the same time period.
    Ohio, as well as other states in our Midwest geographic 
footprint, has the entrepreneurs, university labs, and leading 
medical institutions that drive venture investment. It is 
capital we lack. And the opportunity to be part of this program 
and support local companies would be welcomed by firms like 
mine that have access to a great many more ideas than we can 
fund on our own.
    The bill is currently proposed as an excellent start by 
offering the right incentives to the right stakeholders, by 
requiring privately managed companies to have capital 
commitments from non-federal sources.
    There is an intrinsic vetting that occurs, assuring the SBA 
a level of comfort that the applicant already has the support 
of accredited investors. Limiting the grant to 100 million for 
a single fund supports the appropriate diversification, 
protecting the government's interest as well as facilitating 
syndication.
    The focus on early-stage investing in a diversity of 
industries channels government funding where it has 
historically been the most successful and where the gap is 
greatest between academic grant funding and expansion funding.
    As we move through the legislative process, there are a few 
considerations we think will maximize the success of the 
program. First, venture capital funds have a ten-year life. 
And, therefore, we recommend the language be amended to permit 
drawdowns of capital over the life of the fund for follow-on 
investment and payment of expenses. This would make the 
language more consistent with industry norms and could be 
tempered with a restriction on new investments or a maximum 
percentage that could be drawn down after the first five years.
    Another area of potential concern is the requirement that 
distributions be made to all investors in the form of cash 
without the option of distributing freely tradeable public 
stock. Recognizing IPOs are often a form of financing, rather 
than a liquidity event, this prevents other investors from 
achieving potential up-side and post-IPO stock appreciation and 
may make them reluctant to commit to funds.
    With these changes, we strongly support this program. And I 
look forward to answering any questions.
    [The prepared statement of Ms. Dutch is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Ms. Dutch.
    Our next witness, Mr. Michael Menzies, is the President and 
CEO of Easton Bank and Trust Company in Easton, Maryland. 
Easton Bank is a state-chartered community bank with $150 
million in assets. Mr. Menzies is also Chairman of the 
Independent Community Bankers of America. ICBA has nearly 5,000 
members representing more than 20,000 locations nationwide.
    Welcome.

                  STATEMENT OF MICHAEL MENZIES

    Mr. Menzies. Thank you, Chairwoman vela1zquez and Ranking 
Member Graves, members of the Committee. It is my honor to 
represent the 5,000 community bank members of the Independent 
Community Bankers of America.
    With many of the largest firms stumbling and the 
unemployment rate reaching ten percent, the viability of the 
small business sector is more important than ever. The SBA loan 
programs were created to assist our nation's entrepreneurs. 
ICBA appreciates the Committee's support of robust SBA loan 
programs and proposals to make them even better.
    Community banks like mine specialize in small business 
relationship lending. For their size, community banks are 
enormous small business lenders. While community banks 
represent about 12 percent of all banking assets, they make 31 
percent of the dollar amount of all small business loans of 
less than a million dollars. Notably, half of all small 
business loans under $100,000 are made by community banks.
    The headlines have been full of reports of the giant mega 
lenders that took on huge risks and stumbled. Community banks 
represent the other side of this financial story. Despite the 
dominance in the media about a credit crunch, community banks 
are alive and well and lending. In fact, small banks of a 
billion dollars in asset size or less were the only segment to 
show an increase in their net loans and leases in the last FDIC 
quarterly data.
    The ICBA was pleased with the ARRA stimulus enacted in 
February, which contained several ICBA-backed tax relief and 
SBA reform measures. Specifically, the major SBA loan program 
enhancements enacted are all helping many small businesses ride 
out this deep recession. And we support the extension of the 
key incentives for the SBA 7(a) and 504 lending programs.
    At my bank I have made use of both the first-time home 
buyer tax credit and the SBA ARC loan program. ICBA applauds 
the Small Business Committee's legislation to extend the 
beneficial SBA enhancements included in the stimulus package, 
such as extending the SBA fee reductions and higher guarantee 
levels, expanding the ARC loans programs to apply to existing 
SBA loans, increasing the maximum loan amount to $50,000, and 
streamlining loan paperwork, making permanent the SBA secondary 
market facility authority.
