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S. HRG. 108–567

ACCESSING CAPITAL AND BUSINESS ASSISTANCE:

ARE CURRENT PROGRAMS MEETING THE

NEEDS OF RURAL SMALL BUSINESS?

FIELD HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

FEBRUARY 16, 2004

Printed for the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED EIGHTH CONGRESS

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

ROBERT F. BENNETT, Utah

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE ALLEN, Virginia

JOHN ENSIGN, Nevada

NORMAN COLEMAN, Minnesota

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

WESTON J. COULAM, Staff Director

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Crapo, The Honorable Mike, a United States Senator from Idaho ..................... 1

WITNESS TESTIMONY

Ferguson, Paul L., Commercial Loan Officer, Panhandle Area Council, Inc.,

Hayden, Idaho ...................................................................................................... 3

Lynn, John, Director, Idaho Small Business Development Center, Post Falls,

Idaho ..................................................................................................................... 5

Deffenbaugh, Jim, Executive Director, Panhandle Area Council, Inc., Hayden,

Idaho ..................................................................................................................... 6

Kindred, Douglas L., Retired Small Business Owner and Current Volunteer

with SCORE, the Service Corps of Retired Executive, Hope, Idaho ................ 7

Beck, Robert M., Vice President of SBA Lending, Mountain West Bank,

Coeur d’Alene, Idaho ............................................................................................ 18

Lawton, Debbie, Business Development Officer, U.S. Bank, Coeur d’Alene,

Idaho ..................................................................................................................... 19

Brown, Michael Business Development Officer, Borrego Springs Bank, Coeur

D’Alene, Idaho ...................................................................................................... 20

Randall, Rob, President and CEO, Randall Contacting, Kellogg, Idaho ............. 29

McGregor, Archie, President and CEO, Archie’s IGA, St. Maries, Idaho ........... 31

Gantar, Mark D., President, All Seasons Apparel, Inc., Post Falls, Idaho ......... 32

King, Bruce, Owner, Lakewood Animal Hospital, Coeur d’Alene, Idaho ............ 38

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Beck, Robert M.

Opening statement ........................................................................................... 18

Prepared statement .......................................................................................... 44

Brown, Michael

Opening statement ........................................................................................... 20

Prepared statement .......................................................................................... 48

Crapo, The Honorable Mike

Opening statement ........................................................................................... 1

Deffenbaugh, Jim

Opening statement ........................................................................................... 6

Prepared statement .......................................................................................... 50

Ferguson, Paul L.

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 52

Gantar, Mark D.

Opening statement ........................................................................................... 32

Prepared statement .......................................................................................... 54

Kindred, Douglas L.

Opening statement ........................................................................................... 7

Prepared statement .......................................................................................... 57

King, Bruce

Opening statement ........................................................................................... 38

Prepared statement .......................................................................................... 60

Lawton, Debbie

Opening statement ........................................................................................... 19

Prepared statement .......................................................................................... 62

Lynn, John

Opening statement ........................................................................................... 5

Page

IV

—Continued

Prepared statement .......................................................................................... 64

McGregor, Archie

Opening statement ........................................................................................... 31

Prepared statement .......................................................................................... 66

Randall, Rob

Opening statement ........................................................................................... 29

Prepared statement .......................................................................................... 68

Additional attachments .................................................................................... 71

COMMENTS FOR THE RECORD

Barreto, The Honorable Hector V., Administrator, U.S. Small Business Administration, Washington, D.C., statement ....................................................... 94

Busch, Dr. Chris W., Ronan, Montana, statement ............................................... 98

Manning, Christopher, President, Manning Applied Technology, Troy, Idaho,

letter ...................................................................................................................... 101

(1)

ACCESSING CAPITAL AND BUSINESS ASSISTANCE: ARE CURRENT PROGRAMS MEETING

THE NEEDS OF RURAL SMALL BUSINESS?

MONDAY, FEBRUARY 16, 2004

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 8:30 a.m., in Conference Room Bay 3 at the Coeur d’Alene Resort, Coeur d’Alene,

Idaho, the Hon. Mike Crapo (Acting Chairman of the Committee)

presiding.

OPENING STATEMENT OF THE HONORABLE MIKE CRAPO,

ACTING CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES SENATOR FROM IDAHO

Senator CRAPO. Ladies and gentlemen, we welcome you here, and

this will convene the hearing of the Small Business Committee in

Coeur d’Alene, Idaho. I want to thank all of you for taking the time

particularly on a holiday to attend this official hearing of the

United States Senate Committee on Small Business and Entrepreneurship. I think that this is the first such official hearing to be

held in Idaho, and I want to thank Senator Olympia J. Snowe of

Maine, who is the Chair of the Committee, for allowing us to hold

this hearing here in Idaho.

Because Senator Snowe, who is the Chair, and Senator John

Kerry, who is the Ranking Member, as the Chair and Ranking

Member, respectively, have the prerogative over witnesses who are

invited to testify at our hearings in Washington, I thought it was

important that the Committee record also include the important

testimony of leaders and businesses from the rural West. Therefore, I asked if we could hold this hearing in Idaho, and Senator

Snowe graciously agreed.

She’s a very strong advocate of small business and she and I

work very closely together on many of the critical issues, most of

which, if not all of which, I expect will be brought up here today

from the witnesses who will present testimony.

A recent study by the SBA showed that 80 percent of all small

business lending occurs in urban areas, although loans to rural

businesses are increasing at a faster rate than loans to urban businesses. Unfortunately, the study also shows that a significant problem remains. Small businesses in rural areas nationwide, which

are 20 percent of all small businesses, have less access to credit

than those operating in urban areas.

2

In addition, because of the tight budget conditions under which

we’re operating in Washington, D.C., and, frankly, throughout the

rest of the country as well, our technical and developmental assistance agencies are being asked to do more and more with fewer and

fewer resources. This all leads us to ask some important questions,

and I’m going to posit a few here, and I expect, again, that we’ll

get some other questions, and answers I hope, from our witnesses

today.

Are the capital access programs in rural areas like Idaho sufficient enough to meet the needs of all qualified small businesses regardless of size or location or type of business? Are the current

technical and developmental assistance programs meeting the

needs of rural entrepreneurs? Do we have a situation where the

necessary capital and assistance programs are in place but the people who need them aren’t always aware of their existence or of how

to access them? Or do we need to create new programs or modify

the existing ones so that they can better meet the unique needs of

small business in rural areas? These are just some of the questions

that I have and I’ll be looking for input and information from those

who are before us today.

Of course, recent events involving the capital access program I’m

sure you all want to talk about, 7(a), have prompted a lot of other

analysis of what’s happening in the SBA programs and in the

budget process in Washington, D.C. The SBA’s recent decision to

suspend, cap and restrict its flagship program has certainly caused

a lot of problems and raised a lot of questions, some of which I

hope we can address today.

Why did the SBA reach the point where it felt these caps and

restrictions were necessary? How have these events affected the

Idaho small business community? What has the SBA proposed to

remedy the situation? What should the SBA and Congress be doing

to remedy the situation and restore long-term stability to that program?

I’ll have more to say on these issues during the question-andanswer period with our witnesses, but right now I want to get

ahead and get on with the testimony. I want to let everybody know,

the witnesses to know, that because we operate under time restraints, I will be very insistent on making sure that each of you

follow the 5-minute rule for your oral presentation, and would ask

you to pay attention to that.

In fact, Mike here has got some little cards to help you realize

how much time you have left. I’ve been in a lot of hearings, both

on this side of the table and on that side of the table; and I’ll tell

you what, I’ve never had enough time to say everything I want to

say, and I suspect that that will be the case for you today, too. It

always seems to be that those minutes melt away faster once you

start talking and that’s why we’ve got a little reminder here as to

what they are. If you go over, I’ll kind of rap the gavel here to remind you. It’s only to get you to let us get on to the question-andanswer period as well so we have time for that dialogue.

I assure you that I’ve read all of your testimony. If you can’t get

through everything in your written testimony, don’t worry about it

because your written testimony will not only be read by me and my

staff, but by the staff of the Small Business Committee and other

3

Senators as well. We’ll also be able to get into a lot of the things

that you may not get into in your allocated 5 minutes during the

question-and-answer period. We will have other opportunities.

If for any reason, when we get to the end of your panel, you feel

like you really haven’t had a chance to say what you wanted to say,

we will keep the record open and let you submit some more written

statements, if you’d like to, so you can get your information to us.

With that, let us proceed. Let’s move to our first witness panel.

The first panel includes Paul Ferguson, who is a Commercial Loan

Officer with the Panhandle Area Council; Mr. John Lynn, the Director of the Idaho Small Business Development Center in Post

Falls; Mr. Jim Deffenbaugh—Did I pronounce that right? The Executive Director of the Panhandle Area Council; and Doug Kindred,

a retired small business owner and current volunteer with SCORE,

the Service Corps of Retired Executives.

Gentlemen, we’ll have you present in that order; and then at the

conclusion of your presentations, we’ll engage in some questions

and answers and discussion on the issues.

Mr. Ferguson.

STATEMENT OF PAUL L. FERGUSON, COMMERCIAL LOAN

OFFICER, PANHANDLE AREA COUNCIL, INC., HAYDEN, IDAHO

Mr. FERGUSON. First of all, Senator Crapo, thank you for inviting

us.

Senator CRAPO. You might want to pull that a little closer to you.

Mr. FERGUSON. Closer?

Senator CRAPO. Yes, turn it on. That works, too.

Mr. FERGUSON. Boy, there’s a lot of protocol, isn’t there?

Once again, thank you for inviting us. I’m nervous enough that

I’ll probably go through my talk in much less than the 5 minutes.

Senator CRAPO. You get extra credit for that.

Mr. FERGUSON. But I do appreciate the opportunity.

The Panhandle Area Council is a non-profit development company working here in the Idaho panhandle. We have a business incubator for small manufacturers. We provide technical assistance

for business owners and lending programs from a thousand to a

million-three. One of our goals is to provide and retain a new job

for every $35,000 that we lend to business.

PAC provides loans through the SBA Micro program for projects

under $35,000. Banks are often unwilling to do such small loans

because of the modest return. Annually, we get about 300 inquiries

with microloans. We provide assistance with business plans. We review their projections and make suggestions regarding the appropriate loan product. If it involves the SBA 7(a) program or other

bank loans, we coach them about how to prepare the package and

make their presentation.

PAC projects over $35,000 must have a lending partner. The

bank loans 50 percent of the amount and we allow the bank the

first lien position. The bank, of course, is more willing to participate in projects that have the specialized collateral, smaller equity

or short business history. Often these projects do not qualify for the

SBA 7(a) lending.

The 7(a) program is a huge asset for North Idaho and it’s especially good for the small community banks that cannot afford the

4

risk and also need the ability to sell loans to provide capital for

their other borrowers. The 7(a) program also allows restructure

and consolidation. These requests are not allowed in any of our

other PAC programs.

But there has been a trend in the last few years to emphasis obviously the populated urban areas. The Spokane district office of

the SBA was made a branch of Seattle, and many of the portfolio

and lending personnel have been transferred or eliminated.

The SBA is changing the character of the Certified Development

Companies, the CDCs, that originate and service the SBA 504

loans. The CDCs were established originally with a given geographical area, a local board, a local loan committee to address

local needs. Recent changes are allowing CDCs to cover the entire

State and also allow large CDCs to cross State lines.

These changes do not require local boards, or at least local committees. We feel this change will enable the large CDCs to ‘‘cream’’

the loans and only go to the areas where they’re going to see larger

volume and tend to loan to more risk-free businesses. It’s very hard

for rural CDCs to meet production goals with their limited resources. Many more CDCs will disappear in the rural area.

These smaller CDCs also rely on the servicing income from the

large 504s to fund the staff that also administers the smaller micro

and USBA loans. Competition for the USDA Rural Development

Loan pool money is also difficult for smaller economic development

groups. Performance points used to be adequate to obtain the

money. Now, with the scoring system, there is substantial matching money required to achieve the necessary points to get that bid.

The smaller lenders do not have the ability to provide this larger

matching money.

While the proposed budget says it will provide more funding for

the 7(a) SBA program, the microloan program is being eliminated.

Is this really a net gain for your prospective borrowers? The administration says the microloan can be replaced by use of the SBA

Community Express. PAC has made 67 microloans for a total of

nearly $667,000, so you only have an average loan size of about

$10,000. I do not know of any bank that will do a 7(a) loan with

all of its paperwork just for a $10,000 loan.

The Community Express program does not pay for technical assistance; however, the SBA web site states that they recognize that

this is crucial to the success of a business. Borrowers must receive

pre- and post-closing technical assistance from non-profit providers

or the lender. This assistance is to be paid for by that Community

Express lender. I’m curious how non-profits are going to carry this

cost burden and if banks are willing to do so for such a modestsized loan.

PAC is just a small economic development corporation, but we

have had an impact on the local economies. In just the loan programs, we’ve lent over 12 million on the 504; we’ve created 576

jobs. With our USDA money, we’ve lent over a million and a half

for 113 jobs. Our revolving loans, over 6 million creating over 1300

jobs. In the microloan, we created 67 jobs with $667,000 lent.

I want to thank you for your genuine concern and your willingness to hear my story.

Senator CRAPO. Thank you very much.

5

Mr. Lynn.

