[Senate Hearing 111-1169]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 111-1169
 
   ASSESSING ACCESS: OBSTACLES AND OPPORTUNITIES FOR MINORITY SMALL 
               BUSINESS OWNERS IN TODAY'S CAPITAL MARKETS 

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

                                HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 15, 2010

                               __________

    Printed for the Committee on Small Business and Entrepreneurship

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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                     ONE HUNDRED ELEVENTH CONGRESS

                              ----------                              
                   MARY L. LANDRIEU, Louisiana, Chair
                OLYMPIA J. SNOWE, Maine, Ranking Member
JOHN F. KERRY, Massachusetts         CHRISTOPHER S. BOND, Missouri
CARL LEVIN, Michigan                 DAVID VITTER, Louisiana
TOM HARKIN, Iowa                     JOHN THUNE, South Dakota
JOSEPH I. LIEBERMAN, Connecticut     MICHAEL B. ENZI, Wyoming
MARIA CANTWELL, Washington           JOHNNY ISAKSON, Georgia
EVAN BAYH, Indiana                   ROGER WICKER, Mississippi
MARK L. PRYOR, Arkansas              JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland
JEANNE SHAHEEN, New Hampshire
KAY HAGAN, North Carolina
           Donald R. Cravins, Jr., Democratic Staff Director
              Wallace K. Hsueh, Republican Staff Director



                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana.     1
Snowe, Hon. Olympia J., Ranking Member, and a U.S. Senator from 
  Maine..........................................................     2

                               Witnesses

Hinson, David, National Director, U.S. Minority Business 
  Development Agency.............................................     5
Hedgespeth, Grady, Director, Office of Financial Assistance, 
  Office of Capital Access, U.S. Small Business Administration...    72
Johnson, Robert L., Founder and Chairman, The RLJ Companies......   138
Cofield, Natalie, President, NMC Consulting Group, Inc...........   146
Henningsen, Margaret, Founder and Vice President, Legacy Bank....   155
Hudson, Paul, Chairman and CEO, Broadway Federal Bank............   162
Fairlie, Dr. Robert W., Professor of Economics, University of 
  California, Santa Cruz.........................................   170

          Alphabetical Listing and Appendix Material Submitted

Brown, Warren
    Written comments.............................................   240
Cofield, Natalie
    Testimony....................................................   146
    Prepared statement...........................................   149
Fairlie, Dr. Robert W.
    Testimony....................................................   170
    Prepared statement...........................................   173
    Excerpt of Chapter 4 from ``Race and Entrepreneurial 
      Success''..................................................   178
Hedgespeth, Grady
    Testimony....................................................    72
    Prepared statement...........................................    74
    Statement supplement.........................................    77
Henningsen, Margaret
    Testimony....................................................   155
    Prepared statement...........................................   158
Hinson, David
    Testimony....................................................     5
    Statement supplement: Minority Business Development Agency 
      Report.....................................................     7
    Prepared statement...........................................    66
Hudson, Paul
    Testimony....................................................   162
    Prepared statement...........................................   164
Johnson, Robert L.
    Testimony....................................................   138
    Prepared statement...........................................   141
Landrieu, Hon. Mary L.
    Testimony....................................................     1
Min, Nyein
    Written comments.............................................   242
Peek, C. Earl
    New York Times article ``You're the Boss''...................   246
    Memorandum Opinion and Order.................................   249
Snowe, Hon. Olympia J.
    Testimony....................................................     6


   ASSESSING ACCESS: OBSTACLES AND OPPORTUNITIES FOR MINORITY SMALL 
               BUSINESS OWNERS IN TODAY'S CAPITAL MARKETS

                              ----------                              


                        THURSDAY, APRIL 15, 2010

                      United States Senate,
                        Committee on Small Business
                                      and Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:09 a.m., in 
Room 562, Dirksen Senate Office Building, Hon. Mary L. Landrieu 
(chair of the committee) presiding.
    Present: Senators Landrieu, Cardin and Snowe.

 OPENING STATEMENT OF HON. MARY L. LANDRIEU, CHAIR, AND A U.S. 
                     SENATOR FROM LOUISIANA

    Chair Landrieu. Good morning. Let me call the meeting of 
the Small Business Committee together this morning, welcome all 
of our witnesses, and say how pleased I am to call this 
meeting, ``Assessing Access: Obstacles and Opportunities for 
Minority Small Business Owners in Today's Capital Markets.''
    Before I begin, I would like to just say thank you to those 
of us who joined some of the Committee members earlier this 
morning when we dedicated our new Small Business Committee 
hearing room in the Russell Building. We honored a really 
intrepid entrepreneur and extraordinary woman of history, Ida 
B. Wells, who was a small business owner, a journalist, a 
reporter and someone who has made a significant contribution to 
the effort of recording domestic terrorism and lynchings and 
tortures that took place in this country. But for her spirit of 
never giving up and trying to get it right and telling the 
truth, we honored her this morning.
    Senator Snowe, thank you. We also had Senator Cardin and 
Senator Burris there with us, which is why we are a little late 
to this hearing, because we were wrapping up that reception and 
walking back over here.
    We will be happy for the Small Business Committee to 
actually start having meetings in our regular committee room. 
So thank you all for the slight inconvenience of using another 
committee room this morning.
    I am going to be introducing our panel in a moment, but I 
would like to give brief opening remarks and then call on my 
Ranking Member.
    Again, thank you for joining us to discuss the obstacles 
and opportunities facing minority-owned small business today in 
America.
    Since becoming Chair of this Committee, I have made access 
to affordable capital for all small businesses a top priority. 
The staff have been constantly updating me on how many banks 
are participating in the small business lending programs and 
how many banks and other institutions are being helped through 
the Department of Commerce as well.
    We keep updated information about how many SBA loans are 
being made, and my staff says he gets so aggravated with me 
asking that question. He keeps the information on the back of 
his ID card.
    I convened a roundtable with Senator Snowe on minority 
entrepreneurship on September 24th. We have had requests in to 
the Small Business Administration to give us an update on many 
of their initiatives, including the potential hiring of a new 
position that would fill the position for the Minority Small 
Business and Capital Ownership Development Officer, and I am 
looking forward to hearing about that this morning.
    The current economic recession, as we know, has seen credit 
tightening drastically. Many banks have withdrawn or reduced 
their lending activities. Minority-owned and small businesses 
have even more difficulty in many neighborhoods and areas, 
accessing credit even under optimal economic conditions.
    This is important because minority business development 
plays a crucial role in the economic vitality of America. These 
businesses are some of our nation's greatest assets. Diversity, 
we believe on this Committee, is a strength, not a liability, 
and we want to leverage all the strength that we have in this 
nation to the work ahead, which is to lead us out of a 
recession, and create the kind of jobs that our people need.
    According to the most recent data available from the SBA, 
minority-owned businesses are among the fastest growing 
segments of the small business community. From 1997 to 2002, 
firms owned by African Americans grew by almost 45 percent, 
Hispanics by 31 percent, Asians by 24 percent and Hawaiian-
Pacific Islanders by 49 percent. Minority-owned business 
enterprises account for more than 50 percent of the 2 million 
new businesses over the last 10 years. There are now more than 
4 million minority-owned companies in the United States with 
sales totaling more than $700 billion.
    One of the things we are going to review today is those 
accomplishments as well as the obstacles that still exist and 
what the Small Business Administration and the Department of 
Commerce can do in that effort, and then hear from some 
successful entrepreneurs their life stories about what it took 
for them to succeed. I will introduce them when I introduce the 
panelists.
    Chair Landrieu. Let me now turn to my Ranking Member, 
Senator Snowe, for her opening remarks.