    ICBA believes the key to best meeting small business 
capital needs is to have diversity in SBA lending options. The 
SBA should be there to meet the needs of both large and small 
SBA loan program users.
    Before this financial crisis hit, nearly 60 percent of all 
SBA loans were concentrated in just 10 banks. This is 
unacceptable because there are more than 8,000 community banks 
nationwide that can support a large number of SBA loans in 
total if community banks are able to access SBA loans more 
easily. In other words, we don't want an SBA with a one size 
fits all cookie cutter approach that only the biggest volume 
SBA lenders can use.
    To help encourage more lenders to extend SBA loans to small 
businesses, we support making the community express program 
permanent, supporting a small lender outreach program, 
establishing a permanent rural lender program, and creating a 
national lender training program.
    ICBA appreciates the Small Business Committee's support for 
the SBA programs and especially for proposing a robust 
authorization level. Specifically, we support $17.5 billion in 
7(a) program authority, increasing the SBA 7(a) loan limit from 
$2 million to $3 million--that is enough--allowing alternative 
loan size standards for determining eligible small business 
borrowers.
    We support the Committee's work. Thank you for all of your 
efforts in getting the credit needs of small businesses 
satisfied throughout America. I would be thrilled to answer any 
questions you may have.
    [The prepared statement of Mr. Menzies is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Mr. Menzies.
    Our next witness is Mr. Cass Johnson. He is the CEO of the 
National Council of Textile Organizations. The National Council 
of Textile Organizations represents the entire spectrum of the 
textile industry.
    Welcome.

                   STATEMENT OF CASS JOHNSON

    Mr. Johnson. Thank you.
    Good afternoon, Chairman vela1zquez, Ranking Member Graves, 
and members of the Committee. My name is Cass Johnson. I am the 
President of the National Council of Textile Organizations.
    I think this is the third time I have had the opportunity 
to testify before your Committee. May I just say that you 
always tackle important subjects. We really appreciate it. You 
shine a light where many committees, for some reason, dare not 
go. I just want to thank you for that.
    The U.S. textile industry is the third largest exporter of 
textile products in the world. We export over $16 billion in 
goods to other nations. In that export context, I would like to 
touch briefly on a new topic, the availability of export 
financing for small businesses.
    As the last 12 months have shown, we truly live and compete 
in a global economy. Credit is an essential ingredient in that 
economy. And access to credit, particularly credit for export, 
has become a new and major competitive issue for our industry 
and for other sectors.
    During the financial crisis, Asian governments and banks 
reacted swiftly to ensure that export credit was not only 
available and plentiful. In April, China announced a textile 
revitalization plan that extended increased textile export 
subsidies and new credit lines and guarantees to its small and 
medium-sized textile companies.
    In August, Pakistan announced it was eliminating taxes on 
all textile exports and would be granting comprehensive 
insurance for all textile exporters. And yesterday, India 
announced that all textile exporters would now get a two 
percent rebate on their credit costs from the Indian 
government.
    Unfortunately, in regards to export credit availability 
here, the opposite has been the case. Our industry's access to 
export credit has been significantly reduced. As U.S. 
government institutions, U.S. banks, regional banks, and 
private insurers have deemed the $25 billion textile and 
apparel trade between the United States and the NAFTA, CAFTA 
Andean region to now be risky and, as a result, have hiked 
fees, reduced credit, and withdrawing guarantees and insurance.
    To illustrate the problem, imports of finished apparel from 
Asia have dropped by ten percent this year. That is about the 
drop in U.S. consumption. However, within the CAFTA, NAFTA 
Andean region, imports are down by 22 percent. Accordingly, 
U.S. textile exporters have seen their exports decline by 24 
percent. It will come as no surprise to hear, then, that our 
sector has been forced to lay off more than 50,000 workers 
since December of last year.
    When we surveyed our members as to why U.S. exports were in 
decline to the region, they universally responded that credit 
has been significantly curtailed to their customers in the 
region.