STATEMENT OF JOHN LYNN, DIRECTOR, IDAHO SMALL

BUSINESS DEVELOPMENT CENTER, POST FALLS, IDAHO

Mr. LYNN. Let me scoot up over here.

Senator CRAPO. Yes, I think you can pull that cord a little bit,

too.

Mr. LYNN. All right. Thank you, Senator. Again, I appreciate the

opportunity to be here today. My name is John Lynn and I’m the

Regional Director for the Idaho Small Business Development Center. I’m housed at North Idaho College and we cover the five northern counties of the panhandle of Idaho.

Our office provides one-on-one business consulting services to

start-up companies and small business owners. We also do market

research for companies through our State office in Boise and the

University of Texas. We also provide training services to small

business owners and entrepreneurs throughout the five northern

counties. Last year we provided 1,631 hours of one-on-one consulting services to over 247 different businesses. We also delivered

3,185 hours of business training to 531 individuals throughout the

State.

How we are funded is pretty unique. We are a combination of

Federal, State and local funding. We get about one-third of our

funding from a grant from the USBA every year that we negotiate;

one-third of our funding comes from the Idaho legislature; and onethird of our funding comes from North Idaho College. My staff consists of myself as full-time Director and Business Consultant, a

part-time Business Consultant that works about 19 hours a week,

a full-time Training Director and QuickBooks Consultant, and then

a half-time Administrative Assistant. Basically two and a half people to cover all of North Idaho.

Small business development in North Idaho presents many challenges. One of the things is Kootenai County and its accelerated

economic growth doesn’t really reflect the other areas in the Idaho

Panhandle. Unemployment rates continue to be higher than the

national average, and most areas have experienced significant job

losses due to the downturn of the natural resource based economy

up here.

The biggest challenge facing our office is to try and meet the increasing demands for our services. Grant funding from the SBA

has been flat since 1997. But they request more services every year

and the number of people we see and the number of training hours

that we deliver.

Our rural outreach, being an important part of the SBDC mission, is becoming increasingly difficult to provide SBDC services to

rural North Idaho that have an economic development impact. I

mean we can go and see a lot of different people, but are we really

making an impact in those rural areas without spending a lot more

time and resources up there?

Our challenge is to try to leverage our resources with other economic development organizations to provide business development

services outside of Kootenai County. To be successful, I think what

we need to do is change attitudes in the rural counties up here. We

need infrastructure that needs to be developed, access to capital

6

needs to be improved, and a concentrated and coordinated effort

must be developed between the economic development service providers.

Our office works very closely with the various banks and loan

funds and economic development agencies in the Idaho Panhandle;

and without the SBA loan programs, the 7(a) program in particular

and the microloan program, access to capital for start-up for existing small businesses would be nonexistent. Well over 90 percent of

our clients that receive loans have an SBA guarantee associated

with it in some way or another.

A qualified business in Kootenai County, if it applies for a business loan, has many choices of lending institutions. The same cannot be said for rural regions in North Idaho. Without the loan

funds available through PAC, access to capital in rural Idaho is

very, very difficult. In fact, even in Kootenai County, it’s the small

community banks that are doing the majority of the lending to the

small business and business start-ups; loans less than $200,000.

In conclusion, the SBDC program in Idaho is being required to

meet ever-increasing milestones from the SBA without any increase in resources. If the only area we were required to serve is

Kootenai County, then that would be great because we could keep

busy right here in this county. But if we want to do some rural economic development and make an impact, we’ve got to spend some

time and resources up there. Thank you.

Senator CRAPO. Thank you very much, Mr. Lynn.

Mr. Deffenbaugh.

STATEMENT OF JIM DEFFENBAUGH, EXECUTIVE DIRECTOR,

PANHANDLE AREA COUNCIL, INC., HAYDEN, IDAHO

Mr. DEFFENBAUGH. Morning, Senator Crapo. Thank you for this

opportunity to speak.

Senator CRAPO. It’s working. Just pull it pretty close.

Mr. DEFFENBAUGH. Okay. I would like to speak on the needs of

rural businesses. I believe I’ve got a unique perspective on the subject since, during my career, I’ve both acted as Administrator of

Small Business Services and operator of small businesses. I owned

a chain of convenience stores and was a partner in a large CPA

firm. In both of those rolls, I watched programs evolve and recognized through the efforts of hearings like this, these programs are

improved, and it’s unique that you’re allowing practitioners to at

least express their view.

Rural businesses face challenges that simply aren’t imposed on

urban or suburban businesses. Many times, the cost or availability

of transportation, for example, is an impediment to many businesses; and this is only one of many challenges faced by small rural

businesses. However, when a rural business seeks capital for operating challenges or expansion, they’re credit-scored against a standard established primarily by urban businesses. The financing

standards therefore compound the challenges faced by rural businesses.

Additionally, in a recent move by the SBA to eliminate the community aspect of 504 lending, this may cause a reduction of this

program’s availability to rural businesses. The new ruling simply

has removed the requirement of local credit involvement; and, in

7

fact, encourages large, multi-State certified development companies, without any local interest, to dominate the 504 markets. The

multi-State development companies will have to concentrate on urbanized areas for efficiency and for the greater availability of deals.

The result may be that the rural areas will be ignored or can’t compete against the credit scoring of urban deals.

The SBA has the responsibility to operate their programs as efficiently as possible; and with the idea of only having to deal with

a few large multi-State certified development companies, that’s an

appealing prospect. However, the potential loss of service to rural

communities can have a significant impact on the availability of

rural businesses, availability of capital for rural businesses.

The SBA may be testing the new program in the future; and I

understand you, Senator Crapo, you were involved in seeing that

the Small Business Intermediary Lending Pilot program was included in the reauthorization bill, Senate bill 1375. The pilot authorized the SBA to make 1-percent 20-year loans for up to $1 million on a competitive basis to up to 20 nonprofit lending intermediaries around the country. The funds loaned to the local intermediary will, in turn, be used to capitalize the revolving loan funds

to make loans between $35,000 and $200,000 to small businesses.

There would be no technical assistance grant provided to the

intermediary, and all the administrative costs for technical support

provided to the business borrowers would be covered by the interest rate spread between the lending intermediaries one percent

loan from the SBA and the loans made to the small business borrowers.

The Small Business Intermediary Loan Pilot program addresses

a capital gap that we see in our lending by filling a niche not currently served by the SBA microloan, 7(a) guarantee, Express, or

504 programs in terms of underwriting criteria. The pilot would enable community-based lenders like Panhandle Area Council to provide loans between $35,000 to $200,000 that would be more flexible

in terms of collateral and general underwriting requirements. For

example, those required for 7(a) and 504 and/or size limitations

like we have in the microloan.

Subordinated loans to starting or expanding businesses may play

a vital role in spurring economic development in Idaho as they do

in other States, both in rural and urban communities. The pilot

program is not included in the House bill, and we are hopeful that

it will be included in the final SBA reauthorization bill.

I would like to thank you for the opportunity to express my opinions.

Senator CRAPO. Thank you very much.

Mr. Kindred.

STATEMENT OF DOUGLAS L. KINDRED, RETIRED SMALL BUSINESS OWNER, AND CURRENT VOLUNTEER WITH SCORE, THE

SERVICE CORPS OF RETIRED EXECUTIVE, HOPE, IDAHO

Mr. KINDRED. Morning.

Senator CRAPO. Good morning.

My name is Doug Kindred. I’m a SCORE volunteer. I was born

in Wallace, Idaho, and spent most of my business career in Southern California, and returned home to Idaho 10 years ago. I’m a reVerDate 03-FEB-2003 15:45 Oct 29, 2004 Jkt 094807 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 D:\SBA\94807.TXT SSC2 PsN: SSC2
8

tired small business owner whose career includes serving as a

Chief Financial Officer and Chief Executive Officer for a subsidiary

of a Fortune 500 Company. I’ve been a SCORE volunteer for 9

years serving as the Spokane Chapter Chair, District Director, and

I presently serve as an Assistant District Director.

I’m a member of the Spokane Chapter of SCORE. Our chapter

serves 10 counties of Eastern Washington and the 10 counties of

Northern Idaho. We’re currently located at the Spokane Area Business Information Center, a joint venture of the Spokane Chamber

of Commerce, the SBA branch office, and SCORE.

SCORE-called volunteers are committed to do two things well:

No. 1, quality, confidential, no-cost face-to-face or e-mail counseling; and No. 2, low-cost business training workshops on various

skills. There are seven of us with an estimated 38 years of counseling experience who live and counsel in North Idaho. We’ve got

a good range of skills. Four of us were small business owners, one

currently serves as the Chairman of the Board of a bank in North

Idaho. We can call on more than 35 counselors in Spokane for

added expertise.

The Business Information Center is a valuable resource to our

clients providing weekly SCORE training workshops, twice-monthly free loan briefings, and a comprehensive business library of over

1,000 books, videos, and softwares focused on entrepreneurship.

Our clients can also access SCORE through the SCORE association

web site, www.score.org, for more than 1,000 e-mail counselors

coast to coast who possess 600 different skills.

We conducted over 100 face-to-face counseling sessions and donated more than 475 hours of volunteer service in North Idaho in

fiscal year 2003. The counseling locations include the Work Force

Training Center in Post Falls, the PAC Business Center in Hayden,

the Bonner Business Center in Sandpoint, and the Job Service office in Bonners Ferry. In addition to the people we counsel, more

than another 100 people from North Idaho traveled to the Business

Information Center to attend a training workshop, a loan briefing,

or utilize the services of our business library.

During the 9 years I have counseled in North Idaho, approximately 500 people have attended more than 25 all-day SCORE

‘‘Starting and Managing Your Own Business’’ workshops held in

Lewiston, Moscow, Coeur d’Alene, Post Falls, Sandpoint, Bonners

Ferry, and Kellogg. We partner with the small business development centers, local banks and local business men and women who

sponsor and present at these workshops.

Approximately 25 percent of our counseling sessions are with existing businesses discussing growth issues, strategic planning, financial issues and problems associated with running a business.

Fifty percent of our clients are women. Approximately 70 percent

of our clients are considering starting a business and they’re looking for financing, generally less than $50,000 to finance start-up

costs and working capital.

We encourage our clients to prepare a business plan and we

work with them to determine financing options. This past year

we’ve assisted businesses in getting started, expanding, relocating,

obtaining financing, and solving business problems. Three success

9

stories involving companies SCORE has helped are attached to my

testimony.

The SCORE association is a line item in the SBA budget and is requesting a funding level of $7 million for fiscal year 2005, a $2

million increase. Additional funds will directly benefit our counseling activities in North Idaho. As volunteers, we generously donate our time to help small businesses. We are pleased to participate with other business assistance organizations and I want to

emphasize that we work with other business assistance organizations in our area to help businesses in our community start, grow,

prosper and create jobs.

SCORE is celebrating 40 years of volunteer service this year in

2004. On behalf of SCORE volunteers in North Idaho and the Spokane district, I want to thank the Senator and Committee Members for their support over the past 40 years. Thank you.

Senator CRAPO. Thank you very much, Mr. Kindred.

I want to thank each of you. You all paid very close attention to

the clock and I appreciate that, and we’ll have an opportunity now

to have some dialogue here and some give and take in discussing

some of these things.

Let me start first with you, Mr. Kindred, just to say I met with

a SCORE group down in southwest Idaho that was just starting up

a little while ago and kind of got a briefing from them on what

SCORE does; and it seems to me to be a tremendous asset to those

who are not only current small business owners but those who seek

to start a small business.

Is the $7 million figure, the line item in the budget, is that going

to be adequate, do you think? You may not know how that plays

out across the country, but I was just curious as to what you’re

hearing.

Mr. KINDRED. There would never be enough, speaking on behalf

of Ken Yancey.

Senator CRAPO. That’s an honest answer, I think.

Mr. KINDRED. But in having a chance to visit with Ken and talking about the budget for next year, I believe that that would be

more than adequate for what we’re trying to accomplish in the next

fiscal year. The programs we’d like to expand have been pretty well

established, we know what we want to do, and we understand the

constraints that go on nationwide. I think we’d be very pleased to

get an increase in our funding level.

Senator CRAPO. Well, I’m actually very pleased to hear that the

current proposal is increasing the SCORE funding by $2 million.

Something I probably should have mentioned in my opening remarks is that I’m very concerned about the SBA budget overall. If

you look at the budget, Mike, is it over the last 4 years? Over the

last 4 years, the SBA budget has gone down about 24 percent. It’s

reduced in size by about 24 percent. As you all, I assume, know,

I’m a strong fiscal conservative fighting for limited budgets back

there in Washington, D.C.; and we are in some pretty difficult

budget times, and so I don’t have a problem with telling our agencies that the economic times and the budget circumstances we are

facing right now require some sacrifice.

However, if you look at all of the Federal agencies, there are only

four other Federal agencies in the entire Federal Government over

10

that same 4-year period of time that have had their overall budgets

reduced. The others have all continued to grow, although maybe at

a lower rate than they would like to have grown. Of those five

agencies, including the SBA, that have actually gone down in size,

none of the other four have approached the 24-percent reduction

that the SBA has seen.

Given the fact that small business is the engine driving jobs in

this country, I have a concern about that. Again, I don’t have a concern about some sacrifice at the Federal Government level on budget issues, but I do have a concern about our priorities and who we

are asking to share those sacrifices and how we are doing it in the

budget.