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, RANKING MEMBER, AND 
                   A U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Chair Landrieu for your continued 
leadership in championing our nation's small businesses, 
especially during these precarious economic times, and I am 
very appreciative for your scheduling this hearing today to 
discuss the hurdles for our nation's small businesses. 
Certainly, so many in our underserved communities, are facing 
the tremendous impediment of accessing capital, which is 
obviously the economic lifeblood of our businesses and 
essential if they are to remain open and create jobs.
    As you have said, Madam Chair, this has been a top priority 
in terms of capital access, and that has been indisputable in 
terms of your agenda before this Committee, and I am certainly 
appreciative of that.
    I also want to thank our distinguished panelists who are 
here today, both from the Small Business Administration and the 
Minority Business Development Agency, as well as various 
segments of the private sector--entrepreneurs, academia, 
bankers--who will lend their expertise as we explore the root 
causes of why minority-owned small businesses continue to 
encounter unacceptable barriers in accessing affordable credit.
    With unemployment still close to 10 percent, the 
regrettable reality is that the unemployment rate for 
minorities is much worse. Austan Goolsbee, a member of the 
President's Council of Economic Advisors, recently noted the 
alarming fact that unemployment in the African American 
community is at 16.5 percent. Among Hispanics, that number is 
12.6 percent.
    Imagine the strides we could achieve towards economic 
recovery, as opposed to the jobless recovery that we are now 
experiencing, if we could facilitate more access to capital for 
minority-owned firms.
    To underscore this fact, the Bureau of Labor Statistics' 
recent unemployment data revealed that of the 114,000 private 
sector jobs created last month, 81,000 came from newly created 
small businesses. That means that over 71 percent of the 
private sector job growth came from those new small businesses.
    For our nation's unemployment levels to drop, particularly 
in minority communities, small businesses must drive the 
economic recovery. In fact, we are depending on small 
businesses to lead us out of this recession and towards a 
strong economic recovery, as they have done in every previous 
downturn. Without them, we simply cannot make it happen.
    The market for small business capital across all 
populations is still suffering through some of the worst 
effects of this recession. The Federal Deposit Insurance 
Corporation reported that in 2009 loan balances declined by 
$587 billion, or 7.5 percent. This is the largest drop in 
outstanding loan balances since 1942.
    Providing access to capital is especially necessary for 
underserved communities because of the great disparities in 
capital financing. The Kauffman Foundation's February 2009 
survey on patterns of financing, found that on average white-
owned businesses started with $81,773, yet African American 
owned businesses started with an astonishing average of only 
$28,198. In addition, the survey also found that African 
American-owned businesses were more likely to tap higher 
interest credit sources such as credit cards, rather than lower 
interest business bank loans.
    It is long past time we reverse this pernicious trend. That 
is why it is more imperative than ever that we improve access 
to affordable credit, and why Chair Landrieu and I have joined 
forces to increase the guarantee rate on SBA loans to 90 
percent and reduce fees for small business borrowers. These 
proposals, which were enacted as part of the Recovery Act, have 
paid incredible dividends, and we have seen that with the 
guarantee in fee reduction that has driven lending across this 
country, up 90 percent since the passage of the stimulus.
    In fact, these provisions have already been extended three 
times by Congress, but temporary extensions are not sufficient. 
With the 90 percent guarantee rate set to expire at the end of 
this month, and the funds for fee relief quickly dissipating, 
Congress must provide more certainty to small business owners 
through a longer-term extension of these key provisions.
    Additionally, this Committee recently reported out another 
initiative that would increase capital to small businesses. The 
legislation will allow small business owners to access larger 
SBA loans, increasing 7(a) and 504 loans from $2 million to $5 
million and microloans from $35,000 to $50,000.
    While 18 percent of our nation's small businesses are 
minority-owned, they have received fully 23 percent of the SBA 
7(a) and the 504 loans since the enactment of the stimulus, and 
for microloans, approximately 40 percent traditionally go to 
minority entrepreneurs.
    In fact, today Mr. Hedgespeth will testify that the 
agency's SBA-backed loans are about three times more likely 
than conventional loans to go to minority-owned firms.
    Just think about how much more powerful a tool these loans 
could be in helping minority-owned businesses if their levels 
were increased. This is particularly the case when considering, 
as our witness, Dr. Fairlie's research demonstrates, the vital 
need for startup capital within these minority communities.
    Our legislation was resoundingly passed by this Committee. 
And just yesterday, Mark Zandi, who is the Chief Economist at 
Moody's Analytics, testified before the Finance Committee, 
reaffirming that larger SBA loan sizes would help drive SBA 
loan volume. In fact, he said that small businesses are 
imperative and crucial to an economic recovery and robust job 
creation.
    While I am pleased that SBA loans are being utilized by 
minority-owned businesses, clearly much more can be done and 
must be done to address the problems that minorities face in 
accessing capital. That is why I am calling on the 
Administration to take several steps to address this issue. For 
instance, the SBA should examine the microloan program's 
successes and determine if there are ways to replicate them in 
other programs.
    The agency must also reach into minority communities and 
open a dialogue with community bankers, like some of our 
witnesses here today, and with minority-owned businesses from 
whom we will be hearing from in the second panel, to develop 
strategies to increase the flow of capital to underserved 
communities.
    Moreover, the SBA's entrepreneurial development partners 
need to work together with the Minority Business Development 
Agency to find ways to help level the playing field for 
minority entrepreneurs seeking capital.
    So, Chair Landrieu, I thank you again for shedding light on 
this injustice and the chilling statistics that we have heard 
as well with respect to minority-owned businesses, and what we 
can do to make it better. I look forward to working with you to 
forge additional solutions to address this issue and to 
providing access to capital. Thank you.
    Chair Landrieu. Thank you. I thank my colleague from the 
State of Maine.
    And let's get right into our witnesses. Mr. Grady 
Hedgespeth is the Director of the Small Business Administration 
Office of Financial Assistance which oversees all of the small 
business lending programs. He is our first witness today. Mr. 
David Hinson is the National Director for U.S. Minority 
Business Development in the Commerce Department.
    I know firsthand the Administration's commitment to both of 
these offices and the increase of funding that has changed, I 
think, a very detrimental trend from the past, to investing 
more in the SBA and the hiring of an extremely competent leader 
at the SBA and, both, at the Department of Commerce.
    So if both of you would begin and of course limit your 
remarks to five minutes, thank you so much. We will start with 
you, Mr. Hinson.

  STATEMENT OF DAVID HINSON, NATIONAL DIRECTOR, U.S. MINORITY 
                  BUSINESS DEVELOPMENT AGENCY

    Mr. Hinson. Thank you very much. Good morning, Madam Chair 
Landrieu, Ranking Member Snowe and distinguished members of the 
Committee. Thank you for inviting the Minority Business 
Development Agency (MBDA) here today to discuss the capital 
access for minority businesses and to discuss the activities of 
MBDA.
    My name is David Hinson, and I was appointed National 
Director of the Minority Business Development Agency by 
Commerce Secretary Gary Locke on July 15th, 2009.
    It is abundantly clear that the financial environment and 
recession last year have created tight credit markets, a 
decline in housing values and swollen labor markets. For all 
businesses, especially minority-owned firms, having access to 
capital has always been the difference between success and 
failure for that particular business. While there are valuable 
lending and bonding programs available, minority owned 
businesses continue to face substantial barriers and 
disparities with respect to access to capital.
    Last year, as a result of multiple stakeholder forums, MBDA 
commissioned a study to dissect the issues of access to 
capital. The results of this study are outlined in the MBDA 
reported entitled ``Disparities in Capital Access Between 
Minority and Non-Minority-Owned Firms: The Troubling Reality of 
Capital Limitations Faced by MBEs.''
    I would like to highlight three key findings. Number one, 
minority-owned firms are less likely to receive loans than non-
minority-owned firms. Number two, when minority-owned firms do 
receive financing, they are provided less money than non-
minority-owned firms, regardless to the size of the firm. 
Number three, minority-owned firms pay higher interest rates 
than their non-minority counterparts.
    I would like to take second and illustrate these findings:
    The denial rate for firms with annual revenues of more than 
$500,000 is 14.9 percent for minority-owned firms, but only 8.4 
percent for non-minority-owned firms.
    For firms of the same size, the average loan is $150,000 
for minority-owned firms, yet it is more than $310,000 for non-
minority-owned firms.
    For firms earning under $500,000 in gross revenue, 
minority-owned firms paid on average more than 9 percent in 
loan interest rates, yet non-minority-owned firms secured 
interest rates at less than 7 percent.
    I see that Dr. Fairlie, a co-author of the MBDA study, is 
scheduled to testify on the next panel. So, at this time, Madam 
Chair, I would like to request that the MBDA report in its 
entirety be entered into the hearing's official record.
    Chair Landrieu. Without objection.
    [The information follows:]

    [GRAPHIC(S) NOT AVAIALBLE IN TIFF FORMAT]
    
    Mr. Hinson. And now, with the Committee's approval, I would 
like to move on into some of the things that MBDA is doing to 
address some of these challenges.
    As many of you know, MBDA has been in existence for over 40 
years. The agency's mission is to foster the growth and global 
competitiveness of minority-owned and operated firms 
nationwide. Our goal is to create a new generation of 
businesses with $100 million or more in annual revenue, which 
in turn will generate higher economic activity and job 
creation.
    MBDA's performance is evaluated annually on the number of 
new jobs created, the dollar value of contracts awarded and the 
dollar value of financing packages. Last year, MBDA executed on 
over $3 billion in contracts and financings, which equated to 
the creation of over 3,000 new jobs.
    However, the potential for growth is largely untapped and 
unrealized. If the minority-owned business community reached 
economic parity, which is something we spend a lot of time 
talking about in our agency, this business sector would employ 
16 million people and generate $2.5 trillion in gross 
receivables, thereby expanding the national tax base by 
billions of dollars.
    Clearly, the growth of minority-owned firms can generate 
much needed employment, gross receipts, and add to the overall 
expansion of our national economy. Investing in firms owned by 
minorities not only makes good business sense, but it is an 
investment in the future of our nation.
    MBDA is undertaking a variety of actions to improve access 
to capital. I would like to take a moment and just touch on 
several of these particular initiatives that we are focusing 
on.
    Chair Landrieu. Try to wrap up in a minute, if you would.
    Mr. Hinson. Okay, very good. The first one is a surety 
bonding initiative. Although minority-owned firms represent 12 
percent of the total construction companies, typically they 
receive less than 1 percent of the government contracts. One of 
the things we are focusing on, Madam Chair, is to identify $100 
million in private capital through a public-private partnership 
that will leverage up to a billion dollars to provide surety 
bonding access and capability for minority-owned and operated 
construction firms.
    The second initiative that we are focusing on is a minority 
investment fund initiative. We are working with investment 
firms nationwide to pull together and coalesce capital around 
minority-owned and operated businesses in high-growth 
industries such as green technology, clean energy, health care 
infrastructure and broadband technology. And we believe that by 
coalescing capital around these particular key industries, that 
we can pull together over a billion dollars of wealth from 
private sources and institutional capital, to help address the 
issue of access to capital for minority firms within these key 
industries.
    On a final note, Madam Chair, the Department of Commerce 
and MBDA are honored by this opportunity to testify before you 
and your distinguished colleagues. I respectfully request that 
my full written testimony be entered into the official hearing 
record.
    We look forward to working with you to create an 
environment where minority firms have an equal opportunity to 
participate in every sector of the marketplace. Thank you.
    [The prepared statement of Mr. Hinson follows:]

    [GRAPHIC(S) NOT AVAIALBLE IN TIFF FORMAT]
    
    Chair Landrieu. Thank you very much, Mr. Hinson.
    Mr. Hedgespeth.