    We also learned that our mills are increasingly being asked 
to extend credit to apparel customers overseas who used to have 
their own credit and that they are being asked to do so 
sometimes without normal private insurance or government 
guarantees that used to be in place. And while this has been 
occurring, U.S. mills have been squeezed by their own banks.
    We have instituted new fees, requirements, and standards 
for extending credit to them. To make matters worse, Ex-Im Bank 
has sharply reduced its activity for textile and apparel trade 
in the Western Hemisphere and, according to our members and 
importers, guarantees almost no trade, none of that $25 billion 
trade, in the region. As you can see, the entire credit chain 
for textile and apparel accomplished in the Western Hemisphere 
is under strain.
    NCTO, the National Cotton Council and our members, have 
been examining programs in the SBA and the Ex-Im Bank in order 
to determine how best to restore credit availability.
    We have determined that with a few updates, the SBA's 
export working capital program could provide an essential 
assist during these difficult times. These modifications 
concern the size of the loans being guaranteed and the limit on 
the size of the companies that can access guarantees. These two 
components need to be updated so that textile companies and 
other manufacturing exporters can take advantage of the 
programs.
    Regarding the size of the companies, we are asking that the 
size limitations for companies in NAICS code 313, which covers 
all manufacturers, be standardized at 1,250 employees. A number 
of NAICS numbers have limits as high as 1,500, but our 
companies, for instance, have limits at 500. This will 
automatically open new export opportunities for small and 
medium-sized enterprises in the United States and provide 
access to almost all textile exporters.
    Regarding the loan amount, we recommend a new export 
capital program be created outside of the 7(a) program. We 
suggest that the SBA set loan amounts at 5 million, 10 million, 
and 15 million that tie risk to the amount borrowed. The terms 
of the loan would be from 12 to 18 months and use standard SBA 
terms and interest rates. The guarantee level would be 
dependent on loan size.
    In closing, our industry has solid export opportunities in 
the CAFTA and NAFTA regions and has helped create a platform 
that today accounts for $25 billion in exports and employs over 
1 million workers region-wide.
    However, faced by the reduction in export financing and 
well-capitalized competitors in Asia, we desperately need more 
financing and access to more financing options. We believe the 
SBA ca play an important role. And we urge the Committee to 
consider these two important modifications.
    Thank you very much.
    [The prepared statement of Mr. Johnson is included in the 
appendix.]

    Chairwoman vela1zquez. Thank you, Mr. Johnson.
    Mr. Sekula and Mr. Menzies, can you tell me what is the 
average loan size of 7(a) loan programs that you have made in 
the last two, three years?
    Mr. Sekula. Yes, Madam Chairman.
    We have only been in the SBA lending arena for two and a 
half years. So we are relatively new into this. But since our 
inception, our average SBA loan size for 7(a) is $48,000.
    Chairwoman vela1zquez. Forty-eight?
    Mr. Sekula. Yes, ma'am.
    Chairwoman vela1zquez. Mr. Menzies?
    Mr. Menzies. Chairwoman, I don't have an average, if you 
will, but the range of loans that we have made has been from 
about $25,000 up to about $700,000. So I can think of a loan 
that is 235,000, but that would be the range of loans.
    Chairwoman vela1zquez. Okay. Some in the previous panel 
that we had and some advocates are asking for an increasing of 
the maximum size on the 7(a) loans by as much as 2 and a half 
of the current size to 5 million, from 2.5.
    Have you seen any real demand for loans this large from 
small businesses or if this is something that is more likely to 
benefit large banks that took TARP money?
    Mr. Menzies. We have not seen loan demand and I have no 
knowledge of member banks that have seen loan demand at that $5 
million level. Our belief would be that $3 million should be 
more than adequate.
    Mr. Sekula. Yes, ma'am. Our position is pretty much the 
same. We have not seen an increase in loan demand for those 
sizes of loans. So we feel that the amount at this point would 
be adequate at this point in time, but we are relatively, 
again, new into this.