That’s why I’m going to be asking a few questions about different

aspects of the budget; and I’m glad, actually, you were testifying

that there’s actually a proposed increase for SCORE. One last question on SCORE. Among the counseling you described there, I would

assume that a significant aspect of the questions that are brought

to you or to the SCORE representatives have to do with access to

capital. Is that correct?

Mr. KINDRED. That’s correct.

Senator CRAPO. And you have the ability, either yourselves or

through the system that you have, to find the expertise to help

small business owners or those who are potential small business

developers to understand and identify the best access to capital

that they can get through the SBA programs.

Mr. KINDRED. That would be correct.

Senator CRAPO. Go ahead.

Mr. KINDRED. Well, I was going to just comment that we try to

work with them in preparing the business plan, but as a part of

that process we’re trying to identify what’s the best source for them

as well. We do know the banks, we do know John Lynn in the

Small Business Development Center, we know Jim and what they

do at PAC, so we can direct them to some of these people when

they’re going through this process.

Senator CRAPO. Okay. Good. Do you have any experience or could

you give me, if you have, an opinion on the question that has been

raised by several of the others on the panel about the availability

of capital for small business in rural areas as opposed to urban

areas? Is it easier or harder to get access to SBA capital in those

rural areas?

Mr. KINDRED. I would prefer to let the lenders probably talk

about that.

Senator CRAPO. Sure.

Mr. KINDRED. The sense that I have—again, I’m talking about

the people that we counsel—the majority of these people, when it

comes right down to it, family, friends, savings is going to be the

best avenue for them.

I would say to you that we invite local banks to speak at our

workshops, and I’ve had a number of the local banks basically say,

in front of our attendees, that, ‘‘We don’t finance small businesses

unless we have 2 years’ worth of history.’’ That’s sort of closing the

door on a lot of people that are sitting in the rooms attending our

workshops.

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Senator CRAPO. Well, you know, that’s an issue that has been

raised to me by small business owners; and I was going to go somewhere else, but let me go there right now and expand this to the

rest of the panel. Any of you, please feel free to jump in. How does

a person who wants to start a small business do so if they have

to have a 2-year history before they can get access to capital?

Mr. LYNN. Well, again, like we do a lot of clients in rural North

Idaho and the microloan program is essential because most of these

people that are going to start up are going to start up on a smaller

scale basis and they need $20–$25,000 of start-up capital; and the

banks are not going to lend that money, especially in rural North

Idaho.

As I mentioned previously, even the community banks in

Kootenai County that are doing most of the lending—it’s not the

larger banks—they’re cherry-picking the good deals and the community banks are picking up all the slack. That’s the way I see it.

Senator CRAPO. Any others?

Mr. Ferguson.

Mr. FERGUSON. If I could just make a comment there. John’s exactly right. Of the 300 people or so that call us, 200 or more have

already been to the bank. The problem is the banks have changed

dramatically, too. Most of the people that had discretionary loan

limits that were in the local branches are gone and now everything’s in a different center. Now, a lot of the lending is still being

done by the banks, but a lot of times we needed to help them find

the right person maybe in another city to get that loan because

they aren’t going to find it in their local branch; so that’s where

part of our coaching comes into play there. But so many of these

loans are very modest, and I don’t see anybody else out there with

us except for the microloan program.

But in answer to your question about how do you start if you

have less than 2 years’ history, it’s basically because of a very good

business plan and the projections that primarily the Small Business Development Center does. If we buy into it, we’ll go ahead and

fund as best we can.

Senator CRAPO. All right. Let me ask you just generally, as a

panel, to help me be sure that I understand sort of the waterfront,

if you will, of loans as you all testified. I heard reference to the 7(a)

program, the microloan program, the Community Express loans,

the 504 loans, and the intermediary lending pilot program that Mr.

Deffenbaugh talked about. Are there other loan programs, if I were

to just want to establish the list of programs out there that are

available to deal with?

Mr. FERGUSON. The Department of Agriculture has their intermediary lending program, I think it is similar to what you’ve proposed here for SBA. It’s an excellent program. It fits that niche between $50,000 to $150,000 that we need. It’s a very borrower and

lender-friendly program. In fact, the department even does the environmental studies, which are kind of a pain for the lender and

other things of this nature, and we’re able to do it at a very low

rate.

Most of our programs right now are at 6-percent fixed rate for

the full term, which can be up to 20 years, because we’re able to

borrow at 1 percent on a longer amortization. It’s been very effecVerDate 03-FEB-2003 15:45 Oct 29, 2004 Jkt 094807 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 D:\SBA\94807.TXT SSC2 PsN: SSC2
12

tive, but the money’s hard to get if you don’t have the big matching

pool to get the points.

Mr. DEFFENBAUGH. There’s also two other sources in Idaho. One

is a Federal program, and that’s a revolving loan program established by EDA, the Economic Development Administration; and the

other is a State rural block grant that was granted to, in our case,

ourselves, and that is Panhandle Area Council, to establish a revolving loan fund, also. The resolving loan funds, again in this

case, the State money matched the Federal so that we could capitalize that at a reasonably high rate.

One thing to understand in all these loan programs that we have

and we administer, we’re never the sole source lender. We partner

with banks. That makes both the capital go a little bit further plus

it also introduces the banks to the businesses. There’s an opportunity where possibly a bank would not do a deal except for the

fact that there’s a revolving loan fund or microloan money in the

deal that gives the bank a better opportunity to participate in the

programs.

Senator CRAPO. All right. Thank you.

Mr. Ferguson, didn’t you say that the microloans were being

eliminated in the current budget proposal?

Mr. FERGUSON. That’s what I’ve read from information I got from

the SBA web site. They’re proposing that it be replaced with the

Community Express Program.

Senator CRAPO. Can you explain to me the difference between

the microloan program and the Community Express program?

Mr. FERGUSON. I’m not a 7(a) lender, so I’m not sure of all the

aspects of the Community Express. I understand it’s supposed to

be a little more borrower-friendly and banker-friendly in that it

uses the bank’s documents, and other things like that, as opposed

to all of the SBA documents. Other than that, I don’t see that

there’s a big difference between that and the SBA 7(a) program.

Now, with the micro, we borrow the money in a pool from the

SBA, we lend it out, we’re the underwriter, we’re the originator,

we’re everything, and the documents are very user-friendly in this

case. It’s done primarily with John at the SBDC and the borrower

and we help them put it together, but it’s just for very modest loan

amounts. It’s from a thousand to 35,000. The rates, unfortunately,

are slightly higher; but they aren’t bad, they’re in the high nine

range. The SBA does charge us a little higher rate, too.

Senator CRAPO. The Community Express, is it targeted to that

$1,000 to $35,000 range?

Mr. FERGUSON. I really don’t know for sure. I doubt that it goes

down to a thousand. I’m inclined to think it’s more like maybe

$10,000 to $35,000 but it’s a new program and I’m not a 7(a) lender.

Senator CRAPO. Okay. It just seems to me, getting back to the

question of those who don’t have that 2-year track record and may

need to be getting some early access to capital, that if we eliminate

the microloan program, we may be creating more problems than we

are solving in terms of budget problems.

Now, you indicated that you borrow the money from the SBA. I

assume that means you repay the money to the SBA.

13

Mr. FERGUSON. That is correct. We have to repay the loan. We

have loan loss reserve, and all those other issues. So PAC is at

risk.

Senator CRAPO. Do you know if, for the country, whether there

is a track record on the microloans in terms of whether the SBA

faces a credit risk there? You see what I’m asking? In other words,

does the SBA get its money back under the microloan program nationally?

Mr. FERGUSON. I guess I wouldn’t want to comment on that. I

know that they do consider it to be an expensive program in terms

of a dollar lent and dollar of cost. I know that’s a consideration.

Whether or not their default ratios have created an issue, I’m not

sure.

Senator CRAPO. I’m going to see if I can answer my own question

here. Well, according to some information I’ve got right here, an

analysis that we have of the microloan by the SBA, revealed that—

am I reading this right?—every dollar lent cost the taxpayers 97

cents? Does that mean they only got 3 cents back on the dollar?

That doesn’t make sense to me. I’m going to have to check that out.

We’re going to have to look into this to find out because it seems

to me that there has to be a reason that they were going away from

the microloan program, especially if it fits this initial niche. If any

of you, either in the audience or here, have some information about

that, I’d be glad to receive that information as a supplement to our

record today.

My intention here is to go back to the SBA, through my service

on the Small Business Committee. I also, by the way, sit on the

Budget Committee; so we’re going to write the budget that these

guys all get to use, too. In both of those contexts, I want to be able

to make sure we put the right line items in place and maintain the

programs that may need to be maintained.

I just cannot understand that. Unless there’s a 97-percent loan

default rate, I can’t understand that figure. I don’t think there’s

going to be a—you don’t have a 97-percent default rate, do you?

Mr. FERGUSON. No.

Senator CRAPO. All right. Thank you.

Mr. DEFFENBAUGH. One other thing, just in answer to that, that

I’m aware of, when the program was initiated, traditional lenders,

like Panhandle Area Council, were not allowed to participate in the

program. It was focused more on social service agencies that really

had not been traditional lenders. It evolved over the years and it

allowed traditional lenders to participate in the program.

Senator CRAPO. Maybe some of that early circumstance may be

generating some of the statistics. Well, I can assure you I’m going

to check into that because that number really surprises me.

What about the 504 program? Tell me exactly how it works and

what niche is it supposed to address?

Mr. DEFFENBAUGH. 504 is a long-term, fixed-asset financing program designed to help businesses either acquire new real estate

and build buildings or manufacturing equipment processing equipment. When the program was established, the idea was that a local

community would create a board. The board would then look at the

deals and determine whether there was a job creation requirement

and whether it fit within the community.

14

In fact, there were cases where our board, Panhandle Area Council’s board, has turned down loans because either the loan was

going to be—the building, for example, was going to be put into a

place that just simply didn’t work within the community, or it was

a replication of some of the businesses that we had and it was a

new one and we didn’t want to see it be competitive or uncompetitive, in a sense, of other businesses.

What has changed is the SBA will allow now that the community

aspect is no longer a requirement and a certified development company no longer has an area that they’re required to operate in. In

our case, we can operate anywhere within Idaho, instead of just the

five northern counties, which we’d previously done. If we operate—

we can request to operate in an adjacent State. Ultimately, that

will mean that larger certified development companies can literally

leapfrog across the United States and do deals anywhere. From

SBA’s point of view, quite honestly, they’re going to have to only

deal with a few large multi-State lenders in this case. But that’s

what happens.

However, the multi-State lenders are going to look where the big

markets are and they’re going to ignore the rural areas or they’re

going to hope that banks will bring them to them. They’re not really going to go out and market them and be a part of that community, and that’s what we see as a fault in this change.

Senator CRAPO. How can we correct that? What would be the

best thing for me to do to go back to Washington, D.C., to make

something to happen? Would we put a statutory requirement in of

some sort? If so, what would it be?

Mr. DEFFENBAUGH. I guess from my point of view, probably the

biggest thing is to—maybe not to allow the multi-State ones or

limit the number of States that they can operate in and not have

the SBA eliminate the rural 504 development companies.

Right now we are under the pressure that if we don’t basically

compete, we feel eventually we will be scored against the larger

multi-State certified development companies, that they may cause

us to be eliminated. One of our certified development companies in

Idaho has already been decertified in the Lewiston area. The other

four that exist, I met with them last week, we are all concerned

that we may not have the opportunity to compete.

Senator CRAPO. Tell me how the scoring works. You have a series

of loans that you work on.

Mr. DEFFENBAUGH. Correct.

Senator CRAPO. If you focus on rural areas, those loans will have

a different dynamic than a packet of loans from an urban area.

Give me a little bit of a feeling. How does that then translate into

a bad score?

Mr. DEFFENBAUGH. Right now the score is the total number of

dollars in loan and the number of deals that you do. We are required, at a minimum, to do two deals a year; and I don’t believe

there’s a capital amount. But when the SBA sends out the performance criteria, it’s done by actually dollars not number of deals.

That certainly is one of their considerations. You can see that the

pressure in the future is going to continue to do that.

Evergreen, out of Seattle, is a large certified development company. As you might imagine, in Seattle there are a lot of deals to

15

do. They have been expanding and looking into this area wanting

to do things. Quite honestly, they came over here and we worked

with them to see if they could do things here and to help our process a little bit. Since they’re so good at it, we thought we could

learn from them. They couldn’t find a deal in a year.

They were only concentrating on the Coeur d’Alene area. They

really didn’t look at St. Maries or Bonners Ferry or Sandpoint.

That’s where we look a lot to try to find our deals.

Senator CRAPO. The thinking would be that the large companies

would just come in and basically pick the easy deals.

Mr. DEFFENBAUGH. Exactly.

Senator CRAPO. And get a higher score because they are able to

do the easier, larger deals presumably.

Mr. DEFFENBAUGH. Ultimately, yes.

Senator CRAPO. Then those who are out there servicing the rural

areas are going to be scored lower; but the service, as I see it, is

the more needed service.

Mr. DEFFENBAUGH. Exactly. We obviously receive a service fee to

continue our operations on these. If we are no longer allowed to do

the deals, if we can’t compete, and if we are seeing a lot of pressure

doing the deals in Coeur d’Alene, for example, eventually the ability for us to continue to operate is diminished.

Senator CRAPO. Okay. Mr. Lynn, this is primarily directed at you

because I focused on this during your testimony. But any of you

who want to jump in on any of these questions, please feel free to

do so.