 STATEMENT OF GRADY HEDGESPETH, DIRECTOR, OFFICE OF FINANCIAL 
   ASSISTANCE, OFFICE OF CAPITAL ACCESS, U.S. SMALL BUSINESS 
                         ADMINISTRATION

    Mr. Hedgespeth. Chair Landrieu, Ranking Member Snowe, thank 
you for the opportunity to discuss the access to capital for 
minority-owned small businesses.
    At SBA, we understand the unique challenges that 
underserved communities face in the current economic 
environment. SBA's loan programs are designed to fill various 
market gaps, including those created by racial discrimination. 
Historically, small businesses in these underserved communities 
are among the hardest hit during tough economic times, and 
based on what we have seen, that is certainly the case in this 
recession.
    As my counterpart, Director Hinson, points out, this recent 
MBDA study found that minority entrepreneurs face significant 
discriminatory barriers in the marketplace. Through our loan 
guarantee programs, a series of new targeted initiatives and 
our 8(a) Business Development Program, SBA is expanding its 
efforts to help these entrepreneurs overcome some of those 
barriers.
    In terms of accessing capital, SBA has a proven track 
record of assisting minority-owned firms through our 7(a) and 
504 guaranteed loan programs, as well as our microloan program. 
According to the study by the Urban Institute, SBA-backed loans 
are about three times more likely than conventional loans to go 
to minority-owned firms.
    Also, minority small business loans constitute a percentage 
of our loan dollars that is five times greater than that of the 
private sector. In 2009, 22 percent of all SBA-backed loans 
were made to minorities. These are loans to minority firms that 
are good credit risks, pointing out the critical role that SBA 
plays in addressing the barriers these firms face in the 
private market.
    As we move forward in addressing the specific barriers that 
underserved communities, particularly minority communities, 
face, SBA continues to explore ways to engage its partners that 
share in a commitment to this mission. SBA's microloan program 
is an important way that the agency focuses on underserved 
markets. SBA makes direct loans to nearly 180 community-based 
microloan intermediaries who provide both loans and technical 
assistance to small business borrowers. Since its inception, 
this program has made nearly $438 million of small business 
loans possible.
    SBA also recognizes that many small businesses need more 
than just the loan. They need counseling and technical 
assistance to help strengthen their business plans and make 
them more bankable in this tight lending environment. To fill 
this need, SBA is working closely with its nationwide network 
of partners including about 900 small business development 
centers, 350 SCORE chapters and more than 100 women's business 
centers.
    SBA is particularly excited about the results we are seeing 
from Emerging Leaders, formerly known as E-200, an intensive 
entrepreneurship training pilot for promising firms in our 
inner cities. In 2009, SBA provided training to businesses in 
New Orleans, Baltimore, Atlanta and several other cities: 62 
percent of the participants were minorities, and early 
indicators show that 63 percent of participating companies 
hired new employees, of which 43 percent were hired from the 
local inner city communities.
    In addition to our counseling and lending programs, SBA 
also provides support to minority-owned businesses through its 
8(a) and HUBZone Business Development programs. However, a 
recent Federal Court ruling suggests that it would be useful to 
clarify and reiterate Congress's original intent that there 
should be parity among SBA's contracting programs. SBA hopes 
that Congress will act swiftly to resolve this issue, and we 
look forward to working with you and your counterparts in the 
House to confirm parity among SBA's contracting and business 
development programs.
    SBA takes the issues of access to effective tools, 
including capital, contracts and counseling, very seriously 
because we know that minority and women-owned small businesses 
are among the fastest growing segments of our economy. At least 
they were until this recession.
    We hope that this hearing will provide valuable insights 
into the challenges that the current economic climate poses for 
minority-owned businesses and underserved markets more broadly. 
We also hope this hearing will highlight the incredible 
potential these businesses have to help lead us into full 
economic recovery.
    SBA thanks the Committee for inviting us to participate in 
this important discussion, and I am happy to take your 
questions and also ask that you permit us to submit more 
detailed testimony for the Committee record.
    Chair Landrieu. Without objection, your testimony can be 
submitted.
    [The prepared statement of Mr. Hedgespeth and the 
Compelling Interest brief follows:]

[GRAPHIC(S) NOT AVAIALBLE IN TIFF FORMAT]