    Chairwoman vela1zquez. Okay. Ms. Galiette, by most 
accounts, the need for investment has grown steadily over the 
past decade and is currently higher than at any time in the 
past. However, for years, the investing capacity in the SBIC 
program has gone unused.
    Will the changes in the proposed legislation enable the 
SBIC program to grow and meet the need for capital?
    Ms. Galiette. I think so. I feel that one of the challenges 
for the SBIC program, it's the front end and the back end. The 
front end, the licensing process is so time-consuming and 
cumbersome that good managers are turned away. And at the back 
end, once you have raised a fund, we have raised our first, our 
second, and now our third fund, we are going to be forced out 
of the program because once you have achieved success, you 
become too big for the cap.
    It is not that any individual fund is larger nor is it that 
we are funding larger businesses than we have historically, but 
the average life of a fund is ten years. And so most successful 
fund managers are going to be managing three funds. You are 
going to have your newest fund; your fund that has basically 
hit the fourth year, which is almost the conclusion of the 
five-year investment period; and then your oldest fund, which 
is in its seventh or eighth year, which is almost fully 
harvested but isn't quite harvested. And in order to survive 
and keep capital moving out to communities and small 
businesses, you need to raise that next fund.
    And so what happens is the funds are forced out of the 
program. They raise their next fund, a much larger fund because 
of the economies of raising funds, raising capital is also very 
difficult. So when you are forced to raise all of your capital 
from private investors, you are going to tend to raise a larger 
fund and invest in larger businesses because it is a lot of 
work to invest in small businesses.
    Making a $2 million loan is in many cases more work than 
making a $20 million loan because those companies, they need 
the technical assistance, they need our expertise, they don't 
know how to work with the banks, they don't know how to 
increase lines of credit. And we spend a lot of time on that, 
which the larger mezzanine lenders don't have to do.
    Chairwoman vela1zquez. All right. Would you say that the 
proposed language on the expediting relicensing program is 
crafted in a way that protects SBA?
    Ms. Galiette. I believe it is. I think that clearly you 
need to be a proven manager. You need to have had a couple of 
exits. I think it is three exits in the proposal. You need to 
have a business plan that is substantially similar to your 
prize business plans and the same core group of investment 
managers so you can't have changed your focus or your team. And 
there is always a provision for the administrator, for whatever 
reason, to reject that licensee if there are extenuating 
circumstances.
    Chairwoman vela1zquez. Thank you.
    Mr. Sekula, could the proposed capital backstop program 
containing this legislation have helped credit unions deliver 
more financing to small firms?
    Mr. Sekula. Yes, Madam Chairwoman. I think that the 
backstop would help us more small--at least from the credit 
union perspective, it would allow more smaller credit unions to 
be able to get in and start offering funds easier. And then, of 
course, with the continuation of the SBA doing a lot of the 
administrative work, then there is not the burden of trying to 
hire and get, obtain staff, and retain staff because from a 
credit union perspective, we have to have two years required 
member business lending training before you can become a 
business loan officer. So this will allow those who don't have 
that current staff on hand to be able to do that and capitalize 
on what the SBA backstop program would offer.
    Chairwoman vela1zquez. Ms. Dutch, the proposed small 
business early-stage investment program will permit 
participating investment companies to repay the SBA funds at 
the same time as other investors when the company exits its 
investment. What are the advantages of this repayment 
structure?
    Ms. Dutch. Madam Chairwoman, I think that that is critical. 
As I mentioned, we were a participating securities SBIC. And, 
in fact, as we looked at that program, I think the difficulty 
with that was that it did not participate in the up side.
    And what private investors and institutional investors have 
learned in the venture capital is that when we look across 
venture capital performance, the top tier way compensates. And 
the multiples that they earn compensate. And by capping the up 
side and not participating the same way that the private 
investors do, both in terms of timing and in participating in 
the full up side, their economics were sort of doomed to 
failure.
    And so I think by aligning, the venture capital industry 
has shown over time that it is an attractive asset class. And 
that makes sense.
    Chairwoman vela1zquez. Thanks.