You were talking about what we need to do, and one of the first

things on your list was to build out the infrastructure in our rural

areas, which has been one of my big focuses. This doesn’t get directly at access to capital, although it is, I think, what would make

a lot of these potential start-ups more qualified for access to capital. But I just wanted to get on the record a short discussion about

this issue because it seems to me that for our rural areas in terms

of economic development, that perhaps the most significant thing

we in a policy position can do is to make sure that they have the

infrastructure in place in order to participate in a global economy.

Would you agree? Could you expand on that a little bit?

Mr. LYNN. I would definitely agree with that. I mean access to

broadband, internet fiber I think is a very important development

in the business community right now. I mean you can do business

globally if you can have the capacity to do that. Other issues I

think that need to be expanded are our transportation issues. If

you’re manufacturing a product in St. Maries, it’s very difficult to

get it to the market. I don’t have an easy answer for that one. But

the broadband is something that I think could be addressed at a

national level.

Senator CRAPO. Thank you. The second point that you made, that

we need to increase the access to capital, if we could get the infrastructure built out and in place, increase the access to capital, and

coordinate between the various providers of capital so that we have

an efficient system in place; is that an outline, on a broad scale,

of how we should approach economic development?

Mr. LYNN. Well, I think there’s a lot of agencies out there saying

we’re economic development agencies.

16

Senator CRAPO. Yes.

Mr. LYNN. I don’t think the lines of communication are always

coordinated between the economic development agency in that particular county, through us, through the various community banks,

through the Department of Commerce, and the Department of

Labor. Everyone kind of goes in and does their own little thing, and

I think to make a real impact, everyone needs to be coordinated on

this and maybe a master plan put together or something that says,

‘‘This is how we can make this work and here’s your role in it.’’

I mean I think everyone’s—it’s the turf issue. ‘‘Well, this is what

we do,’’ ‘‘This is what we do.’’ Well, you know, let’s all get together

and do it better.

Senator CRAPO. That wouldn’t just be Federal agencies.

Mr. LYNN. I think that local, Federal and State agencies need to

have a little better communication so we’re not duplicating services

and we’re working together to actually do something.

Senator CRAPO. As you’re describing this, I think that’s a very cogent thought. I’m trying to figure out how we would make it happen. Have you got a suggestion we could pass along here?

Mr. LYNN. Yes. I guess it comes down to why doesn’t Kellogg

work with Wallace? It’s one of those issues that has always been

there.

Senator CRAPO. I’m not sure I want to create a superagency that

would manage all of this, because we might just have more bureaucracy. I really believe you’re onto something, but I’m not quite

sure how to make it happen.

Mr. LYNN. I don’t think I have the answer to that. I don’t know.

But I think there could be a better effort made in the rural areas

of North Idaho.

Senator CRAPO. Thank you. I agree, and I’m going to be trying

to give that some thought. One of the problems we have is there

are a lot of great ideas. We try to make laws out of them and put

some enforcer in place to make these good ideas happen. However,

sometimes we get something worse than we started out with.

But I really believe that coordination idea is important because

one of the things that I’ve found as a Member of Congress is my

constituents come to me often with questions about—kind of probably the same kind of questions they go to the SCORE folks with—

How do we do this? What resources are available and what can I

do? I would have thought, you know, I could ask somebody on my

staff to call up the ‘‘How Do You Do It Agency’’ and say, ‘‘Where’s

the list? Where’s the checklist of what you should do here and how

you do it?’’ There isn’t such a thing. Although there are—we are

getting there. We’ve got—in certain categories in certain areas, we

can do it. But if we had a more cohesive approach to coordination

among the various services that are provided, then that might

work. Perhaps the folks at SCORE are putting that together. There

might be an expert at SCORE who could be the one that I’d get

my staff connected to who could answer us.

Well, a lot of ideas and suggestions I think have come forward

to me, and I just wanted to kind of wrap this panel up by giving

you some of my thoughts right now and then asking if any of you

have any further comments on them. But it seems to me that,

clearly, we have the overall budget issue in terms of resources at

17

the SBA, which is going to—frankly, be kind of a broad part of the

overall budget battle, just to be sure we have the amount of resources in the SBA to do the job.

But I can tell you that I believe that of all the functions that the

Federal Government performs, right now our economy needs jobs

and we need that engine that drives jobs to be operating as efficiently as possible, and I believe that’s the small business community in our nation. I believe that in terms of where we put our

focus as to the resources that we do have in the Federal budget,

this should be one of the higher priorities. That’s kind of a first

step.

Secondly, I do believe that rural America faces a much more significant problem in terms of getting access to capital and having

the infrastructure that promotes strong business development and

economic growth. As a result of that, we’ve got to pay attention to

things like the infrastructure and making sure that, in the SBA

context, the programs that we operate are operated in such a way

that they facilitate reaching out to and promoting the right kind

of business opportunities in the rural areas rather than, as some

of you have testified, creating a scoring system that’s going to focus

on urban areas or the like.

As I’m looking at it, I’m going to go back—we clearly have to fix

the 7(a) loan program. We all know that. That’s going to be mostly

a budget issue, I think. Secondly, I’m going to go back and look

very carefully into the microloan issue to determine just what is

going on there and why and whether we need to make sure that

that tool remains available. From what I’ve heard today, it sounds

like it should.

The 504 loan programs and the developments there, particularly

with the larger companies and the multi-State lending companies

dominating, which will then pull away from the rural communities,

is an issue I think we need to look at very carefully, and I promise

you we will do that.

I’m pleased to hear that this pilot program that I’ve been involved with sounds like a good idea and it looks like it’s filling a

good niche. We’ll try to make sure that it not only survives but that

it could possibly become more than a pilot program, become more

than another one of the aspects, on a permanent basis, that we operate through.

With regard to SCORE, I guess I’m just going to make sure that

you get your budget.

Mr. KINDRED. We certainly would appreciate that.

Senator CRAPO. That kind of, to me, sounds like where I’m headed from what I’ve heard from this panel. Any further comments

from any of you?

Mr. LYNN. Thank you.

Senator CRAPO. All right. Well, I thank you very much. We will

excuse you and move on to our second panel.

Senator CRAPO. Those who have been invited to be with our second panel are Mr. Bob Beck, the Vice President of SBA Lending

at Mountain West Bank; Ms. Debbie Lawton, Business Development Officer at U.S. Bank; and Mike Brown, the Business Development Officer at Borrego Springs Bank. We’ll put some name tags

up here for you. You can sit at the designated spot and we will

18

have you testify in the order that I read your names. Same instructions apply to you. Please try to pay a little bit of attention to Mike

over here or I’ll have to tap the gavel.

Mr. Beck.

STATEMENT OF ROBERT M. BECK, VICE PRESIDENT OF SBA

LENDING, MOUNTAIN WEST BANK, COEUR D’ALENE, IDAHO

Mr. BECK. Morning, Senator Crapo.

Senator CRAPO. Morning.

Mr. BECK. I’m Bob Beck with Mountain West Bank and I’m the

Vice President and Manager of the Small Business Lending Department. Thank you for allowing me to address you today.

We are very concerned about the SBA programs as we know

them today. They may be putting small business lending here in

rural America, and elsewhere, in jeopardy of obtaining access to

capital necessary for the beginning and expanding of their business. We are especially concerned in the following four areas: funding, restructuring of existing rules and procedures, centralization of

loan processing, and the possible elimination of SBA-supported consulting services.

I’ll first address the funding issues. The funding of the SBA loan

program seems to be an issue almost every year. I believe the funding crisis could be avoided if the SBA would form a dialogue with

their lending partners and other experts in the field such as

NAGGL. The current budget of $9.5 billion will probably not be

sufficient and will, in all likelihood, be $3 billion short for the fiscal

year 2004. Caps of $500,000 and $750,000 have been put in place in recent

years and, in addition, the elimination of the piggyback loans most

recently, which are causing problems. We would request that both

the piggyback loan structure be put back in place immediately and

the maximum of the $2 million loan be reinstated as quickly as

possible.

The SBA is beginning to get a reputation of on again and off

again. Consistency and integrity is a must. We need to immediately

reestablish what the SBA loan guarantee program is all about, particularly by providing capital to small businesses that would otherwise not be able to get funding and business assistance without the

SBA loan—the SBA’s participation.

In a recent announcement by the SBA, they have proposed to

fully fund the program but only by providing much less of a guarantee and charging less than guarantee fees. This will have a dramatic effect of reducing capital to small businesses. Lending partners will be unwilling to lend with less of a guarantee due to lack

of collateral especially with start-up businesses or expanding businesses that have less than adequate liquidation values to support

the loan. Larger loans do create more employment opportunities.

Larger loans do create more employment opportunities. Larger

loans provide more guarantee fee income to the SBA, up to 3.5 percent on larger loans as opposed to 1 percent on loans less than

$150,000. The piggyback loan has been stopped, which again limits

access to needed capital. Lending partners must be willing to explain to small business owners clearly and precisely the rules and

regulations with consistency.

19

Centralization: It is our understanding the agency is planning to

centralize all the loan processing by eliminating 138 loan officers

in favor of 36 centralized loan decisionmakers. Even though our

bank participates in the Preferred Lending program, we constantly

rely on the district office to provide guidance and answer questions.

We are desperate to preserve our SBA loan office in Spokane,

Washington so they can continue to provide service to small businesses as well as lending partners. We need to learn from larger

banks as to the benefits they may have gained from centralization.

The SBA plays a crucial role in providing services for small businesses through organizations such as SCORE, and Small Business

Development Centers. In addition, Business Information Centers

play a vital role as a resource for start-up and existing businesses.

Local loan officers are very active in presenting loan applications

with guidance on how to apply for the loan with their lending partners. These services also include assistance with export trade

loans, HubZone classifications, 8(a) contracting statuses and many

more.

In light of these pending closures, we are somewhat perplexed

how the SBA could justify the recent announcement of two new offices in Alaska. We don’t understand how these new offices are

opening when the SBA office is a proven area that needs to remain

open and continue to provide the services already in this existing,

proven rural market.

Thank you for allowing us the opportunity to present these matters to you.

Senator CRAPO. Thank you very much, Mr. Beck.

Ms. Lawton.

STATEMENT OF DEBBIE LAWTON, BUSINESS DEVELOPMENT

OFFICER, U.S. BANK, COEUR D’ALENE, IDAHO

Ms. LAWTON. Senator Crapo, as a lender under the SBA loan program and a small business owner myself, I’d like to thank you for

letting me testify here at this hearing this morning.

I’m an employee of U.S. Bank in our Small Business Administration, and I have spent the last 14 years of my career helping small

businesses access funding through the Small Business programs, to

help them grow their businesses and start their businesses. During

my career, I’ve approved loan funds as small as $5,000 up to multimillion dollar loans, and I’ve helped assist numerous businesses

under virtually every industry out there.

This has been a very gratifying career for me as without the SBA

program, I am the last resort lender here under most banks. The

Small Business Administration lending programs are indispensable

for this country’s economic health. It is common knowledge that the

majority of all jobs are created from the small businesses. It’s also

common knowledge that the majority of small businesses do fail

within the first few years; and as a lender, I can recognize the

bank’s risks in lending to these small businesses.

Many bank policies preclude lending to small businesses without

that 2-year historic debt service. Without the aide of the U.S. Small

Business Administration loan programs, many of these small businesses would not be able to obtain their financing that they would

need to create these jobs that are so needed in our economy. AcVerDate 03-FEB-2003 15:45 Oct 29, 2004 Jkt 094807 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 D:\SBA\94807.TXT SSC2 PsN: SSC2
20

cording to a recent article in the Chicago Tribune, the SBA program backs 40 percent of all long-term lending to the country’s

small businesses.

In most years, the SBA loan program has been able to meet the

needs of both the lenders and the businesses. I know that through

recent things that are going on right now, some of my testimony

is being resolved at this point, and that’s a good thing. However,

the recent shutdown of the SBA’s 7(a) loan program, many banks—

and that’s estimated—many businesses, estimated at about 200,

have been caught in the middle with no place to go. This shutdown

and this subsequent capping of the loans at $750,000, along with

the first-time ever prohibiting the piggyback loans, has caused the

SBA to slam the door on at least $1.3 million loan requests as of

12/30 alone.

Many of these small business owners do not qualify for other

loan programs, and they do not have time to switch those programs. I was personally handling two business acquisitions with

purchase prices over $1.2 million. With the capping of the

$750,000, they had to come up with a large sum of money; and in

today’s economy, that’s almost impossible. Some of these people do

not qualify to—these two people, they were business acquisitions—

they did not qualify for the 504 program. Although they called your

office to complain, they were told to find a 504 lender. These guys

did not qualify for 504. It’s a business acquisition. I’m also dealing with a $2 million refinance for a car dealership.

It is a balloon payment and, since it’s a refinance, it’s not eligible

under the 504 program. Once again, because of job creation, it

doesn’t qualify for 504, so I can’t help this guy. I don’t know what

he’s going to do with his employees. I don’t know what he’s going

to do with his business.

The fact of the matter is that the SBA did shut down this program; it’s limited us to caps, it’s limited to—prohibiting us to doing

piggyback loans. Basically we need to find the budgeting. I think

that’s being worked on at this point. They’re asking to lower the

subsidy rate, which I have fears will increase our fees. They have

come out with solutions. They’ve not really come out with plans for

these solutions, so we don’t really know how they’re going to meet

these goals. They sound like a good fix, but let’s just hope that it

does get there.