    Chair Landrieu. Let me begin, Mr. Hinson, with you. You 
mentioned in your testimony that you are considering the 
viability of a private managed investment fund. You touched on 
that briefly. Will you take this opportunity to go into a 
little bit more detail about how the Department of Commerce is 
contemplating this effort? Is it precedented in any way, and if 
so, what is the precedent?
    Mr. Hinson. Right. Madam Chair, thank you for that 
question.
    In the capital markets, there are a number of private 
equity funds. There are a number of institutional investors 
that focus on the market for investing in minority-owned 
companies. What we are contemplating is really coalescing 
sources of capital that to date have not coalesced around these 
particular companies and these unique industries. Through the 
structure of a public-private partnership, we look to bring 
these people together under the auspices of the Department of 
Commerce, to get them focused and in relationship with the 
companies that have a need for that capital.
    So what we are looking at is a public-private partnership 
structure, and we are still in the design phases of that right 
now. But the idea is simply to take sources of capital that to 
date do not necessarily focus on these particular market 
sectors and expose them to the economic value proposition of 
investing in these companies.
    Chair Landrieu. Thank you.
    Mr. Hedgespeth, the Small Business Investment Companies, 
SBICs, are supposed to bridge some of the gaps, as you know, 
between minority and non-minority businesses seeking venture 
capital.
    You mentioned this, but it is worth repeating. There is an 
alarming trend in lack of access and decline in the SBIC 
venture capital going to minority and women-owned businesses. 
In 1998, the percentage was 26 percent. The most recent data, 
it has dropped to 7.19 percent. In the same timeframe, for 
women as well it dropped from 6 percent to 2.8 percent.
    How do you explain this trend by the SBIC program in making 
investments to minority and low income areas, and what steps is 
the SBA taking to address this trend, try to reverse it and 
move it in the opposite direction?
    Mr. Hedgespeth. Those trends are in fact partly reflective 
of the fact that SBICs have been trending towards larger 
investments in their investment companies. One of the things 
that we have done to try and offset this trend, because very 
often the minority firm is at an earlier stage in their capital 
need than the typical majority firm that is looking for 
mezzanine financing, is we have in recently promulgated 
regulations required that 25 percent of SBIC investments go 
towards lower dollar investments.
    We are also going to be continuing our efforts to broaden 
the outreach of our SBIC program in finding funds that 
specifically work with, and target, the areas that are 
comparable and complementary to our mission of increasing 
access to underserved markets and minority entrepreneurs.
    Chair Landrieu. Both of you may want to comment about this. 
The Senator from Maine and I have a bill pending, with 
unanimous support from this Committee--I believe it is 
unanimous--to raise the limits for small loans from $35,000 to 
$50,000. The current limit for the express loans is $35,000. Do 
you think that that will help, and if so, would you care to 
comment if that is the right amount, or should we be pushing it 
even higher?
    Maybe, Mr. Hinson, we will start with you and then Mr. 
Hedgespeth.
    Mr. Hinson. There is certainly no doubt that increasing the 
loan amount is helpful. Anecdotally, though, $35,000 as a base 
is generally ineffective in helping the firms get through tough 
economic times and certainly grow. Many of these firms are 
operating very leanly. So they do not necessarily generate, in 
and of themselves, enough capital to add an additional person. 
So they are not necessarily going to stimulate job growth.
    From our perspective, a $50,000 level would be a welcome 
addition. But practically speaking, I would recommend and 
propose that you consider something more along the lines of a 
$100,000 level, possibly even a $200,000 level, so firms can 
obtain the capital to not only continue to function during 
times when credit is very tight, but also be in a position to 
add on that additional employee today that they anticipate they 
will need for tomorrow.
    Chair Landrieu. Mr. Hedgespeth.
    Mr. Hedgespeth. Well, as the Administration has proposed 
raising the limit in our microloan program from $35,000 to 
$50,000, and we are delighted by the support it enjoys from 
this Committee. We think it is a very, very critical evolution 
of our microloan program that especially reflects the current 
reality where many businesses that were bankable 2 years ago, 
that need that $35,000 to $50,000 of capital, businesses, 
landscaping companies employing 10, 20 people, who had a 
banking relationship and now do not have one, are increasingly 
turning to our microloan intermediaries for that working 
capital gap. And we would like to be able to allow them to meet 
that need.
    Chair Landrieu. Finally, if I could, Mr. Hedgespeth, I sent 
a letter to Administrator Mills, asking for her to give 
consideration to fill the position of Associate Administrator 
for Minority Small Business and Capital Ownership, considering 
the importance based on testimony from both of you with the 
focus of getting capital into the hands of minority-owned 
businesses, current businesses as well as potentially new 
businesses. Increased capital access could help create jobs. We 
could use those jobs right now in the United States of America 
and particularly use them in the communities and neighborhoods 
that have experienced even a sharper economic downturn.
    So what do you have to report to me about the opportunity 
to potentially fill this position and even get a sharper focus? 
Not that I do not believe the Administrator is herself focused, 
and you and this Administration, that have surely demonstrated 
their commitment, but this would give the extra push from a 
specific focus. And what do you think about the filling of this 
position as a possibility?
    Mr. Hedgespeth. Well, Administrator Mills did receive your 
letter, and shares your concern and interest in moving very 
swiftly to fill this position. While I cannot speak to details 
at the moment, I can inform you that we believe we have an 
extremely qualified candidate identified, and you should be 
looking forward to some direction or some announcements in the 
near future.
    Chair Landrieu. Thank you.
    Ranking Member Snowe.
    Senator Snowe. Thank you.
    Mr. Hedgespeth and Mr. Hinson, do you ever coordinate 
between SBA and your agency, especially when it comes to the 
Small Business Development Centers and Minority Business 
Development Centers? I know we have more than a thousand 
nationwide under SBDCs. So is anything happening in that 
regard, so we can coordinate, not duplicate, efforts, that 
might provide a synergy that would be important?
    Mr. Hinson. Thank you, Senator Snowe.
    Yes, we do collaborate quite a bit. Oftentimes, many of the 
8(a) firms, while they are still in 8(a) status, will come to 
us. We work together on various events.
    Certainly, we have worked very closely together when it 
comes to the economic stimulus activity relative to minority-
owned firms. We have done quite a number of joint events. We 
have reached out to the various Federal agencies as a team. I 
work very closely with Associate Administrator Joe Jordan in 
that respect.
    So our activities are very coordinated. Taking into 
consideration, though, that we do have different business 
models and different structures, I think we have done a very 
good job at coordinating our activities.
    Senator Snowe. But it is not formalized, I gather. Is it 
done on an ad hoc basis?
    Mr. Hinson. It is not formalized to the extent that we have 
necessarily signed MOUs, if you will. We are actually looking 
at some formalization from our side, and I think that SBA is 
looking at formalization from their side too. Interesting, we 
are moving in that direction.
    Senator Snowe. Yes. Do you analyze the cost of creating a 
job with each of your agencies? I know there are different 
numbers with respect to that, but I do not know whether the 
goals are different that account for the cost per job to 
create.
    Mr. Hedgespeth. That is not something that I think we have 
focused on. We have really focused on ways to be more efficient 
and making sure that the firms that we do touch really are 
supported by all the programs offered by both SBA and the 
Commerce Department, and being much more intentional about 
tracking the success of our firms as they move through our 
counseling process, contracting opportunities and also then 
opportunities for capital support.
    Mr. Hinson. From our vantage point, we actually can give a 
number of the cost per job. We focus, our operation focuses on 
return on investment. Right now, our ROI is 94 times. That 
means for every dollar of taxpayer money that goes into our 
agency, we produce $94 of economic output.
    We track very closely new job creation. We do not track 
yet, but we are going to begin to track, jobs saved. So it is 
an easy calculation for us relative to determining the cost per 
job.
    Senator Snowe. I would appreciate those numbers for the 
Committee, if you have the numbers of jobs created. I mean that 
would be helpful as a measurement. Do you have them, Mr. 
Hedgespeth?
    Mr. Hedgespeth. We certainly have numbers, in fact, of how 
much it costs for us to deliver our services.
    Senator Snowe. You do? Yes. I think that would be helpful 
to sort of guide us in how things are working in that respect.
    Mr. Hedgespeth. We will provide you with that information.
    Senator Snowe. Okay. I appreciate that.
    Mr. Hedgespeth. Thank you so much.
    Senator Snowe. Now in terms of the existing programs under 
SBA, we have the microloan program and now you have indicated 
that we should increase the amount to maybe $100,000, $200,000 
because the accumulation of wealth is an issue with minority-
owned businesses and also, obviously, having the funds to 
sustain it. So you think it would be worthwhile in that regard 
to increase the loan limit, at least for a temporary period of 
time, for example? Do you think that would be helpful?
    Mr. Hinson. I think it would be helpful. Many of the 
minority firms--let me give you a scenario. We have firms, for 
example, that get government contracts from certain cities. 
Because of the issues that cities face with their specific 
budgets, they may not pay these firms for six months. Okay? So 
imagine you had done the work today, but you do not get your 
money for six months. In the absence of having working capital 
available, which banks are not necessarily providing to this 
sector of companies, these companies go out of business.
    So the very entity that should be supportive is actually 
running them out of business, and this particular funding 
mechanism provides a necessary bridge to make them--if the size 
is large enough, it provides them a bridge to keep their 
operation going while they are waiting to execute on their 
receivables.
    Mr. Hedgespeth. If I could follow on, on that, Senator 
Snowe, there has been a proposal from the Administration to 
increase, temporarily increase the size of our SBA Express Loan 
to a million dollars. That is perfectly complementary with what 
my colleague here says in terms of providing a key source of 
working capital to that larger firm that is trying to bridge 
those contracting payment issues, which is really critical 
right now in terms of adding jobs and keeping jobs.
    Senator Snowe. So what could happen in terms of the 7(a) 
and the 504 loan programs to improve the amount, or the 
percentage, going to minority-owned businesses?
    Obviously the microloan program has worked in providing 
access to capital to minority communities. So we can build on 
that. But what about the fact that 24 percent of all 7(a) and 
504 loans go to minority-owned businesses? What more can we do 
to increase that number?
    Mr. Hedgespeth. Well, as you mentioned in your opening 
remarks, sustaining the Recovery Act fee relief and higher 
guarantees is a very important thing to do.
    We are also just strongly focused on increasing the number 
of points of access for borrowers. The number of participating 
lenders, as a result of the Recovery Act initiatives, has grown 
substantially. Over a thousand lenders, I believe at our last 
count, are making SBA loans who were not making SBA loans just 
a couple of years ago.
    We continue to look for outlets in credit unions, ways to 
work increasingly with the CDFI fund and our colleagues there, 
to increase the number of those mission-focused lenders who 
already carry a double bottom line of serving underserved 
communities and doing so profitably.
    Trying to find ways for our 7(a) program, not just the 
microloan program, to work more effectively with those 
partners, those are the things we are doing.
    Senator Snowe. Yes, I know, to that point, lenders that 
have not been participating in the SBA programs have now come 
back into the program, and I congratulate you and the 
Administrator for making that happen.
    If there are 16,000 institutions, between banks and credit 
unions, what more can be done to attract and to target new 
lenders into the market? I mean how many lenders do we have 
overall in the SBA programs?
    Mr. Hedgespeth. Lenders that currently have an executed 
agreement with us in 7(a) number about 5,000. Some of those are 
really not focused on small business lending, but many are, and 
we are working along with trade associations that reflect the 
broader banking community to try and reach those institutions.
    But, more importantly, we really want to try and work with 
institutions who already serve the minority and inner city 
neighborhoods and underserved markets, where there really is 
the sweet spot for SBA programs, and be much more intentional 
about identifying them and working to bring them back into the 
fold. Our field operation is very focused on this. It is their 
number one objective for the year. We are extending our 
outreach to community credit unions because we believe they 
have already proven to be a good source for making inroads into 
these communities, recognizing that community banks have a 
critical role to play in making more capital accessible to 
minority communities.
    Senator Snowe. Thank you.
    Chair Landrieu. Can I just interrupt here?
    I know that you all think I was kidding about this, but we 
actually carry this number with us. It should motivate us to do 
more because actually there are 7,544 credit unions in the 
United States and there are 7,948 Federally chartered banks, 
which is 15,000 plus roughly. There are only 2,200 SBA lenders.
    In Louisiana, where I carry these numbers, there are 232 
credit unions, there are 156 banks, and only 38 SBA lenders. I 
have my staff keep a map of Louisiana up, showing what banks in 
our state are SBA lenders and where they are, where those loans 
are being made, and there are huge geographic areas that are 
not even touched.
    This is something that I am going to really drill down on 
with this Committee because when we look out at what both 
Commerce and the SBA do, their jobs and missions are to use the 
framework and the skeleton that is out there, which are the 
banks, and the credit unions.
    When you lay on top of that all of the financing that we 
have given to minority business centers, our women-owned 
business centers, the volunteer SCORE chapters that are out 
there, many organizations that we do not directly fund, but 
indirectly encourage. For example, chambers of commerce, 
minority business councils, and city halls. You have 
departments at the state level. We really have to think about 
how we can push through some of these programs and funding to 
reach the network that is out there, to reach where the 
businesses are, in small places, neighborhoods, rural areas and 
urban centers.
    So I thank my staff for keeping this. I am going to provide 
it to all the members of our Committee.
    And yes, you are correct, we have a thousand new lenders 
since the Ranking Member and I led the effort to eliminate the 
fees and increase the loan rate. While we have gone up 1,000 
the number is actually down from 1999. I think we now may be 
getting back up to that level. We have to figure out a better 
way to get our banks involved, particularly our community 
banks, in this effort, and we are going to work on that.
    Any further comments?
    We will get our second panel. Okay, thank you all very 
much, and we appreciate your testimony.
    If our second panel will please come forward, and to save 
time I am going to introduce them as they are moving to the 
table.
    Our first witness is Mr. Robert Johnson, the Chairman and 
Founder of RLJ Companies, an innovative business network which 
owns or holds interests in a diverse portfolio of companies in 
banking, private equity, real estate, hospitality, professional 
sports, film production, et cetera. He has been named by USA 
Today as one of the most influential black leaders in the past 
25 years, and of course, Founder of BET.
    Ms. Natalie Cofield, President of NMC Consulting Group, 
will be our next witness. Ms. Cofield operates a boutique 
consulting firm with the mission of increasing entrepreneurship 
and business development opportunities and improving business 
programs for aspiring business owners.
    Ms. Margaret Henningsen, the Founder and Vice President of 
Legacy Bank, is our next witness. An advocate for empowering 
women and minorities, Legacy Bank provides services to 
thousands of the underserved, has funded more than a thousand 
small business, commercial and economic development loans, or 
has processed those loans.
    Mr. Paul Hudson is Chairman and CEO of Broadway Federal, 
the largest and only publicly owned African American bank west 
of the Mississippi. We are excited to have you here, Paul, to 
hear from you.
    And finally, Dr. Robert Fairlie, Professor of Economics at 
the University of California in Santa Cruz, who has done 
extensive research on entrepreneurship technology, inequality, 
and labor economics. Thank you for joining us. We have a copy 
of your book, and our staff has been using that to prepare for 
this hearing.
    If we can begin with Mr. Johnson and we ask you to limit 
your testimony to five minutes each, and then we will have a 
round of questions.
    Mr. Johnson.