    Mr. Menzies, a frequent criticism of the ARC loan program 
was that these loans were burdensome for lenders to make. What 
are some ways that the paperwork burden for ARC loans could be 
reduced while keeping the loan safe for banks like yours?
    Mr. Menzies. Chairwoman vela1zquez, community banks make 
relationship decisions. They are not in the production 
business. We don't use computers to credit score and simulate 
the repayment of a loan and run it through a big production 
model.
    So one vehicle would be to allow community banks to use 
their standard C's of credit, character, capacity, capital, 
collateral, coverage, and conditions, and make those judgments 
the way they make judgments and feed them into the SBA program 
without the level of paperwork that is currently required in 
the ARC program.
    Another clear benefit of this program would be to expand 
some of the definition of the use of the program. If I 
understand it correctly, it can be used to fund payments, if 
you will, but there are situations where individuals in small 
businesses have used their working capital to make payments. 
They have depleted their working capital to make those 
payments.
    And that working capital needs to be restored at the 
favorable terms that are available in the ARC program. That 
would be extremely beneficiary if that was incorporated in this 
legislation.
    Chairwoman vela1zquez. Thank you.
    Mr. Graves?
    Mr. Graves. Thank you, Madam Chair.
    I just have one question for Mr. Johnson. I think you kind 
of already answered it, but I wanted to reiterate. Should we 
have a greater emphasis on expanding capital and credit to 
manufacturers and, for that matter, any business that is going 
to improve the trade deficit?
    Mr. Johnson. Absolutely. And what we are seeing is because 
of access to credit being reduced, the exports we should be 
making, we are not able to make. And, therefore, the deficit is 
increasing. And the proposals, the modifications we have 
proposed I think would help a lot. Our information is that 
manufacturers because the program size and the size of the 
companies simply are not availing themselves of these 
opportunities.
    Our industry is certainly looking for a way to restore 
credit and would employ this program vigorously.
    Mr. Graves. Thank you.
    Chairwoman vela1zquez. Mr. Schrader?
    Mr. Schrader. Thank you, Madam Chair.
    Mr. Sekula, there has been a lot of discussion. You guys 
beat the drum pretty good on increasing the small business loan 
amounts for the credit unions. And considering that a lot of 
the banking community, at least large banks, aren't loaning at 
all has a lot of cache, at least with me.
    I am interested in symmetrics. I mean, what assurances do 
we have that if we give this authority, that there will be an 
increase in small business lending beyond what you are already 
doing? And how would we gauge that? I mean, given the change, 
what increase in small business lending, what percentage 
increase in your portfolio or the credit unions across the 
country would we expect to see?
    Mr. Sekula. Well, unfortunately, I can't speak on behalf of 
all the credit unions of what their growth will be across the 
country. I can talk about some of what we have experienced over 
the near term.
    For instance, when TARP went into place within 6 months 
after that, credit union member business lending increased 18 
percent while lending with other financial institutions had 
dropped on the business side.
    From Randolph-Brooks' perspective, we have been doing SBA 
lending for two and a half years. And our SBA lending from 
August of '08 to August '09 increased 107 percent. So the 
demands are there, but there are also barriers to entry.
    And some of the things that you have addressed in this are 
by removing the preferred lender status so that more SBA loans 
can be granted is going to be a plus, the backstop deal with 
opportunities for preferred lenders to buy those loans.
    But we also have to get past the issues that credit unions 
have with the arbitrary cap that was placed back from the 
Credit Union Membership Access Act, back from 1998. Prior to 
1998, credit unions did not have a cap in place. During the 
Credit Union Membership Access Act, they asked Treasury to do a 
study on that and found that credit unions had no--there were 
no economic or safety and soundness reasons to necessarily 
support that.
    They also found in that study that the credit union 
delinquency and charge-off as compared in the member business 
lending arena were much lower than those of other financial 
institutions. And those numbers still hold true today in 
regards to performance for member business lending portfolio.
    I feel from my perspective that by removing some of these 
barriers, these entry to barriers for credit unions to get in 
and play who do have the capital to be able to lend, that 
credit unions will help.