Senator Crapo, we need your help in appropriating sufficient

funds to the program with future budgets without raising the fees

that will be associated with the programs so that both lenders and

borrowers can utilize the program and to their best ability.

Thank you for your opportunity to present my story.

Senator CRAPO. Thank you very much.

Mr. Brown.

STATEMENT OF MICHAEL BROWN, BUSINESS DEVELOPMENT

OFFICER, BORREGO SPRINGS BANK, COEUR D’ALENE, IDAHO

Mr. BROWN. Is this on? Hello.

Senator CRAPO. Yes, now it works.

Mr. BROWN. All right. Thank you very much for the opportunity

to present my opinion of what’s going on with access to capital in

the smaller markets. I’ve been involved in finance for almost 30

21

years. The majority of it has been dealing with small business finance both in economic development and SBA-guaranteed products. Rather than reiterate what Bob and Debbie have said, I will

go to the points that I think are specifically important in what’s

going on right now.

The SBA program, whether the bank is big, large, small, in between, there is somewhat of a network within the banks, regardless of the size, if a loan officer within the bank can’t get it done,

they want to get that loan done, so they’ll call one of our—we’re

all associates, we all know one another—and describe the project

in general terms to see if there’s an interest in financing that program.

I hear the larger banks getting beat up upon to some degree in

economic development finance when, in fact, a large percentage of

the referrals that come to me, because I do regional lending

through Montana, Idaho and Washington, come to me. If they can’t

get it done for one reason or another, I get the opportunity to do

that. On the other hand, the small banks that have lower loan limits or a more constructive loan policy will also call me to see if I

can come in and get involved and assist with the financing. I don’t

know. I think that the criticism of the larger banks is a little bit

overplayed in that what goes on is not widely known in the finance

community or the economic development community.

One of the big concerns and problems with doing SBA financing

is the inconsistency with the funding programs. We don’t know how

to plan. We’re all profit-making entities and we need to plan our

budget, annually at least; ideally, longer. When the program continues to fluctuate on again, off again, the guaranteed percentage

changes, it disables us from doing that effectively.

There’s recent talk of reducing the guaranteed percentage downward, which I think would have a devastating effect on the program itself. The original program to have an SBA guarantee with

a conventional commercial loan, was to supplement a collateral deficiency or one other weakness in the credit. With the 75-percent

guarantee, that provides the strength of the credit that maybe all

the other criteria is there for a loan so that the lender’s more apt

to go forward to it. To reduce that is going to have a measurable

effect on non-real estate or non-heavily-collateralled projects, which

was the very reason I think that—one of the reasons that I think

it became there.

I think that reducing the guaranteed percentage will reduce radically the number of lenders in the arena and significantly reduce

the access to capital by the rural businesses because in the urban

areas, the collateral values of property appreciation and value of

collateral available is oftentimes a lot stronger.

The centralization that is being talked about with the SBA draws

the local input of the loan officers into two regions of the United

States rather than 80-some offices. Those local lenders—or the

local loan officers that I’ve worked with in Portland, Seattle, and

Spokane—know the local business, they know specific borrower

over time, and they know the local dynamics and are able to make

considerations that might not otherwise be made in a checklist-type

approval process if centralized. I guess that’s a pretty general summary of everything that I have. Thank you very much.

22

Senator CRAPO. All right. Thank you very much.

Before we get into some of the questions that I have on the specifics that you have raised, I wanted to get into an issue, Mr.

Brown, that you raised in your testimony—it’s the question of the

impact of bank consolidation on access to capital in rural areas.

One of the things that the small business community or the SBA

has found in some of their findings—in fact, there was a report

issued just last week by the SBA’s Office of Advocacy titled ‘‘The

Impact of Bank Consolidation on Small Business Credit Availability.’’

First of all, have any of you seen or heard of that report?

Mr. BECK. Yes, I read it.

Senator CRAPO. Okay. One of the findings of the report is that,

‘‘Credit access for small businesses has been significantly reduced

by banking consolidation and that, as a result, small businesses

have increasingly turned to nonbank sources for financing to provide credit access.’’

I’m not sure how much of that impact is expressing itself in

Idaho. In fact, Mr. Brown you indicated that the larger banks do

work very well with you, if I understood your testimony right.

Mr. BROWN. Yes, right.

Senator CRAPO. I am interested in your views as a panel on these

findings and particularly what kind of impacts we are seeing in

Idaho as a result of bank consolidation.

Mr. BROWN. What I think is the most important to any lender

is to have continuity in the program. Private sector financing will

adapt to whatever they have as long as it remains in place. The

large bank consolidation has taken a lot of the local lending out of

the local smaller branches and they concentrate in the more urban

areas, which is a logical financial decision. A lot of the talent that

was in the little branches that get purchased by the larger banks

gets drawn out into the areas of more demand. But, nonetheless,

they do still maintain a presence and they do refer the loans to

their head office. Oftentimes, unfortunately, those are declined.

But as you see the consolidations, it creates a void where a

smaller community bank does pop up and begin to replace that

local input. Over time, it begins to happen. The nonbank lenders—

I happen to work for an actual bank, but I am a Regional Lender

acting much like a nonbank lender in that we—I do financing anywhere over a three-State area. If the local businesses have knowledge that us regional lenders exist and/or the bankers that can’t

get the project done once they get centralized and their focus is

more urban, if they will refer out to the regional lenders, then I

think it would be helpful to the rural community.

Senator CRAPO. All right. Mr. Beck, did you want to comment?

Mr. BECK. Yes, I would. As larger banks get larger and these

consolidations move about, those bankers will typically want to do

the larger loans in urban areas and so on like that. They don’t supply enough personnel to operate in these smaller communities

where their entire budget is a minute part of their overall goals for

making loans; whereas in community banks, our sole survival is to

provide loans to small businesses in our area where we are

headquartered and operate. This is part of the community developVerDate 03-FEB-2003 15:45 Oct 29, 2004 Jkt 094807 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 D:\SBA\94807.TXT SSC2 PsN: SSC2
23

ment, and I think it’s crucial to keep the hands where they need

to be especially in the small business lending unit.

Senator CRAPO. Thank you.

Ms. Lawton, did you have an opinion on that?

Ms. LAWTON. As a larger bank myself, I know that some of what

they’re saying is true; we are in there for a profit and we can make

the profit in the urban areas and with the larger loans. But as a

Business Development Officer for U.S. Bank, which I believe is the

third largest bank, I am servicing those smaller urban areas as

well and I am—a lot of my loans are coming out of there. I am not

as profitable as some of my other counterparts in the urban areas,

but we’re out there, we have a presence. I can’t speak for the other

large banks, though.

Senator CRAPO. All right. Thank you.

I want to go back to what I think is a common theme among the

three of you, which is that the problems we’ve had at the SBA, particularly with regard to funding, are creating an inconsistency that

makes it difficult to do business; not just for you but for those who

want to gain access to capital in the country.

With regard to the 7(a) loans, I think we can stipulate, I agree

with you, that the financing for those loans, which ran short last

year, has created a serious problem; and we are now looking at a

solution. The SBA has proposed a solution with a number of parameters that you’ve already identified that are raising concerns,

and I just wanted to go over each of those concerns and then go

back to the overall funding objective to see what we need to do to

avoid; and then I’ll take that back to Washington and see if we can

actually get it done in the budget.

But the first point is that there is an effort to reduce the guaranteed percentage. Can you each just give me a little more input as

to what impact will it have on your lending practices and on the

access to capital particularly—I’m talking across the board, but, as

you know, I’m very interested in rural Idaho. But what impact

would it have on access to capital and on your business practices

if the SBA’s proposal reducing the guarantee percentage were to

become enacted?

Mr. BECK. Well, I’ll start. The way I look at it, the guaranteed

percentages, they’re pushing more and more for the Express programs and reducing the guarantee to 50 percent. When you get

into that 50-percent arena, you’re going to have to be very well

collateralized. You’re going to have to be very well documented on

the cash flow issues, length of time in business, all of those traditional lending things that the regulators and auditors require of us

banks, which is the basics of a lot of SBA loans, is the lack of collateral. We’re not going to be willing to take ‘‘riskier loan’’ unless

we’re protected better. At the 50-percent level, does that really give

us any protection? I would question that.

Also, when we get into the areas of smaller percentage guarantees, don’t kid yourself. We, as a community bank, are in there for

the premiums offered by the secondary market to help sustain us,

to also give us the ability to make larger loans because that guaranteed percentage is pulled away from our legal lending limit. With

that lesser of a percentage, again, it affects two areas: directly our

income and then also our regulatory lending limits.

24

Senator CRAPO. All right.

Ms. Lawton.

Ms. LAWTON. Well, I would just feel that in the rural areas, we

look at that property as more specific, not as a multi-purpose property, because the amount of people out there to purchase that business or purchase that property out there is very limited in the

rural areas. If you were to start cutting our guarantees, we will

back right out. A 50-percent guarantee is not going to be enough

for us to go out to the rural areas. In the metropolitan areas and

the urban areas, yes, we would still have enough to go out there

to be purchasing and making up for some of these shortfalls for the

collateral purposes. But in a rural area with a 50-percent guarantee, I would have to say that the bigger bank’s probably going

to pull out.

Senator CRAPO. Which obviously reduces the access to capital in

rural areas more.

Ms. LAWTON. Absolutely.

Senator CRAPO. Mr. Brown.

Mr. BROWN. I agree with everything they both said and I’d like

to reiterate the point about the smaller banks. There are lending

limit issues with the 75-percent guarantee. 25-percent goes against

their legal lending limit. If you cut that to 50, it has a dramatic

effect on their lending ability.

Also, in the rural areas of North Idaho, the real estate values,

as a percentage of an entire project, is measurably lower than in

the rural—or in the more urban areas. The need for capital for

equipment working capital and inventory is the same. When you

break that down to a collateral available to secure the loan in a

rural area, you have a lot less collateral available in the way of

real estate versus what it is in the urban areas.

When the guaranteed percentage drops to 50 percent, when

you’re doing a discounted collateral value on the non-real estate

portion of the project, it is anywhere from 50- to 90-percent discount to see what you’re going to net out, that risk translates to

everybody including the SBA. I do agree that if the percentage of

guarantee is dropped to 50 percent, that most all lenders will constrict their 7(a) lending probably to real estate and probably to the

more urban areas.

Senator CRAPO. In addition to the restriction from rural to urban

which would result from this, it would push the loans more into

collateralized businesses.

Mr. BROWN. Yes.

Mr. BECK. Absolutely.

Mr. BROWN. Yes. A 50-percent guarantee is probably close to a

zero-percent guarantee when you’re actually considering a net loss.

Senator CRAPO. Right.

Mr. BROWN. Is there a net there? No, it takes the net away.

Senator CRAPO. All right. That’s very helpful.

Then the next part of the proposal is an increase in fees. Tell me

what that’s going to do other than cost money. I mean I know that,

but—

Mr. BROWN. Well, I’ll start on that one. As far as fees go, the fees

are relatively high with the SBA program by its nature; but the

fees are always an issue when anybody’s looking at net profit of

25

any program, from the lender’s side. But the access to the capital

that’s provided by the SBA programs can’t be replaced anywhere

else. There’s just nowhere else to get it. The amount of down payment or equity required going in is relatively small compared to

what is conventionally required.

If the fees sustain the program, let the fees remain. We would

all like to see a reduction in fees, but compared to the availability

and the value of the program, I don’t think they’re a significant

issue.

Senator CRAPO. Ms. Lawton.

Ms. LAWTON. Well, I think in a lot of instances that the capital

is coming into the business; the down payment is the driving force

of why they’re coming to an SBA loan. A lot of businesses out there

have the cash flow, they have the experience, they just lack the

down payment. If we raise the fees too much higher, they’re going

to be just as qualified to go into a conventional type lending, and

won’t be able to meet their capital requirements to get into it because we ask for those fees up front.

I think a lot of times that might preclude people from actually

finding the financing because the fees are a lot higher if we continue to raise the fees.

Senator CRAPO. Mr. Beck.

Mr. BECK. Personally, I like the way the fee structure is right

today. It’s based on a mathematical formula to determine the subsidy rate necessary to fund the program. I support it. I think it’s

very important that the SBA realizes that they can generate their

own fees to sustain this program.

Just as a ‘‘for instance,’’ I did some quick calculations here. On a $750,000 guarantee at 3.5 percent, it generates $26,250 in fees.

If they reduce that fees and reduce the size of loans to 1 percent,

and if you do seven $150,000 loans and get that 1-percent fee,

you’re going to only generate $9,625. Now, to me that doesn’t make

sense in a profit mode or to fund losses that the SBA is going to

have. Why would you want to eliminate that fee income? Granted,

the small business does pay those fees and I understand that; but

they always seem to be able to work through that especially with

the longer terms that SBA has allowed.

If you break that down into the number of months that this loan

is going forth, it doesn’t seem like that much of a cost. I think

we’ve also got to realize that it’s the bank’s responsibility to pay

those fees. It’s not necessarily always the borrower. Yes, the rules

and regulations allow for us to be reimbursed for that, but I think

we need to keep the fee structure where it’s at.

Senator CRAPO. All right. The last thing I wanted to talk about

in terms of these impacts of the proposals is the elimination of the

piggyback opportunities. Again, I have listened to your testimony

on that but would like you to explain just a little better to me just

what is that going to do if this proposal is implemented?