 STATEMENT OF ROBERT L. JOHNSON, FOUNDER AND CHAIRMAN, THE RLJ 
                           COMPANIES

    Mr. Johnson. Good morning, Madam Chairwoman Landrieu and 
Ranking Minority Member Snowe. I appreciate the opportunity to 
appear before the Committee to discuss the challenges and 
opportunities minority small business owners face in today's 
economic climate.
    As an entrepreneur, I know firsthand the challenges 
minority entrepreneurs face. I also know the talent, 
dedication, determination and vision that minority 
entrepreneurs possess in their desire to become a part of, and 
a contributor to, the American dream. But the simple fact of 
economic reality in America is that minority Americans are 
significantly and disproportionately underrepresented in access 
to capital to start and fund entrepreneurial enterprises due to 
years of racial and economic discrimination.
    The Committee should make note of a recent study by the 
Economic Policy Institute which found that the medium net worth 
for African Americans was $11,800 compared with $118,000 for 
whites. When home equity was subtracted, African Americans had 
$300 in net assets while whites had $36,000. This gap is likely 
to widen as unemployment stagnates and as the mortgage crisis 
costs some black families their home.
    Without question, the lack of access to capital and capital 
formation are the principal factors holding back opportunities 
for minority businesses and, as a consequence, wealth and job 
creation within the minority community.
    In my opinion, there are two crucial political and 
philosophical issues that first must be confronted and resolved 
before capital can be effectively directed to minority 
Americans in this society.
    The first question is: Why do federal, state governments 
and major U.S. corporations define minority ownership as owning 
or holding 51 percent equity? The answer usually offered is a 
51 percent equity climate prohibits so-called minority front 
companies, or shams, from gaining access to government 
preferences.
    But why do we assume minority companies are fronts? The 
answer is painfully obvious, and it is partially why we are all 
here today. We know that minorities as a whole lack access to 
capital and therefore are unlikely to raise sufficient equity 
capital to control a company without outside financial 
assistance. But whose fault is that?
    Think about this for a moment. As a business person, your 
goal is to grow in scale and value. How do you accomplish this 
if your company cannot raise outside equity, if it exceeds your 
51 percent ownership requirement.
    Why not the debt market, you might ask. Lenders have only 
one goal--a repayment of debt with interest as quickly as 
possible. On the other hand, and I know this to be a fact, 
strategic equity partners seek to combine investment and 
operational synergies with the minority company to maximize 
long-term growth in value.
    I suggest we let the market relationship decide and base 
ownership not only on equity control but other factors. Such 
other factors could be: Is the minority the founder of the 
company? Is the minority the key revenue driver of the company 
based on his or her intellectual capital, so-called sweat 
equity? What about considering voting control in different 
classes of stock to give more votes to the minority, or board 
control where the minority has the right to appoint the board 
majority?
    Or, simply drop the equity requirement from 51 percent to 
10 percent to recognize what we all agree is the true problem: 
the disparity in capital access that minorities face when 
launching a business.
    This leads me to my second point. Is there a compelling 
national interest for helping minority business and what are 
its limitations?
    If the goal is to foster minority business as opposed to 
just small businesses, how do we address the Supreme Court's 
compelling national interest test? The Court ruled that any 
government-sponsored economic preference to minority businesses 
should be narrowly tailored so as not to cause reverse 
discrimination. Justice O'Connor, writing for the majority in 
the Adarand case, stated that there was no compelling national 
interest in favoring a minority contractor for highway 
construction jobs over a majority. If this precedent dictates 
our approach to minority business development, it will forever, 
in my opinion, restrict minority access to government-sponsored 
business opportunities.
    We agree that due to past discrimination minorities cannot 
compete on capital formation, on experience or scale without 
capital and are unlikely to win most competitive bids without 
an advantage or a preference.
    In conclusion, let me state that I do not have ready a 
politically acceptable answer to these philosophical 
quandaries, but I am enough of a business person to know that 
the free marketplace, left to its own devices, will not solve 
this problem.
    I do not believe the government can promote minority 
ownership by placing restrictions on their startup potential, 
by requiring an unconditional 51 percent ownership.
    I do not believe that government can say it is critically 
important to have minority business succeed in the marketplace 
and, on the other hand, declare there is no compelling national 
interest to favor these businesses.
    I hope that I provided some framework for a debate, and I 
know I am committed to work with this Committee to achieve a 
viable consensus on how to grow and expand minority business 
ownership and opportunities in America. Thank you.
    [The prepared statement of Mr. Johnson follows:]

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    Chair Landrieu. Thank you, Mr. Johnson. As usual, you have 
accomplished the mission you set out to do. Do not worry.
    Ms. Cofield, we would love to hear from you, and I want to 
recognize that your family is from Natchitoches and you are a 
graduate of Southern University. We are very proud to have you 
today.

STATEMENT OF NATALIE COFIELD, PRESIDENT, NMC CONSULTING GROUP, 
                              INC.

    Ms. Cofield. Good morning, Chairwoman Landrieu and Ranking 
Member Snowe.
    My name is Natalie Madeira Cofield, President of the NMC 
Consulting Group, headquartered in Washington, D.C. Thank you 
for the opportunity to testify on behalf of aspiring and 
existing entrepreneurs of color, more specifically those who 
seek or have sought to obtain financing. It is an honor and a 
privilege to serve as a voice of millions of American minority 
business owners who struggle with the harsh reality that 
business ownership or expansion may not be an option for them 
due to undercapitalization, lack of social capital and lack of 
financing.
    As a champion for small business, I would be remiss if I 
did not highlight the contribution that the more than 4 million 
minority-owned businesses make to the U.S. economy, employing 
more than 4.7 million and producing more than $668 billion in 
annual gross revenues. What these statistics do not show, 
however, is the overarching impact that these business owners 
have on their communities--providing valuable support, examples 
of success and philanthropic investments, all of which support 
more viable and economically self-sufficient neighborhoods and 
ethnic groups.
    Unfortunately, the number of businesses owned by Americans 
classified as minority is not as many as it could or should be. 
More specifically, only 18 percent of all U.S. firms are 
classified as minority-owned, and when considering African 
Americans, this number is roughly 5.3 percent for a population 
that represents 12 percent of the country.
    This is not solely due to incomplete business plans or 
unfeasible concepts, but because of factors that have made the 
playing field inequitable. It makes it necessary that 
government programs exist and critical that these programs are 
improved.
    I have identified three factors that I believe have impact 
on issues for access to credit disparities:
    Insufficient capital infusion--an historical disparity in 
the sufficient disposable income that weakens the ability to 
provide initial business seed capital and results in the 
immediate need for financing.
    Insufficient access or social capital--a social 
relationship or bond between people, personal or professional, 
that transfers into human or economic capital. Minorities have 
often had a dearth of more developed social networks that makes 
accessing angel investment from family, friends, colleagues and 
external private investors increasingly difficult, as many 
people do not have access to someone who has legacy or 
substantial existing disposable assets.
    Then insufficient or inadequate financing--historical 
antagonistic practices in the areas of lending, such as 
excessive interest rates, higher required down payments, higher 
fees, higher declinations and lower approved amounts.
    This is shown in a case study of a client of mine. These 
obstacles have been evidenced by Jennifer King. She is an 
African American woman and disabled veteran who served proudly 
in the U.S. Navy. The daughter of a low income single mother 
who came from generations with minimal financial access, she 
was the only one of her four siblings to attend college.
    After college, she joined the Navy where she was exposed to 
various cultures that led her to devise a concept for her 
business. In 2006, she incorporated, and with a 740 credit 
score rating and a completed plan, was denied a meeting with a 
major bank because of the amount of capital that she 
requested--$500,000 with a $100,000 capital injection.
    She was an African American woman who was fluent in Arabic, 
who wanted to create a business marketed toward the diplomatic 
community. It was too difficult to sell. She met with Federal 
credit unions and was denied an SBA loan because she could not 
come up with the required 25 percent down payment, and this is 
during a time where even home mortgages were going for zero 
percent down. This was compounded by the fact that her home 
equity line of credit was not permissible to cover the 25 
percent down payment, working capital that she would need to 
actually obtain this loan, and this was to be her only source 
of financing.
    She met with the Veterans Corporation and was informed that 
they did not offer loans, though their web site stated so in 
2008. She submitted her information for the SSBIC and never 
heard back as of April 12th. She even tried to pay for social 
capital by hiring someone to find angel investment, but the 
monthly retainer was too significant to afford. She did not 
qualify for MBDA and, most disappointedly, was told by SCORE 
that it was their job to convince her not to start her business 
in an attempt to weed out the serious entrepreneur.
    In an effort to improve her standing and the possibility of 
starting her business, she enlisted the partnership of another 
woman veteran. Her white business partner's experience was the 
opposite. She came from a family with a legacy of home 
ownership, investments and financial access.
    And I would like to actually just point out that based on a 
study from the Insight Center for Community and Economic 
Development, the median wealth for single black women is only 
$100. For single Hispanic women, it is $120. This compares to 
over $41,000 for single white women.
    This support allowed her to bring to the concept $100,000 
in non-debt-backed assets at the onset. Then the economic 
recession began. Unfortunately, five years later, the lack of 
sufficient capital, lack of social capital, insufficient 
financial terms coupled with the recent economic downturn and 
its impact on her biggest asset, her home, has stalled her 
significantly. Today, she is a participant in my PROSPECTUS 
program.
    This is not unlike thousands of African Americans and other 
minorities pushing toward the pursuit of entrepreneurship.
    Chairwoman Landrieu, as a young woman, if she came to you 
for your advisement, you would have advised her to go to 
college and graduate school, to serve her country proudly, to 
purchase a home, to maintain stellar credit and to dream of an 
opportunity to leave her legacy. You would have encouraged her 
to participate in the American dream--all things that she did. 
If she cannot break the generational issues of lack of 
financial access, then who can?
    Furthermore, we must ask ourselves, what could this one 
woman do with her dream if only she was able to obtain 
financing? She could be one more person who could create new 
jobs. She could be one more person to inspire those depressed 
by past and current conditions. And she could be one more 
person to testify that the American dream is obtainable and 
real.
    [The prepared statement of Ms. Cofield follows:]

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    Chair Landrieu. Thank you, Ms. Cofield, for your passionate 
and compelling testimony. We really appreciate it, and it will 
be a very important part of this record.
    Ms. Henningsen.