    I'm not leading to create an illusion that credit unions 
are going to save small businesses and take care of all of 
their lending needs. It has to be a cumulative effort of all 
financial services getting in place to be able to provide those 
services. But I think credit unions can't.
    Mr. Schrader. And you would be willing to work with the 
Committee on metrics, like most small businesses would?
    Mr. Sekula. Yes, sir.
    Mr. Schrader. Mr. Menzies? Excuse me if I got that--
    Mr. Menzies. Menzies.
    Mr. Schrader. Menzies. I apologize.
    A little off topic, I think related here, I have been a 
little concerned with the FDIC director's recent announcements 
trying to recapitalize their money. They are talking about 
making banks pay three years in advance what their normal dues 
would be.
    Could you comment--I guess I would be interested in the 
credit unions' response on that, too--comment on what that is 
going to do to the ability or inclination of banks to lend 
money in these very difficult times?
    Mr. Menzies. Absolutely, Representative. I would like to 
make two comments, if I may, which is that I think it would be 
healthy for the nation to give credit unions unrestricted 
access to commercial lending and remove their 12 and a quarter 
percent cap, provide them an opportunity to be taxed and to pay 
towards the trillion-dollar federal deficit, provide them an 
opportunity to be part of the community reinvestment program, 
and offer them the opportunity to be regulated safety and 
soundness-wise the same way that community banks are. It would 
be a great opportunity for the nation. Taxing, CRA seems--
    Mr. Schrader. If you could my question because I am running 
out of time?
    Mr. Menzies. Okay. And the answer to your question about 
recapitalizing the fund, it's a long, frankly, issue. We know 
that there are $42 billion in the fund right now. Thirty-two 
billion have been dedicated for reserves. Ten billion is left 
in capital.
    The prepayment strategy is a strategy that is somewhat 
helpful to banks because we are allowed to put that prepaid 
premium on the balance sheet of the bank and amortize it over a 
three-year period of time.
    The inequity of that solution is that all of us know that 
the $6 trillion of liabilities of the largest banks of the land 
are de facto guaranteed under too big to fail. And the previous 
special assessment was created by defining it as assets minus 
capital, which appropriately assessed those de factor insured 
liabilities. And that is the negative, if you will, of the 
prepayment of the deposit insurance premium.
    Mr. Schrader. Just real quick because, again, I am running 
out of time--I apologize.
    Mr. Menzies. No problem.
    Mr. Schrader. With the prepayment, are most banks going to 
be lending more or lending less given the changes in their 
balance sheet?
    Mr. Menzies. It absolutely will restrict the ability of 
banks to lend. In the case of my bank, $750,000 would be our 
prepaid insurance premium. That will come out of liquidity.
    Mr. Schrader. Yes.
    Mr. Menzies. And that will be not available for lending. 
Yes, sir. That is your point. And that is an accurate point.
    Mr. Schrader. I would like the Committee to look at that 
sometime perhaps. Thank you very much. I yield back.
    Chairwoman vela1zquez. Ms. Halvorson?
    Ms. Halvorson. Thank you, Madam Chair. And thank you, 
panelists, for being here. Thank you, Mr. Johnson, for 
acknowledging the fact that we take on the hard issues because 
it is something that we have no choice to do. This is something 
that, no matter where we go, this is the first question we get 
from our businesses: how do we get access to capital and how do 
we get these things done.
    I introduced the House Resolution 3723, which does take the 
7(a) loan from 2 million to 3 million and increases the ARC 
loan from 35 to 50 because I believe that we take a good 
program. We want to increase it.
    I am glad that the Chairman asked about the average 7(a) 
loan because, even though we wanted to make it better, we do 
acknowledge that, even though people want to make it even 
bigger, the average loans aren't anywhere near what people say 
that they should be.
    What we are trying to accomplish with this legislation is 
an increase in lenders to participate in this 7(a). And I often 
hear small business owners in my district say that they can't 
find bankers that are going to offer these 7(a) loans, 
especially in my rural part of my district.