Mr. BECK. Go ahead, Mike.

Mr. BROWN. Well, in the organizations that I’ve worked through

in regional lending over the past 10 years, we used it a lot with

the 7(a) program, and the reason being that the 504 program is excellent for real estate or for heavy fixed asset financing; but with

the price of everything going up nowadays, there’s a lot of parts of

26

the project costs that are not eligible under the 504 program and

there’s some instances where the 504 program is not—or the financing project is not eligible for 504.

In those instances, we used very frequently the piggyback program to, you know, put in a conventional first and then have the

SBA in a supportive position. A big percentage of the projects we

used the 504 whenever it’s feasible because that’s the best for the

borrower with that low fixed-rate debenture loan, and it puts the

lender in a good first lien position on the other 50 percent.

But where that’s not possible, just in the short time that the program was suspended, and now since that 750,000 cap with no piggyback, personally, in the relatively few number of projects that I

finance, I’ve run into several that I could not do anything for and

I didn’t know where to refer them to because there’s just nowhere

to go.

Senator CRAPO. There are no other options.

Mr. BROWN. No.

Senator CRAPO. Do you have any kind of a percentage idea yet,

have you got enough of a track record with this new proposal

that—could you tell me what percentage of the loans you’re not

able to do because of this?

Mr. BROWN. Well, it’s been a relatively short period of time.

Senator CRAPO. Yes.

Mr. BROWN. But I’d say probably 20 percent of the inquiries I’ve

had I’ve said that, ‘‘I can’t do them now. Hopefully, it will change;

and please hold on and maybe in a month or two,’’ or whenever,

and I keep them, their name and number, so that I can call them

back. But I’d say roughly 20 percent at this moment that did not

qualify for 504 and were too large for the $750,000 cap and did not

qualify for conventional.

Senator CRAPO. Okay.

Ms. LAWTON. I’d say probably about 30 percent.

Senator CRAPO. About 30 percent for you? All right.

Did you have anything on this, Mr. Beck?

Mr. BECK. I’d just like to add that, you know, I’ve used the piggyback program several times, and what the piggyback really allows

me to do is to take an ineligible company and make it eligible, especially for the use of proceeds. Also, it does directly supply more

money and access to capital. If we can do a piggyback loan, I don’t

necessarily have to charge the guaranteed fee. Lastly, as far as I

go, I was actually planning on the piggyback to remain in place,

especially in light of what they did with the $500,000 cap. I was

counting on that because I couldn’t get my loans completely approved that were over the $750,000 mark, and I knew that cap was

coming in place. That has resulted in three of the loans I have

pending right now, three of the total 35 I’ve done are sitting there

in limbo, and I’m hoping this piggyback loan structure gets back

in place immediately.

Senator CRAPO. All right. I think that discussion has been helpful, and I believe it helps to just make very clear that we need a

different solution than the one that is being proposed. Mr. Beck, in

your testimony you indicated that you think that we’re looking at

about a $3 billion shortfall in the funding proposal for 7(a) loans.

Is that correct?

27

Mr. BECK. Yes.

Senator CRAPO. Which will be somewhere in the neighborhood of a need of around $12.5 to $13 billion.

Mr. BECK. Absolutely.

Senator CRAPO. Do you think that that would allow us to get the

maximum back up to 2 million and keep the fees where they are

and proceed as we were?

Mr. BECK. I believe so. If you get a combination of the piggyback loan structure and the $2 million limit, it all helps. I’m not saying

that all of those large loans are absolutely necessary. I believe only

five percent of the total monies available have been in that category of between $750 and $2 million. But I think it’s crucial that

these larger companies get their money in order to provide more

jobs. That’s the bottom line. I think the more job placement with

the larger companies, it filters down to the lower ones. It’s the ripple effect. I think it’s very important that that $12.5 billion level be obtained; and I think we know historically, and the demands that

have been placed since the beginning of the year are at that level.

Senator CRAPO. That’s what our track record so far looks like.

Ms. Lawton.

Ms. LAWTON. I’d have to agree with Bob.

Senator CRAPO. Mr. Brown, did you have anything?

Mr. BROWN. Yes, I’d agree as well. That amount has proven to

be about where it nets out. Having a reliable known figure to work

with, the financing industry can deal with it if they just know what

it’s going to be.

Senator CRAPO. All right. I’m going to ask another question here

that I’m not sure any of you will have the answer to. In fact, we

probably have it right here. The question is the same one I asked

on the microloans. Do you know whether the SBA has a high level

of cost to the 7(a) program that it administers?

Mr. BECK. I wish I knew, and I’ve asked that question several

times. I think it’s been an issue that has plagued the SBA program

for years. We need to know specifically what the loss ratio is. Even

in this centralization of loan collections and all that have just occurred, we still don’t know. That amazes me. It also amazes me

that the number of files, and the way they’re going to be handling

these, it doesn’t appear to be organized or planned; and this was

announced several months ago.

Senator CRAPO. That’s right.

Mr. BECK. Yet we know for a fact that the offices aren’t even set

up, the facility isn’t set up. I mean it’s in process, I understand

that; but to imagine to take 14,000 customers, collection accounts,

whatever you call them, and put them in boxes and ship them to

a place they don’t even have shelves to put them on, I’m shocked.

Senator CRAPO. Any other comments?

Ms. LAWTON. The centralization, what Bob’s saying is without

knowing the areas they’re dealing with, how can they make prudent decisions?

Senator CRAPO. I think that’s a very good point. The centralization question to me gets back again—I’m assuming that the SBA,

particularly with Congress restricting its funding by 24 percent

over 4 years, is facing some pretty significant downsizing presVerDate 03-FEB-2003 15:45 Oct 29, 2004 Jkt 094807 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 D:\SBA\94807.TXT SSC2 PsN: SSC2
28

sures. I understand the centralization pressure may actually have

been generated by Congress.

That having been said, I’m concerned to hear the stories that

you’re talking about in terms of the loss of people in the field, so

to speak, outside of the Washington bureaucracy and the loss of expertise and access that that is going to present to you. Again, I am

assuming—and I may be wrong, but I’m assuming that this is a

budget-driven issue as well and that we may need to address it in

that context. Am I correct?

Mr. BECK. Yes.

Mr. BROWN. I believe so. I think that the centralization issues

seems like a train that’s coming down the track and that’s going

to happen in some form or another regardless of what we all say.

Hopefully, there will be some local loan officer or local presence

available that has a lending history that can be used in the case

of appeals. If we send something in, an application in its abbreviated form, to a centralized approval process and it’s declined for

one reason or another, that there would be some kind of an appeal

process to a local district office loan officer that knows the dynamics of that rural community, or that local community, that could

pitch in and maybe not approve it but add the credibility to it to

have a resubmission.

Senator CRAPO. If this centralization occurs the way it looks like

it’s heading, where will you end up having to deal with these?

Mr. BROWN. Sacramento.

Senator CRAPO. Sacramento? And today you deal with?

Mr. BROWN. Spokane.

Senator CRAPO. Spokane. All right. First of all, let me say I agree

with the points that have been made here. Again, although we are

fighting a very difficult budget climate back in Washington, and

I’m sure I’m telling you something you already know, but with the

entitlement programs basically running uncontrolled, because they

are mandatory spending that we don’t have the votes in Congress

to adjust right now; and with the war on terror and our national

security and Homeland Security driving so much spending right

now, the rest of the budget outside of the entitlement programs

and national and homeland security is—in the President’s proposal,

the rest of the budget is held to less—well, to an average of onehalf of one percent increase. That doesn’t mean that everybody gets

one half. Some are going to get cut, some are going to get more.

But the bottom line is we’re working in a tight fiscal climate.

That having been said, it seems to me that it is very shortsighted, in terms of the issues we’ve been talking about today with

the primary focus on trying to restore the strength and increase

the stability and growth in our economy, that we are making some

of these decisions that, particularly for rural America, are going to

drive access to capital away and are going to, even in urban America, make it much more restricted and probably focus it on certain

types of more collateralized business.

Mr. BROWN. Yes.

Senator CRAPO. To me, that is a mistake that is going to be much more costly than the $3 billion we were talking about as far as the

investment. I wish I had the numbers and the study on this, but

I’m confident that if we were able to analyze what would happen

29

dynamically in our economy if we make this program work the way

it can, and if we can do so for another $3 billion, that we would

probably generate a lot more than $3 billion of tax revenue to the

Federal treasury and that this is going to pay for itself.

As I go back and try to work through both the Budget Committee

and the Small Business Committee, I think the solutions you

talked about here are the ones we need to implement; and I appreciate your helping to educate me in more detail as to what the

problem is and what the consequences are of the proposed solution,

and I’ll work to see if we can’t try to find a solution to fix it.

Mr. BROWN. Thank you.

Senator CRAPO. Thank you very much.

Senator CRAPO. We will excuse this panel now then and move on

to our third panel. Our third panel consists of Mr. Rob Randall, the

President and CEO of Randall Contracting in Kellogg, Idaho; Mr.

Archie McGregor, President and CEO of Archie’s IGA in St. Maries;

Mr. Bruce King, the Owner of Lakewood Animal Hospital in Coeur

d’Alene; and Mr. Mark Gantar, President of All Seasons Apparel in

Post Falls. Please come forward. Apparently Mr. King has not arrived yet. If he gets here before we finish, we will invite him up

to the panel.

I welcome all of you here and again remind you to try to keep

an eye on Mike while you’re making your comments, and then we’ll

be able to get into a good discussion. We will go in the order that

we just identified you, so, Mr. Randall, please proceed.

STATEMENT OF ROB RANDALL, PRESIDENT AND CEO,

RANDALL CONTRACTING, KELLOGG, IDAHO

Mr. RANDALL. Thank you. To begin with, I would like to thank

the Senator——

Senator CRAPO. If you would pull that mic just a little closer to

you. Thank you.

Mr. RANDALL. Is that a little better?

Senator CRAPO. Yes.

Mr. RANDALL. Okay. To begin with, I would like to thank Senator

Crapo and his staff for the opportunity to present the history and

success of Randall Contracting. Our accomplishments would not

have been completely successful without the capital and business

assistance provided by the 7(a) SBA loan program and the local

lender partnership of Mountain West Bank.

Randall Contracting is an excavation company specializing in

site work projects involving reclamation and utilities. Our clients

are mining companies, private developers, governments that are

State, local and Federal. Randall Contracting began business in

February 2001 as a sole proprietorship. We had an SBA-backed

loan of $100,000. At the time of our opening, we were basically two

employees, a shovel, and a lot of persistence.

By the end of the first 12 months, we had managed to land three

projects with a gross revenue of over $750,000. Randall Contracting

became a corporation. We’d employed seven people on a seasonal

basis and still two full time. During our first year, the guidance

and confidence given by Bob Beck and his staff at Mountain West

Bank, along with John Lynn from the Small Business Learning

30

Center, created an even greater desire for Randall Contracting to

succeed.

By the end of our first year, we accomplished paying off our first

SBA loan and established ourselves as a reputable and dependable

company. Since the first day of business, I’ve had the attitude that

a customer will always get a completed first class project on time

and under budget. I also studied existing successful businesses and

modeled Randall Contracting after their success.

Year two of Randall Contracting began by searching new ideas

of expanding on our previous year’s success. Through contacts we

had established the previous year, I found a reputable company

going through a downsize and eliminating their construction division. I approached the company and offered rather than eliminating these jobs and auctioning off the equipment the idea that

Randall Contracting purchase the company and continue their current contracts. After a couple months of negotiations, we came to

a purchase agreement.

Meanwhile, I had weekly meetings with Bob Beck at Mountain

West Bank. By previously establishing the relationship with Bob

Beck, another SBA loan was quickly processed. Suddenly Randall

Contracting had construction offices in Idaho and Montana with 12

full-time employees and full benefits. We quickly drew on our employees’ expertise and created opportunities with every contact.

I do have to add at this point I was wondering for the first few

months: Can I take on the responsibility of running and creating

a multi-million-dollar-a-year company given the present economic

situation? I had a lot of sleepless nights and came to the conclusion

that I would succeed simply because of all the families involved.

By the height of the construction season in 2002, Randall Contracting had created 58 jobs for seasonal employees and had 14

full-time positions. We finished the year with $4,800,000 in gross

revenue, a growth rate of over 500 percent in 1 year. I will say that

by mid-summer it felt really good to be able to know that I’d help

put food on the tables of over 70 people.

We began 2003 with around $2 million in carry-over work from

contracts. With carrying over our exceptional reputation of quality

job performance, we were able to retain most of our seasonal workforce from the previous work year and added where needed. We

purchased additional equipment and added to our fleet of 50 other

pieces purchased in 2002.

At the height of the construction season in 2003, Randall Contracting had a workforce of 77 people and 31 subcontractors. Based

on our past performance, we were successfully awarded several

multi-year contracts and finished with another record year. In

2003, we had gross receivables over $6,400,000.

We’re now starting our fourth year in business. Our current

backlog of work for 2004 is $8,250,000. With this, it will complete

another record year without even bidding any other projects for

Randall Contracting.

The real clincher to this is that it has taken place in rural Shoshone County, in Kellogg, Idaho, one of the highest unemployment

counties in the State. To date, over the last 3 years, because of the

7(a) SBA program, Randall Contracting has been able to contribute

over $8,000,000 towards rebuilding the Silver Valley. We now have

31

had 21 employees buy homes in Shoshone County, and these are

all young, hard-working people who believe in growing a building

community. None of this would have been possible without the

rural 7(a) SBA program.