 STATEMENT OF MARGARET HENNINGSEN, FOUNDER AND VICE PRESIDENT, 
                          LEGACY BANK

    Ms. Henningsen. Good morning, Chair Landrieu, Ranking 
Member Snowe and members of the Committee. I am Margaret 
Henningsen, Vice President and Founder of Legacy BanCorp and 
Legacy Bank. I welcome the opportunity to speak to the 
Committee on assessing access and opportunities and obstacles 
for minority small business owners.
    I will share with you how we grew and how the success of 
the small businesses we finance makes Legacy Bank successful. I 
will also speak to how those same small businesses are now 
struggling to survive and thus affecting the success of Legacy 
Bank. My testimony will also focus on the need for capital to 
keep those businesses going and how the current economic 
conditions could very well signal the end of a decade of strong 
growth in minority business communities. In the two years since 
I last testified before this Committee, the situation facing 
minority businesses has drastically changed.
    I began thinking about starting a bank in the mid-nineties 
as a result of the lack of capital for minority entrepreneurs 
who were seriously underserved and a significant number of 
people who were underbanked in Milwaukee. I was joined in this 
effort by co-founders Deloris Sims and Shirley Lanier.
    We were three black women in our fifties who recognized the 
need for greater access and pent-up demand for commercial 
capital, for minority and women-owned businesses in our target 
market. Our research supported our contention that the 
opportunities were out there, and there was a need for a bank 
that could guide those entrepreneurs to the right resources for 
success.
    Legacy is a State charter commercial bank located in 
Milwaukee. Our charter was granted in July of 1999 by the 
Wisconsin Department of Financial Institutions after we raised 
$7.5 million in capital. We were the first women in the history 
of the state to form a bank holding company and charter a 
commercial bank. Our bank provides financing for existing and 
startup businesses, commercial real estate, home purchases, 
home equity loans and a variety of retail products, including 
products for underbanked and unbanked consumers.
    Ironically, we celebrated our 10th Anniversary in 2009 with 
assets of over $225 million during 1 of our nation's worst 
economic downturns. This was no small feat, as some predicted 
that we would not survive given the location of our bank and 
the market we wanted to serve. For six of our nine years, 
Legacy Bank achieved nearly double-digit growth every year and 
consistently exceeded our annual goals for net income. Our 
growth has been fueled by the never-ending demand for loans in 
our community and surrounding areas as more people, 
particularly minorities, strive to achieve their dream of being 
an entrepreneur and having a successful small business.
    Many of the major businesses around today were small 
businesses that a financial institution took a chance on. Even 
some of the largest financial institutions started out as small 
community bank servicing a niche market, in particular, 
underserved neighborhoods that needed financial services and 
the opportunity to access capital. This is the model for Legacy 
Bank.
    We have a niche market in an underserved community and have 
been touted as a national model for community banking in 
underserved areas. Until the last 13 months, we were growing by 
providing financial services to that community and beyond. That 
growth has come to a standstill as the economic conditions have 
made it nearly impossible for us to continue financing in our 
market.
    Our existing customers who took advantage of every 
opportunity we could offer, have used up all of their resources 
as well as whatever we could provide. It is inevitable that 
those same successful businesses will not survive. As the 
credit crunch has accelerated, we have seen a major increase in 
the number of existing and startup businesses, especially 
minorities, coming to Legacy, needing capital to survive. For 
the first time, we have had to turn down some of those 
customers, both existing and new.
    The need for capital must be addressed. It must be swiftly 
developed and available to those once successful businesses 
that are now struggling in minority and underserved 
communities. To ignore the lack of opportunity that now exists 
would be devastating as the opportunities for employment and 
economic success have all but disappeared. In the same fashion 
that large banks and financial institutions and major 
corporations have received relief, small businesses must be 
included in that plan. It is a major issue that opportunities 
being publicized by the Small Business Administration are too 
little too late.
    The loan requirements for collateral and cash from 
borrowers who need the most help are unrealistic when the 
businesses are struggling to survive, yet being asked to meet 
credit and cash requirements that are nearly impossible. We 
encouraged and educated our customers to be prepared, but 
nothing could have prepared them for this economic crisis that 
was not of their doing.
    Data demonstrate the fact that many minorities who become, 
or want to become, small business owners are often first 
general entrepreneurs. These enterprising owners did not have 
the benefit of family members handing down a business or 
providing them with the necessary training and coaching that is 
so crucial for business success. At Legacy, we have found that 
when financial training and business coaching are provided, 
along with funding, businesses can succeed. The process of 
working with owners to strengthen their business is part of our 
banking model, but we have been unable to overcome the credit 
crunch that is so adversely affecting our customer base.
    Many banks argue that small business loans are too small, 
but that not enough money can be made from them, they involve 
too high of a risk, or that the borrowers lack the skills or 
are unprepared to run a successful firm.
    What we have found is that many of our customers have 
excellent ideas, good locations, a customer base, and the drive 
and tenacity to make their businesses succeed, plus a Plan B in 
case A does not work. Once they are given the opportunity, 
access to capital, training, coaching to make these businesses 
work, they have been successful, as supported by our double-
digit growth serving this customer base.
    There is risk involved. There is no doubt about that. But 
that is true no matter who is borrowing the money, as evidenced 
by the number of corporations that are failing, struggling and/
or being bailed out.
    Let me share lending data with you.
    Chair Landrieu. Please wrap up in about 30 seconds, if you 
do not mind.
    Ms. Henningsen. Oh, okay. Well, one thing I do want to say 
that is really important is in the last 15 months our lending 
has declined to less than $2 million, in the last 2 quarters, 
down from about $34 million in the year prior to that. In the 
first quarter of 2010, we did no new lending, only renewals. 
Much of our time and funding has gone to our existing 
customers, trying to keep them in business.
    [The prepared statement of Ms. Henningsen follows:]

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    Chair Landrieu. Thank you very much for that real-life, up-
to-date and compelling testimony.
    Mr. Hudson.

 STATEMENT OF PAUL HUDSON, CHAIRMAN AND CEO, BROADWAY FEDERAL 
                              BANK

    Mr. Hudson. Thank you, Chairwoman Landrieu and Ranking 
Member Snowe and Senator Cardin. Thank you for inviting me to 
appear before you today.
    Minority small business owners use the term capital even 
when they are really talking about debt financing. I have heard 
that today a lot. This word capital has got many meanings. This 
is based on certain realities in our community which include 
the following:
    The primary source of funds to finance minority business 
operations and expansion is often in the form of debt, short-
term debt. These sources include credit card debt, loans 
collateralized by personal and business assets which is most 
often the business owner's personal residence, and loans from 
family members and friends.
    Capital, on the other hand, is a foreign commodity in 
minority communities. The lack of capital in minority 
communities results from past discriminatory policies and 
practices that created a wealth gap. Minorities have 
substantially less wealth than the rest of Americans. The lack 
of wealth accumulation within minority communities has resulted 
in limited investable capital from local sources for minority 
business owners.
    As a result of this broader definition of capital within 
minority communities, I have found that minority business 
owners often blur the distinction between short-term debt and 
longer-term equity. For purposes of this statement, I will 
address both the access to both sources of financing.
    For all my adult life, minority business owners have 
complained about the obstacles to capital, to accessing 
capital. Based on my experience, there are five major 
obstacles:
    The lack of wealth accumulation within minority 
communities--this has meant limited opportunities to access 
local sources of capital. Local networks of friends, associates 
and organizations are often the connectors between business 
owner and investor. The lack of local sources of capital has 
historically contributed to the unequal access to capital by 
minorities.
    Redlining--and I know Dr. Fairlie is going to talk about 
redlining extensively, and a lot of people have talked about 
redlining, but it is clear that minorities have a different 
standard when they face bankers today.
    The third factor is minority business owners do not have a 
nexus to investment networks, which is another byproduct of 
discrimination and segregation. I am often asked about making 
an equity investment in a small business even though we are a 
bank, not a private equity fund. The financial network of most 
borrowers does not extend to angel investors and more 
traditional equity funds outside minority communities. Thus, 
Broadway Federal Bank, the local community bank, is the logical 
and often the only financial option.
    The fourth factor, minority businesses are often not 
organized or structured in a way that facilitates investment. 
Many small minority business owners are organized as sole 
proprietorships with a strong preference for ownership control, 
which gets back to Mr. Johnson's point.
    Finally, some minority business owners lack the financial 
sophistication to source investment opportunities, prepare 
investment materials and structure investment terms, which I 
know the SBA has the wealth centers that are working on that, 
with technical assistance.
    In addition to the above obstacles, the current economy has 
weakened the balance sheets and income statements of minority 
small businesses, and the depressed economy, as Senator Snowe, 
has resulted in the steepest lending since 1942.
    Broadway Federal Bank, as a small minority business, 
provides a case study of the possibilities and creative 
solutions to providing capital opportunities for minority small 
businesses. In the last 30 years, minority businesses have 
grown larger and more mature. Broadway is 63 years old, with 
assets slightly in excess of $500 million, annual gross 
revenues of close to $30 million.
    Minority businesses make an important contribution to the 
economy and job creation. Broadway is a Certified Community 
Development Financial Institution based on its delivery of 
financial services and products to underserved communities.
    Thirdly, but the most important part of this case study or 
example, is that the U.S. Treasury invested $15 million of 
capital--not loans, not debt--$15 million of capital in 
Broadway under the Troubled Asset Relief Program in the form of 
preferred shares at a dividend of 5 percent. That additional 
capital support net lending in 2009 of $109 million--$15 
million of capital, $109 million of loans primarily invested in 
commercial operations in urban minority communities.
    I make the following recommendation for the Committee's 
consideration: I think the TARP program provides an excellent 
example of what can be done in America and how government can 
play a role in supporting the rebound of this economy. Allocate 
$10 billion of stimulus funds to the Small Business 
Administration for capital investments in small minority 
businesses. The capital fund investment should be targeted to 
support job creation and economic growth in low and moderate 
income communities. The SBA should develop investment criteria 
to maximize job creation and minimize investment default.
    And I think it is important that the SBA contract with 
minority asset managers to help source and manage small 
business investments, and to provide the technical assistance 
and business education.
    I thank you for your interest in the plight of minority 
small business owners and for your commitment to identify and 
implement solutions to the obstacles to accessing capital and 
technical assistance by small businesses.
    I appreciate the opportunity to contribute. Thank you.
    [The prepared statement of Mr. Hudson follows:]

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    Chair Landrieu. Thank you, Mr. Hudson.
    Dr. Fairlie.