    So, even in this legislation that I have, we are seeking to 
address this program or these problems by creating a real 
lender outreach program. And I know that the small bank 
outreach program is going to seek to increase the 7(a) 
participation among credit unions and community banks.
    So I guess my question is--and before I ask my question, I 
also want to say that I have banks in my district that don't 
want to offer the ARC loans because they are saying that 
they're afraid that if a person defaults on the ARC loan that 
the SBA is not reimbursing them or it's very difficult to get 
the reimbursement, even though they're guaranteed at 100 
percent.
    So I would like anybody on the panel that would like to 
answer that if you are having trouble getting reimbursed from 
the SBA if there are any defaults. But, actually, I want 
anybody and Mr. Menzies or Mr. Sekula to discuss how you think 
what we could specifically do to increase the participation of 
people in banks and credit unions using this 7(a) program.
    So if we could start with Mr. Sekula?
    Mr. Sekula. Well, as I mentioned earlier, I think for entry 
into the 7(a) program from the credit union perspective, only 
less than 3 percent of credit unions out of close to 8,000 
credit unions are participating and offering SBA loans.
    It is a very small percentage, but the average credit union 
size is only $92 million, as compared to the bank average size, 
it is probably close to $1.6-1.7 billion. So, as a result, 
their resources are very limited into that.
    And so some of the stipulations that are put in place in 
H.R. 3723 will remove some of those by deferred lending steps 
or hoops that you have to jump through in order to become a 
preferred lender in order to offer it in 7(a) loans.
    In addition to that, as I mentioned earlier, removing the 
cap of the 12.25 percent will provide some opportunity for that 
to take place as well as increasing the cap limit for member 
business loan qualification of 50,000 to 150,000.
    And I really think that without them having to add 
additional staff that is going to be a drain on resources as 
they can work through the SBA program, that we will find more 
credit unions participate in the 7(a) programs.
    Ms. Halvorson. And, Mr. Menzies? I just want you to know 
everywhere I travel in my district, I say the community bankers 
did not get us into this mess. We love our community bankers. 
And, please, if you would like to add to how we increase 
participation?
    Mr. Menzies. God bless you, Representative.
    Ms. Halvorson. I do, everywhere I go.
    Mr. Menzies. As I mentioned in my testimony, supporting a 
small lender outreach program is very important. Education is 
important. I get an e-mail every week from our local SBA 
office. Mr. Knox sends me an e-mail and educates us on what is 
going on. I think education really is the key.
    I have also heard, have not experienced or witnessed or 
personally seen examples of the SBA not paying on guarantees, 
but I have heard the same thing of a technical default in the 
loan documents existing and having trouble getting paid but 
personally haven't experienced that.
    I think training is the issue and training loan officers. 
Loan officers like to do deals. They like to get things done. 
And when you bring in this infrastructure of new documents and 
new process and new procedure, lenders are inclined to say, you 
know, ``I would rather it go this path and this path.''
    Ms. Halvorson. So are you saying education--
    Mr. Menzies. Education.
    Ms. Halvorson. --is a primary barrier from banks and credit 
unions?
    Mr. Menzies. I think it is the primary opportunity. I think 
good lenders allow the SBA to be one tool in their bag of 
tricks. And they always consider the SBA solution as a piece of 
the whole solution. Rarely is it the total solution anyhow. 
Training banks and lenders on how to access and use the SBA in 
my opinion is a great opportunity.
    Ms. Halvorson. Great. Thank you. Thank you.
    I yield back.
    Chairwoman vela1zquez. Mr. Graves, any other questions?
    [No response.]
    Chairwoman vela1zquez. Well, let me take this opportunity 
to thank all of you. I think this Committee, we are listening. 
And we read the papers. We watch the news on TV. We hear the 
stories going on about the jobless economy and the fact that 
one of the obstacles that you are facing right now is the lack 
of access to capital. And so through this proposed legislation, 
we are trying to address some of the impediments that exist. 
And I want to take this opportunity to really thank all of you 
for being here today.
    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 2:00 p.m., the foregoing matter was 
concluded.]
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