In closing, I would like to thank you again for the opportunities

presented to Randall Contracting; but most of all, the credit for our

success goes to my employees and family, clients, the SBA, Mountain West Bank and Bob Beck for their confidence in Rob Randall.

I’d also like to extend a sincere thanks to Senator Marti Calabretta

who awarded our first large project, the Success Mine clean-up.

Senator CRAPO. Thank you very much, Mr. Randall. It’s a great

success story.

Mr. McGregor.

STATEMENT OF ARCHIE MCGREGOR, PRESIDENT AND CEO,

ARCHIE’S IGA, ST. MARIES, IDAHO

Mr. MCGREGOR. Senator Crapo, as the Owner of a small business

in a rural area of Idaho, I would like to express my appreciation

to you for giving me the opportunity to testify on the questions of

assessing capital and business assistance in the rural area of

Idaho.

After working with a national chain store for many years, I

looked for an opportunity to own my own business. The normal risk

and challenges of owning your own business intrigued me. I felt

that I had learned the skills to operate my own business and succeed. Finally, I took the risk by investing my own savings and secured a bank loan and purchased the first IGA store in St. Maries,

Idaho.

Five years ago, after successfully operating the store, I recognized the need to modernize it and looked for value-added services

to offer my customers. To achieve this plan, I qualified for an economic development loan from the area Certified Development Corporation. This was my first time to use loan programs available to

small businesses. Although the paperwork seemed insurmountable,

the program provided the loan I needed, and today my store has

expanded my customer and employment base.

With the success of my first store and an understanding of operating a grocery facility in a rural setting, I purchased a second

store in Orofino, Idaho. The successes I achieved in St. Maries are

now being applied to my second store. I will be modernizing the facility, expanding services and creating more jobs.

I have found that rural businesses face challenges not imposed

on urban or suburban businesses. A good example is the availability of transportation of goods. Because of our location, both of

my stores are not on typical delivery routes. To get services that

keeps me competitive with urban areas, I must find creative ways

to keep my stores supplied with goods and fresh consumables.

This very question has been pressing my evaluation process in

the past few weeks because I lost my established delivery system

and therefore need to determine a new cost-effective way to supply

my stores. An urban store owner would simply bid out for a new

transportation supplier and usually have many choices. I have to

create the solution myself.

32

It is my understanding that in Idaho over 80 percent of the

workforce is employed by small businesses. Since most of Idaho is

rural, the type of challenges that I face in the operation of my business must be a concern to most of the small businesses throughout

the State. Taking this logic further, 80 percent of the workforce is

directly challenged by the same concerns that face small business.

If small businesses are to remain effective, competitive and growing, we need assurance that the programs offered by the SBA are

available, valuable and designed to address the needs of small businesses. For rural areas, there needs to be some consideration for

the unique challenges faced by small businesses operating in those

areas. They can’t be compared with urban businesses.

For example, the creation of one job in a rural setting may have

a significant effect on an economy, while the creation of one job in

an urban setting may have little, if any, effect on the local economy. It seems that there should be some evaluation of merit when

offering services to small businesses in rural areas.

I don’t have all the answers for rural businesses, but rural businesses are a valuable part of the Nation’s economy and they should

be offered services that account for the unique circumstances that

they face.

Senator Crapo, thank you for this opportunity to discuss this situation faced by rural small businesses in America.

Senator CRAPO. Thank you, Mr. McGregor.

Mr. Gantar, go ahead, please.

STATEMENT OF MARK D. GANTAR, PRESIDENT, ALL SEASONS

APPAREL, INC., POST FALLS, IDAHO

Mr. GANTAR. Thank you, Senator.

Senator Crapo, as a small business owner in North Idaho, I

would like to thank you for inviting me to testify before you for assessing capital.

Senator CRAPO. Can you pull that mic just a little closer?

Mr. GANTAR. Sure.

Senator CRAPO. Thanks.

Mr. GANTAR. I think I have quite an interesting story to tell you.

I am the Owner of an apparel manufacturing business located in

Post Falls, Idaho. We have been in business for 20 years and recently moved to Post Falls from Spokane, Washington, where we

had been for those 20 years. Prior to 1984, we were owned by a

company named Pacific Trail Sportswear and I was their general

manager and vice president of Production for Pacific Trail, managing eight large factories in Washington and Utah.

In 1984, Pacific Trail decided that they wanted to outsource their

manufacturing to a cheaper labor force in mostly Korea, and I purchased the manufacturing assets from them and started All Seasons Apparel. We began as a down outerwear manufacturer and

were at one time the largest down manufacturer in the country of

jackets, vests, pants, quilts—you name it.

That business was abruptly taken from us by China, both as a

cheaper labor source and our ability to get down for our products

because of the environmental lobby. From there, we changed into

a large athletic wear manufacturer mainly for Nike. We produced

their running suits, shorts, Lycra at a rate of near 500 dozen per

33

day employing over 300 people in the process. That work was also

abruptly taken from us as Nike took all their production to China

again.

Then we started in the fleece business producing fleece jackets,

vests, pants, hats for mainly Union Bay at first; and then over the

years with companies like Patagonia, L.L. Bean, Lands’ End, REI,

Helly Hansen, Columbia Sportswear and others. Recently, this

business was also taken from us and is now made in Mexico and

China, Vietnam, and some African countries.

In addition to these apparel items, we have been a large manufacturer of denim jeans and jean jackets for mainly Levi Strauss

& Company. As you probably have read from recent press coverage,

Levi is going to Mexico and parts unknown to manufacture their

uniquely American items. I would like to personally congratulate

Levi Strauss. They were the last to go and have held out the longest. Just last year we produced their Levi-branded jeans and jackets, and I have the highest respect for this fine company. Lee,

Wrangler, The Gap and others went outside the United States long

ago while Levi tried to stay, but they had no choice as I see it.

These trade laws forced them all out.

To get to the point, currently it appears that we have excellent

access to funds through the SBA and other State organizations to

help finance our business, both in growth and in start-up situations. But we can have all the financing in the world, but if we

can’t access the business, it doesn’t do us any good. Quite frankly,

the only apparel manufacturing that is really flourishing, other

than a few companies, are those that are working for the Government.

We are in the process of trying to convert to a Government contractor and have been for nearly 21⁄2 years. We have bid on nearly

12 separate contracts and some over a year and a half old. One we

are waiting on now is a HubZone set-aside and a disabled veteran

preference on a pant we have done in the past. This particular bid

closed on the March 28, 2003, and it still hasn’t been awarded.

I am hoping and am willing to negotiate price further with the

Government, but I am not optimistic, and most of the bids seem

to go to the east coast from the DSEP. I was told that this bid

would probably be awarded to prisons back east, Federal prisons.

In any event, they had the first priority on these bids.

I am almost in a state of shock as I look down on my factory with

nearly 800 machines and barely 15 people working in a plant that

has traditionally had over 200 people working very hard to help

support their families. I have not taken a paycheck in over a year

and I’m watching my personal assets dwindle, but I will not give

up.

My father once told me that we had been very foolish prior to

World War II, when our industries were allowed to go to Japan and

China, specifically the tool and die business; and it took us 2 years

to gear up to be able to beat Hitler and the Japanese during World

War II. Well, it appears that we might be doing it again.

I am a well-educated person with a degree in economics, among

others. As a country, we need to keep a strong manufacturing base

in steel, wood products, farming, aerospace, textiles and apparel.

Manufacturing brings new money into a community as opposed to

34

retail and restaurants that just recycle the same money. An apparel factory is something to behold when it is full and running

properly.

We historically employed all age groups, sexes, nationalities, sexual orientations, and all of us getting along to get the products to

our customers on time with the best quality. Over the last couple

of weeks, through the Job Service, we have gotten in the mail nearly 100 applications for power sewing machine operators, but I cannot act upon them. That one Government contract mentioned earlier would put all 100 of these applicants to work in this one factory.

Senator Crapo, I would like to respectfully submit that our elected officials need to reassess the trade agreements that have been

passed, specifically NAFTA and the WTO agreements. The Congress of the United States has effectively eliminated the jobs from

the very people that have elected them. I think our Senators and

Congressmen have underestimated the impact of NAFTA and other

trade policies and should now make the changes necessary to restart all manufacturing in this country.

I again want to thank you for giving me this time to present my

story to you and I look forward to a continuing relationship with

you and your fine staff.

Senator CRAPO. Thank you very much, Mr. Gantar, and I want

to come back to the outsourcing and the trade issues that you have

raised there; but first I want to go through these SBA issues.

We have a real range of different experiences here in the businesses. Each of you have been involved with SBA financing. My

first question is: How important to you was access to SBA loan programs, and how did you find out about them? Did you find it easy

to access them? You can start with anybody.

Mr. Randall.

Mr. RANDALL. I actually had found out about it through an advertisement of Mountain West Bank. The access to it with Bob

Beck was relatively easy. The use of it was a little more difficult

than I had anticipated. The whole process went fairly smooth, however, it took a little longer than I anticipated.

Senator CRAPO. How many SBA loans have you been involved

with in your company now?

Mr. RANDALL. Two.

Senator CRAPO. Two. You gave me the statistics, but how many

people are employed?

Mr. RANDALL. At this time I have 14 full employees. I have an

office in Idaho and in Montana. This summer, I will have well over

100 seasonal employees that will work basically from April until

weather shutdown—Thanksgiving.

Senator CRAPO. All right.

Mr. McGregor.

Mr. MCGREGOR. Yes. I was familiar with the Panhandle Area

Council here in North Idaho and while visiting with them I found

that I would be able to get some funds, matching funds to expand

the store. The store that I purchased in St. Maries had gone bankrupt and was closed when I took it over. We were able to overcome

that hurdle.

35

Then when we found that in order to meet the need of the resident area in the area of groceries, we had to expand the store; and

that was when the real challenge came for monies to expand the

store in a rural community. Had we not done that, I don’t think

that St. Maries would be as far forward as it is today. I feel that

we somewhat set a stage to the opportunities for rural communities

to develop.

Today we employ about 60 employees in that store. We still have

competition in town, and we have reduced the escape factor from

the community. It has been a great experience for me and I would

like to thank PAC for what they did in making it possible with

SBA.

Senator CRAPO. How many employees do you have?

Mr. MCGREGOR. In St. Maries, we have about 55; and in Orofino,

we have about 40.

Senator CRAPO. All right. What kind of SBA loan? Do you know?

Were you in the 7(a) program? Did you know what programs you

were working with?

Mr. MCGREGOR. I don’t remember which programs I was on. I’m

sorry.

Senator CRAPO. Mr. Randall, do you know whether you were on

a microloan to start with and then your second loan was a different

one?

Mr. RANDALL. The second one was a 7(a) loan. I believe the first

one was a 504, but I could be wrong.

Senator CRAPO. Okay. Mr. Gantar, on the SBA issues, what was

your experience?

Mr. GANTAR. Well, to be honest, we would have been out of business a couple of years ago without the SBA. I was with a larger

bank for many, many years. The relationship had deteriorated over

the years with that bank as they kept buying and gobbling each

other up.

Senator CRAPO. The consolidations?

Mr. GANTAR. Yes, and to the point where we had probably had

five different loan officers over the years, eventually getting to the

point where they weren’t interested at all in us.

Then Jobs Plus here in Idaho referred me to Bob Beck. Things

turned around for me immediately. Bob has just done a great job

with me in accessing capital so I can keep going. I need capital. I

need loans because I’m financing payroll. Most of the companies I

deal with—like Levi Strauss or like Lands’ End—want 30- or 60-

day terms; and you cannot operate unless you have money to meet

payroll and taxes in order to keep going. You’ll drop dead. The SBA

has made it so that I can exist now, and hopefully it will continue

to be that way.

Senator CRAPO. All right. It’s just remarkable to me the small

business, side of these stories. Each confirms my belief that if we

continue to have the right kind of effective small business support

through the SBA that the cost to the government is virtually not

there when you look at the dynamic economy.

When we score things in Washington, D.C., we’re not able to

score on a dynamic basis. If we put money out, even if that money

is returned, with interest, we have to calculate it as a hundred percent expenditure and cost to the budget. We don’t take into considVerDate 03-FEB-2003 15:45 Oct 29, 2004 Jkt 094807 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 D:\SBA\94807.TXT SSC2 PsN: SSC2
36

eration the fact that an investment is different than a consumption

expenditure, and that’s part of the reason we have these problems

in fighting over the budget issues with the SBA programs.

That having been said, it seems to me that the stories that your

businesses and your circumstances tell, with regard to the discussion that we had in the previous two panels about these programs,

and the need to make sure that they are operated in the right way

and not changed because of budget pressures to do things that

would take them away, is proof of the fact that these investments

that we are making through the small business programs are

meaningful and are making a difference.

A question just came to my mind, Mr. Gantar. In your circumstance, I assume you have a significant amount of equipment,

and so forth, that could be used as capital for the investments. You

may not know the answer to this, but if they changed the capital

requirements for the loans or the collateralization requirements for

the loans to require more collateral, would that cause a difficulty

in you being able to continue with SBA loans?

Mr. GANTAR. Well, you’d have to ask my banker. However, today

it was brought up that the value of property in urban areas, I

mean in rural areas like ours, is less than in urban areas. I think

that would affect things more than anything.