STATEMENT OF ROBERT W. FAIRLIE, PH.D., PROFESSOR OF ECONOMICS, 
              UNIVERSITY OF CALIFORNIA, SANTA CRUZ

    Dr. Fairlie. Yes, thank you, Chair Landrieu, Ranking Member 
Snowe and Senator Cardin. It is an honor to testify before you 
on the important topic of access to capital for minority 
businesses.
    I am a Professor of Economics at the University of 
California, Santa Cruz, and I have studied small business and 
entrepreneurship for nearly 20 years. I have been asked to 
briefly discuss the findings of my research on this topic. As 
we will see, I am going to present a number of numbers that 
have been discussed sort of briefly, from other panelists and 
also from members of the Committee.
    The U.S. economy has lost more than 8 million jobs since 
the start of the recession in December, 2007. The national 
unemployment rate is hovering around 10 percent now which is 
surprising because only a couple of years ago it was down 
around less than 5 percent.
    Small businesses have been hit extremely hard by the 
downturn. The rate of businesses filing for bankruptcies in the 
U.S. increased by more than 150 percent since mid-2007. The 
financial crisis certainly contributed to the rapid increase in 
business closings over this period. All indicators, including 
the recent survey of loan officers by the Federal Reserve, 
indicate extremely tight credit conditions for small businesses 
and entrepreneurs. Minority-owned businesses are being hit 
especially hard by the current financial crisis.
    Extensive research of mine and others indicates that 
minority businesses face substantial barriers to entry, growth 
and survival even in more promising or favorable economic 
conditions. Minority firms are more vulnerable because they are 
generally smaller and have fewer resources to draw on in 
difficult economic times. The average minority-owned business 
has revenues of $170,000 per year, which is only about 38 
percent of the level for non-minority businesses. Minority-
owned businesses also hire fewer employees and have lower 
profit levels on average.
    Of the many factors responsible for these disparities in 
business performance, access to financial capital is perhaps 
the most important. A large number of studies show that limited 
access to capital hinders the formation and growth of minority-
owned businesses. One of the major roots of the problem is the 
extremely high level of wealth inequality between minorities 
and non-minorities.
    Estimates of median net worth from the Census Bureau here 
are displayed in Figure 1. As you can see from this figure, 
half of all African American families have less than $5,500 in 
total wealth, and half of all Latino families have less than 
$8,000. If you look at the red column here, that shows you the 
level of wealth among non-minority owned families, which is 11 
to 16 times higher at $87,000.
    These disparities in wealth are also substantially higher 
than disparities in total income. So African American and 
Latino families have income levels that are 60 to 70 percent of 
non-minority levels.
    Now why are these levels of wealth important, these 
disparities in wealth? Well, these low levels of wealth among 
minorities translate into fewer startups and undercapitalized 
businesses because an entrepreneur's wealth is important 
because it is often invested directly into the business or used 
as collateral to obtain business loans. Entrepreneurs also 
frequently are required by investors to invest their own money 
in the business as an incentive.
    Further limiting the ability of minority entrepreneurs to 
obtain financial capital is racial discrimination in lending 
markets. Several studies have examined whether minority firms 
face discrimination in obtaining business loans. The main 
finding from this literature is that minority-owned businesses 
are more likely to experience loan denials, pay higher interest 
rates and are less likely to apply for loans because of a fear 
of rejection.
    Using the latest data from the Federal Reserve, I conducted 
a similar analysis recently. You can see in this figure, Figure 
2 here, that minority firms are twice as likely to be denied a 
loan application, they are twice as likely to not apply for a 
loan out of fear of rejection on that loan, and minority firms 
that do obtain loans pay 1.5 percentage points higher interest 
rates on those loans than non-minority firms.
    These disparities do not disappear even after controlling 
for the age, experience and education of the owner of the firm, 
the creditworthiness, size, industry, age and location of the 
firm, which is consistent with the existence of lending 
discrimination.
    The end result is that minority-owned businesses have 
substantially lower levels of financial capital in their 
businesses. Figure 3 displays estimates from Federal Reserve 
data indicating that minority firms have much lower levels of 
equity investments and loan amounts than non-minority firms. 
Minority-owned businesses have an average of $3,400 of equity 
investments in their business and $46,500 in loans; non-
minority businesses have values of equity and loan investments 
that are more than twice that level.
    Again, these disparities do not disappear even after we 
control for the characteristics and owner of the firm.
    I have used data from other sources and find similar 
patterns of low levels of financial capital among minority 
businesses.
    Minority-owned businesses contribute greatly to the U.S. 
economy. Businesses owned by minorities produce nearly $700 
billion in total sales. Minority firms employ 5 million workers 
with an annual payroll of $120 billion. These jobs are located 
across the nation, with many of them located in minority and 
economically depressed communities.
    Often overlooked, however, is that minority business owners 
also create a job for themselves. When added up, that 
represents an additional 4 million jobs that are created by 
these businesses in the economy.
    In closing, although minority-owned businesses contribute 
greatly to the economy, there remains a lot of untapped 
potential among this group of firms. As I have discussed, 
minority entrepreneurs are constrained by limited wealth, high 
loan denial rates, high interest rates and lending 
discrimination. Barriers to growth such as these, for any group 
of business owners in the country, limit total U.S. 
productivity. These barriers have a negative effect on job 
creation and innovation, and will restrict our country's 
ability to move out of the recession and remain competitive in 
the global economy.
    Thank you for the opportunity to present the findings from 
my research. I look forward to hearing your comments and 
questions.
    [The prepared statement of Dr. Fairlie follows:]