Senator CRAPO. That’s a good point.

Mr. GANTAR. I, of course, own my property in Post Falls; and if

they reduce that, it’s going to be just a—probably a trickle-down effect against me immediately, and I think that’s more of an issue

than my machinery. My machinery isn’t worth as much to the bank

as my property is because of the export of jobs. The machinery becomes less and less valuable. But the property values are still there

and that’s what you loan against.

Senator CRAPO. That’s a good point.

Mr. Randall, in your business—I know some of these are sort of

softball questions, but I really want to flesh this out. Could you

have had the expansion of your business and the success story

you’re telling us about without the SBA loan program?

Mr. RANDALL. I don’t believe it would have been possible at all.

I think John Lynn and Bob Beck went out of their way to help us

succeed. Both of those are strong members and proponents of the

SBA program.

Senator CRAPO. Mr. McGregor, same question to you. When you

faced that point where you realized you had to expand in order to

be competitive—

Mr. MCGREGOR. It would have been the difference between an

expansion that would have really met the total community needs

or just upgrading the store so that you were operating a class store.

With that loan, I was able to double the size of the store, provide

services that were not being provided in the community before, and

it has proven to be a successful part of our business.

Senator CRAPO. All right. Well, Mr. Gantar, let’s go to the trade

issues that you raised, the outsourcing issues. First of all, let me

tell you that I agree with you. I’m a big believer that we need to

aggressively develop trade relations with other nations in such a

fashion that we have true free trade. I believe that we need to be

eliminating the tariffs and other trade barriers that the United

37

States and other nations engage in, and ultimately moving to a free

market.

I don’t know how that would play out in the outsourcing issue,

but I do believe that if we had harmony among our nations on

issues, not just like tariffs and trade barriers but also on some of

the requirements that we impose on our producers through our bureaucracy, that we would have a much more level playing field. Ultimately, I voted against NAFTA when it came up, notwithstanding

the fact that there was intense pressure from many communities,

not the least of which was the agriculture community, because of

the belief at the time that it was going to expand markets and open

up opportunities for our producers.

I felt that we didn’t have the protections in place and that, as

a result, we were not only yielding up our sovereignty, but that we

were getting ourselves into circumstances in which we would ultimately see the loss of jobs; and now we are starting to see that.

We welcome Mr. King here and we’ll let you make a statement

here in just a moment, but we’re in the middle of a discussion I

want to continue. I feel that this issue of outsourcing is going to

be an incredibly big issue in this year’s election. It’s a big issue before Congress today, and I’d welcome not just Mr. Gantar’s comments, but the comments of any of you on this. What do you think

we need to do? What policy do we need to change, and how should

we address this problem at the policy level in the United States?

Mr. GANTAR. Well, that’s a very complex question. You have to

look at it from the point of view of labor. The elimination of tariffs

and what that does to our money source. We have a supply of

money. It redistributes the money then to the top companies, so

that the companies make a lot more money and a few make money

in these foreign countries. Labor doesn’t do any good. We have not

helped the people of Mexico. Obviously they’re still immigrating

here like crazy.

What tariffs does is it redistributes back to labor and it gives

labor some leverage. What’s happened in our country? Labor has

no leverage. I’ve seen it. I’ve managed factories for 35 years. I remember back 30 years ago, when I was negotiating with labor, they

had leverage with me because the company was making money;

and I had leverage with my customers on price. Now it’s gone.

Big companies like Nike and Levi, don’t manufacture their own

goods. They are merchandisers. They use others to manufacture for

them; people like me, people in Mexico, people in Europe, wherever. Now they’re able to just chase the lowest denominator. It may

be a free market economy, but it’s not free for small businesses in

the United States. It’s free for the big companies like Nike.

If I was not able to access SBA loans, right now I would probably

be in China or Vietnam or someplace like that, engineering factories for Nike or Levi. I would not be employing people here in

Idaho.

Now, tariffs are just a bad word with everybody it seems like except labor. Maybe we should give incentives to these companies to

manufacture some portion of their goods in the United States, to

a big business; some kind of an incentive, like tax breaks or something to level the playing field a little bit more, to motivate them

38

then to go to a company in Post Falls, Idaho to produce their jackets.

I don’t have the answer and it’s swung way beyond where it

should have gone. I think that we need to give leverage back to

labor somehow. Of course, the only way to do it is tariffs or incentives to business to produce in the United States.

Senator CRAPO. All right. I appreciate that. Any other comments

from any of the others here?

Mr. Randall.

Mr. RANDALL. I just have one small comment. I know everything

that we’ve gone through here today has been evaluated on the risk.

I actually do believe that as a requirement for one of the larger

SBA loans, that as a company becomes successful, they need to

compete—they need to be able to work with the smaller upstart

companies on a mentor/protege-type program. I think that will alleviate some of the risk for the SBA, some of the default risk for

the banks, and it gives you an outlook on a successful company to

help you build a small company.

I’ve been very fortunate in the success of my business, and I

would think that it would only be appropriate for me to help mentor some of the smaller companies that are trying to start up. I

think that should be a requirement of that program. It creates a

win-win situation for everybody involved with virtually no cost either to the government, to the bank or even to the mentor.

Senator CRAPO. All right. Thank you. That’s a good suggestion.

Mr. McGregor, anything else?

Mr. MCGREGOR. No.

Senator CRAPO. Well, Mr. King, we appreciate—King, right?

Mr. KING. Yes.

Senator CRAPO. We appreciate you making it here, and you were

not here for my previous instructions. I’ve instructed everybody to

keep their comments to 5 minutes. We do welcome you here and

would love to hear your input, and we’ve got a little time clock

keeper here to help you keep an eye on the clock.

STATEMENT OF BRUCE KING, OWNER, LAKEWOOD ANIMAL

HOSPITAL, COEUR D’ALENE, IDAHO

Mr. KING. Well, thank you. I’m sorry.

Senator CRAPO. You have to pull that kind of close.

Mr. KING. Can you hear me better now?

Senator CRAPO. Yes.

Mr. KING. Sorry for the delay this morning.

Senator CRAPO. That’s all right.

Mr. KING. Thank you for looking for input on small business

funding. I’m a recent small business loan borrower, and I hope that

telling you briefly just my story may give your Committee just

some good information. My name is Bruce King. I am a private

practice Veterinarian and I recently constructed a 6,500-square-foot

small animal veterinary hospital in Coeur d’Alene. The hospital

employs five full-time staff members. The staff members earn an

average of $8.50 an hour and receive comprehensive health and

dental insurance coverage after an initial evaluation period. Provided that my hospital meets the projections that I have for it,

within 3 years I should have 15 full-time staff members employed.

39

Besides providing a valuable service to the community that’s

needed, it created a lot of good jobs having this hospital built; and

without the SBA loan programs in existence, I would not have been

able to do it.

I graduated from the Washington State University College of Vet

Med in 1995. I was originally from Coeur d’Alene, so I’m a native

person here. I did what was most common of new graduates, and

that is I went out and I got a job working for another existing practice to get experience. After 3 years of working there and getting

experience, I felt that I was ready for me to go out on my own; and

with a partner, I went and purchased a foreclosed building in Post

Falls, just nearby here. It had previously been a restaurant and

had been on the market for a long time. We were able to get a good

deal on purchasing the building.

Due to my business partner’s good relationship with the bank

around here, it was very easy to get a loan. We pretty much got

100-percent financing, got a conventional-type loan with a fixed interest rate, very favorable terms; and so things were very easy on

that first go-around and the hospital did very well. After 4 years

of ownership, I sold it to my partner. That was last fall. Then at that time I had about $275,000 in cash, 8 years of experience of being a Veterinarian, good credit, and I had the experience of starting up a new business. I thought when I was going to

turn around and go and do the same thing again, I would find it

very easy to obtain a loan like I had before. I went and did my

business plan and took it to the banks around here. There was

quite a bit of interest, everyone was interested in loaning on it; but

I was in a real Catch 22 position because I did not have a 2-year

set of financials to give them to get a conventional loan for the

business that I was proposing to start.

I did fit within the SBA loan guidelines, though. Initially I was

pretty hesitant to go with the SBA just mainly because, in my

mind, it had the reputation of being just a costly kind of slow, burdensome, paperwork-filled type of a process. I went and investigated getting financing with some of the veterinary-specific lenders that they advertise in the back of vet magazines. They either

were unwilling to lend for a large construction project, or they

would gladly lend you the money but then they would charge you

tons of high fees and they’d give you a really short balloon payment, like 5 years, to pay the loan off; and just totally unacceptable.

Due to a lack of other good options then, I went ahead with the

SBA, and I have been very pleasantly surprised with the experience. It did take a little bit longer to do an SBA loan than my previous conventional loan experience, but I didn’t consider it to be excessive. I went to three lenders in this area. I felt comfortable with

all of them. I chose to go with Mountain West Bank mainly because

Bob Beck was very familiar with the CAPE program and getting

my fees paid for for the loan. That ended up saving me about

$20,000 in the process. I’ve had good experience with it and I

would recommend it to any other small business.

In the process of doing my business plan for this last hospital

and the one I currently have, I did also use the services of the

Idaho Small Business Development Center. John Lynn helped me

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do all my spreadsheets, gave me a lot of really good advice on doing

my business plan. If I start another business, I’m going to use that

again as well.

The only regret I have in the whole project is I did end up with

a variable rate loan. I really would have liked to have gotten a

fixed rate just for kind of security in the future, and I would have

been even willing to pay some fees or points to get it, but it didn’t

turn out to be available in my situation.

I’ve heard that the CAPE program is not going to be available

necessarily to future borrowers, and that would be one thing I

would encourage if there’s a way to do it; either to continue funding

for that or just to reduce the loan fees in general, because that

made a big difference for me. In my case, the money that Bob

saved me went to pay for the dirt to build the lot on my land. It

was about the same amount of cost.

In general, I think that the thing that could be done to really

help small business out and just improve conditions for everyone

is to encourage through some mechanism some significant financial

reward for if a business is going to give good wages and offer good

medical insurance, not just really skimpy where the employer pays

just a portion but if you pay all of it, there should be some way

they’re rewarded back for it because ultimately I think everyone

will benefit.

Thank you for taking the time to listen to me and again I apologize for being a little behind.

Senator CRAPO. No trouble. Let me just ask you quickly—as I’ve

asked the others here. In your circumstance then, without the SBA

loan programs, you would not have been able to get financing?

Mr. KING. Well, I would have had to do a smaller project; and

at the stage of practice that I am in right now, I didn’t want to go

backward. I could have put a hospital in a strip mall and had no

equipment and I would have been able to get financing. But to

build the type of facility and do the quality work that I needed to,

the only place that would give me a loan to do it was the SBA.

There wouldn’t be five people employed right now; there might only

be two. There’s no bazillion people that have spent the last 7

months working on my building, none of those people would have

been employed either, creating it.

So, yes, I could have had something, but it wouldn’t have been

nearly what I ended up with.

Senator CRAPO. All right. Well, thank you. That concludes the

questions that I have for this panel. Unless any of you want to

make another comment, anything you haven’t had a chance to

bring forward, we will conclude this panel.

All right. Thank you all very much for your time today. That also

concludes the panels for this hearing.

I have found the information that has been presented today to

be very helpful. As I said at the outset, one of the problems that

we see is that as we—as the economy is now starting to grow back,

we know that the engine of jobs in this country is small business

but we don’t yet see the job growth following this economic recovery. That is not unusual, and so we’re not, on a global scale, yet

seeing a high degree of alarm because of that; but we want to be

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sure that the job growth does follow the economic recovery that appears to be stabilizing for our country.

In that context, as I’ve indicated, I sit on the Budget Committee

as well as on the Small Business Committee; and representing a

state like Idaho, rural small business development and economic

development in general becomes a very significant issue, not only

for the Nation but for a state like Idaho; and that’s one of the reasons I wanted to be sure that this kind of information got in the

record for the Small Business Committee as we deliberate on how

to work with the SBA on its budget and on its program implementation.

I’m pleased that a number of other issues have been raised here,

such as the broader question of outsourcing that Mr. Gantar raised,

the question of the infrastructure for rural communities which was

raised in one of the earlier panels, and a number of the other

issues that relate to the broader issue of what needs to be in place

for economic development in rural communities.

One of the things that I’m committed to doing is to identify what

we need to do in our rural communities and those areas where our

Federal Government can properly play a role. Then make certain

we are playing the role and filling the needs there as effectively as

possible. It does seem to me that we start with the infrastructure

to make certain that we have everything in place, from roads and

bridges to broadband access to good health care to good education

and the like, and I put all that in the infrastructure category in

my own mind.

Then we work on development of adequate access to capital and

the kinds of collaboration that need to take place between the various providers of access to capital and support for development of

small business. If we can do so effectively, then we’ll have a number of success stories like those that we’ve just heard from those

here and we can start seeing that growth back in our rural communities.

Again, this has been very helpful to me. I’ve got myself a good

checklist of things that need to be accomplished, and I think the

direction that we need to take has been clearly identified by this

panel. I know this is going to be very helpful to Senator Snowe and

other members of the Committee as we further deliberate in Washington, D.C. I appreciate everyone here who has come to participate; and those of you who came to listen. I hope it has been beneficial for you as well. Without anything further, this hearing will

be adjourned. Thank you.

[Whereupon, at 10:53 a.m., the Committee was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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