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    Chair Landrieu. Thank you, Dr. Fairlie.
    Let me just say I think this has been one of the most 
interesting, thought provoking panels and most professionally 
executed panels that I have ever heard in my time in the 
Senate. I have been here almost 14 years. I really appreciate 
the work that went into your presentations, to try to elicit 
the appropriate response from not only this Committee but the 
members of Congress.
    I am going to start, Mr. Fairlie, with you because I was 
just sharing with Senator Cardin that I think Americans would 
be absolutely shocked to hear the statistic here, that average 
African American families have less than $5,500 in wealth 
compared to average white families, that have an average of 
$87,058. That is what you have testified.
    Could you explain a little bit in more detail for people 
who, after hearing that, are still not going to want to accept 
that, a little bit more detail about it?
    Are you talking about home equity and home ownership, or 
are you just talking about wealth in either the stock market or 
bank accounts, all of the above? Could you just give a little 
bit more clarification to that?
    Dr. Fairlie. Yes, I would be happy to. I have studied this 
issue for numerous years. I actually found it one of the most 
depressing statistics, just kind of frankly, when I was doing 
research for a book of mine.
    What I am referring to is total wealth as measured by the 
Census Bureau. It includes all of an individual's assets, 
subtracting off the debt that they own on it. So it would 
include their home, subtracting off the mortgage that is still 
owned on that home. It would include savings accounts, stock 
market accounts, things like that, minus any debt that you have 
on a credit card or anything else. So it basically includes the 
total wealth that is added up.
    Now certainly there are a lot of very wealthy families that 
are minorities, but the median level I think is a very good 
statistic because it tells you the 50th ranked family for each 
group. So the 50th ranked family, if you kind of ranked all 
African Americans by wealth, comes out at $5,500. The average 
Latino family comes out at $8,000. So there are much, much 
lower levels, one-eleventh to one-sixteenth what you find for 
non-minority families.
    I have also looked at kind of the historical patterns in 
this data. There are not clear trends showing gains in wealth 
accumulation among minorities relative to whites, and I found 
that is also a very sort of depressing and kind of surprising 
statistic.
    Now the statistics only go back to 1984. That is when the 
Federal Government started collecting these data on wealth. So 
it is not that we have a long history of data in this area, but 
it just shows you we have not made a lot of improvement, at 
least over the kind of recent history, in terms of wealth.
    Chair Landrieu. You also had some interesting statistics, I 
think in your research, about the level of education. It is in 
your book, ``Race and Entrepreneurial Success.'' You mentioned 
you found evidence that a business owner's education level is 
an important determinant in business outcomes. Do you mind just 
elaborating on that?
    Dr. Fairlie. Yes. So, in that research, what I found is 
when I focused specifically on African American business owners 
I found that about 20 percent of African American business 
owners had a college degree or higher education level, and 
among whites it was 28 percent that had a college degree or 
higher. So I thought, well, there are these big differences in 
education levels among the owners. Can they have an impact on 
the success of the business?
    What I found is that education was one of the most 
important determinants of a firm in terms of the level of sales 
the firm has, the profit levels of the firm, whether or not the 
firm closes, and also whether or not the firm hires employees. 
So what I found, sort of putting all of that together, is that 
it was hindering African American growth in terms of the firms 
and their success.
    Chair Landrieu. Ms. Cofield, your testimony was very 
compelling. Could you please describe a little bit in more 
detail your business and how many clients that you have?
    You gave a very detailed description of one of your 
clients. Is that the nature of your business, to advise 
individual potential business owners and entrepreneurs?
    Ms. Cofield. Sure. Yes. My company is a boutique company 
here in Washington, D.C., and I actually have a program called 
PROSPECTUS which is a nine-week entrepreneurship training 
program for aspiring and existing entrepreneurs. In our cohort 
now we have a small cohort of 11 entrepreneurs, and they are at 
every stage from feasibility to actually looking for capital. 
And her case study is just one of the many that I have come 
across during my years as an entrepreneur, but also working in 
business development here in Washington, D.C. and in Los 
Angeles, as well as New York.
    Chair Landrieu. Thank you.
    Finally, to Mr. Johnson, you probably laid out one of the 
more compelling thoughts. Senator Cardin was not here when you 
did, but I know he is familiar with your testimony. You said 
that you really think the 51 percent requirement for equity, to 
determine whether the firm is truly a minority firm, actually 
is a great hindrance. Do you want to just elaborate on that? I 
know you did not have that much time in your testimony--because 
I am very interested and had not actually thought about that 
before, I have to say, and I think you have made an excellent 
point.
    Mr. Johnson. Thank you, Senator. The 51 percent requirement 
is a political decision. It has nothing to do with the 
marketplace. If someone has a good business idea and they can 
attract capital, capital will flow to that idea and that 
opportunity. That is the way capital works.
    But what happened when there was a move to create so-called 
black capitalism or the opportunities for minorities, the 
feeling came in some political quarters, we have to prevent so-
called shams or fronts. So the idea was to put a threshold 
requirement of 51 percent on the assumption that no one would 
put money into a minority company if the minority controlled it 
because obviously you are not going to put money in a company 
you do not have any influence over.
    So that level of threshold became the norm. It started with 
the government and then moved to corporations.
    What that does, though, is it limits a minority's ability 
to attract investment capital because most investors, when they 
invest in a company have two things in mind. One, to grow the 
investment as large as they can, and obviously if they can 
acquire more equity in the company they would like to do so, 
particularly if the company is growing and if they bring some 
assets that help the company grow. At the same time, they also 
want to have an exit strategy in case they want to leave the 
company.
    But if the company has this 51 percent minority 
requirement, it is going to always depress both the opportunity 
to attract outside equity and the ability to get an exit 
because who is going to buy into a company where they can never 
get a so-called path to control.
    And my argument is go to the real marketplace. You take a 
person like Jamie Dimon at JPMorgan Chase, probably owns less 
than 1 or 2 percent of the stock, but you know he controls that 
company.
    You take a person like Oprah Winfrey. She is the rainmaker 
for that company. Oprah could go public and sell 90 percent of 
her ownership of that company, and only with 10 you would know 
she would still be the controlling revenue force and leader of 
that particular enterprise.
    So my argument is if we could eliminate as a controlling 
factor that 51 percent. Look to other factors. Two sources of 
voting control: Stock A and B, A votes 10, B votes 1. Board 
control where the minority can say I have gained board control 
from the investor, so I do have a significant control. Put 
these factors in or just simply go to 10 percent to reflect the 
economic reality where white Americans have about 90 percent 
more capital than African Americans.
    But to continue that, in my opinion, will always limit 
minority companies to being small, and it would limit outside 
investors wanting to acquire a stake in a company they never 
control.
    Chair Landrieu. It serves as a ceiling as opposed to a 
launching pad.
    Mr. Johnson. Absolutely. I mean that is a problem.
    Chair Landrieu. Senator Snowe.
    Senator Snowe. Thank you.
    And I thank all of you. You are trailblazers in your 
respective spheres, and I appreciate your testimony very much. 
It is very helpful and illuminating and, as the Chair 
indicated, startling. It does provide, I think, a reinforcement 
of how we ought to do things better with respect to the 
resources that we have at the Federal level, and certainly 
through the SBA and the Commerce Department.
    Mr. Johnson, to your point, because you made some 
interesting arguments about some of the criteria that are 
utilized in SBA programs--the SBA should respond to the 
questions you raised in your testimony.
    Madam Chair, we ought to get a response from the SBA 
because these are issues that could be hindrances and barriers 
to opening the doors for entrepreneurship.
    You have made a very compelling case in that regard.
    Mr. Johnson. Yes, Senator, I think the issues I see are we 
have talked about raising the amount of lending that could go 
into a minority business. Have we always thought about raising 
the level at which you could qualify for an SBA loan?
    I mean part of the problem is there is a cap on net worth. 
That may take out a lot of very competent minority business men 
and women who have succeeded despite the odds, but they are not 
eligible for any kind of Federal assistance because we have 
politically said, again, that: If you happen to be a $500,000 
minority guy or woman, you have great business experience. You 
have succeeded against the odds. You are not eligible for any 
government assistance. But you are still a minority, and you 
still face many of the same things that the professor talked 
about--higher interest rates on whatever borrowing you might 
get, a limit on the amount you can borrow.
    In some cases, because of net worth levels, like the 51 
percent concept, we have taken some of the best players off the 
field.
    And I think you could get a better result, and my feeling 
is that in terms of the SBA or the approach I would take if I 
were doing this I would simply take the level of money and 
create a private investment fund that would be charged, and 
they would get a fee for this, but they would be charged with 
making loans to minority business.
    So you get really good people who know how--Natalie--to 
say, okay, I have got $2 million, or I have got $10 million or 
$100 million from the government. My job is to go to out a lot 
of micro businesses by investing in those companies.
    That is the way I would approach it, rather than having in 
some cases the government do it. I am not a big fan of the 
government doing everything. So these are things that I think.
    And then that goes to this other issue of this compelling 
national interest test on the court ruling. You cannot reverse 
discriminate. Well, if you do not reverse or at least 
preferences or advantages, you will forever limit the growth of 
minority business in terms of scale and size. They just will 
not get there.
    Senator Snowe. Well, that is very helpful in that regard. 
We will explore that. I think it is very useful.
    You yourself started out in 1979, and that was just at the 
onset of another recession. What recommendations or what 
strategies did you use, and what would you recommend to 
entrepreneurs today, and small businesses, to survive, if not 
thrive?
    Mr. Johnson. Senator, when I started, believe it or not, 
interest rates were around 18 percent.
    Senator Snowe. I know it well. It was my first time in the 
House, so it is etched in my memory.
    Mr. Johnson. My story sort of comes under the exception to 
the rule. I mean I had a chance to be in an industry, the cable 
industry, at a time when it was coming out of the foothills and 
going into the urban markets and happened to meet a unique 
entrepreneur in the name of John Malone of Liberty Media, a 
cable company that really believed in backing entrepreneurs, 
and he backed myself, John Hendricks over at Discovery, even 
Ted Turner. But that was a unique opportunity and a unique 
relationship.
    The problem is, and the tragedy of it is, it is almost 
impossible to duplicate and put into a sort of 
institutionalized process.
    So what happened is I was able to get the social contact by 
working as a lobbyist at the National Cable Television 
Association. The industry was expanding into urban markets. I 
came up with the idea of Black Entertainment Television. The 
industry needed minority programming in urban markets. Malone 
was an entrepreneur who supported me, and I was able to grow 
with an industry from the bottom up and grow my company. So 
when I started BET on a half a million dollar loan from John 
Malone, I sold it in 2001 for $3 billion to Viacom because I 
grew with the industry.
    At that particular point in time, that was the strategy of 
what I implemented--finding strategic partners. Every business 
I have now I have always taken this model. If most African 
Americans could find a strategic partner like a Malone, if we 
could go out and match up minority entrepreneurs with majority 
strategic partners and supporters, you could change 
dramatically the number of large-scale minority businesses.
    Senator Snowe. That is interesting, yes. And developing a 
network too, absolutely.
    Mr. Johnson. That is exactly it.
    Senator Snowe. Well, Ms. Henningsen and Mr. Hudson, from 
your perspectives, listening to what Mr. Johnson has had to 
say, and from your experiences, what can we do through SBA to 
help target these resources more effectively for minority-owned 
businesses?
    You have set a model, both in terms of the profitability 
and also the social responsibility. So what does that say to 
other lenders? What could we do to encourage other lenders to 
create similar systems?
    Ms. Henningsen. Well, the model is a simple one. First of 
all, we took the position that we wanted our businesses to 
survive. So we were a little bit rough and tough with them when 
they came in to get the financing, but I frankly believe that 
is the only reason some of our businesses are where they are 
now and are sort of surviving. But even our strongest 
businesses, we find are in trouble and need that extra boost. 
But the educational piece was extremely important in making 
sure that the small business owners knew what they were doing.
    The partnering concept Mr. Johnson talked about, we are big 
with that. As a matter of fact, we have taken some of our most 
successful businesses, and when new entrepreneurs have come to 
us we have said we want you to sit down and talk to this 
business owner and get a feel for what you are facing. And as 
entrepreneurs ourselves, we have been able to say to them, 
these are the issues.
    But at the end of the day, right now what our small 
businesses need is money to keep them going. We have a lot of 
businesses that had Plan B, but we are down to Plan Z now. I am 
not kidding. With the way these businesses are struggling, 
people's homes, their family's homes are tied up in some of 
these businesses.
    As the founder of the bank, this has been the worst 15 
months of my life because even though we have what I would 
describe as a good replicable model, I do not believe anyone 
was prepared for what we are going through right now, but the 
model does work.
    Senator Snowe. It does work. These are unusual times.
    Mr. Hudson. Just quickly, I would agree with I do not 
support a 51 percent requirement. I agree with joint ventures 
and partnerships. I even probably agree with the fact that 
asset limits, minimal asset limits or maximum asset limits, 
prohibit attraction of successful, potential successful 
businesses.
    I think where you have to be concerned is that there is a 
nexus to low income communities, minority communities. There is 
some way you have to have a nexus to those investments and jobs 
and economic development in low income communities. So that is 
where you have to think through how do you ensure that your 
dollars are being reinvested and that the benefits are going 
back into low income communities.
    Senator Snowe. Thank you.
    Chair Landrieu. Let me just say in conclusion that Ranking 
Member Snowe and I are going to be very influential in the 
building of this next Jobs 3 Bill. We had Jobs 1 and Jobs 2, 
and we will build a Jobs 3 bill.
    Much of the testimony that you all have put on the table 
today, I will do my very best to have as a core and part of 
this Job 3 Bill as we focus on getting our eyes and our hearts 
on Main Street, from Wall Street, and get our hearts and minds 
on these neighborhoods that are chronically underserved, a 
community that still faces extraordinary discrimination. Even 
though it is a lot more subtle, it still exists, and it has to 
be corrected.
    These capital markets must work for all Americans. They 
just have to.
    While government does, Mr. Johnson, have a limited role, it 
could have a very muscular and important role to play in 
righting injustices.
    So it has been very illuminating and instructive. I thank 
you very much, and the meeting has come to a close.
    [Whereupon, at 11:45 a.m., the Committee was adjourned.]



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