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94-955 PDF 2004

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SMALL BUSINESS AND ENTREPRENEURSHIP

IN ARKANSAS: ACCESS TO CAPITAL AND

SERVICE DELIVERY

FIELD HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

FEBRUARY 19, 2004

Printed for the Committee on Small Business and Entrepreneurship

(

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, Chairman

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)

CONTENTS

OPENING STATEMENTS

Page

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

WITNESS TESTIMONY

Watts, Joe David, Former Liquidation Officer, Small Business Administration, Conway, Arkansas ....................................................................................... 4

Grimes, Keith, Commercial Loan Officer, Pine Bluff National Bank, Pine

Bluffs, Arkansas ................................................................................................... 6

Roderick, Janet, State Director, Arkansas Small Business Development Center, Little Rock, Arkansas ................................................................................... 6

Gomez, Eduardo, Owner, Andina Cafe ́ & Coffee Roastery, LLC, Little Rock,

Arkansas ............................................................................................................... 8

Blair, Daniel, General Manager, Daniel Utility Construction, Inc., Little Rock,

Arkansas ............................................................................................................... 14

Walls, C. Sam, Executive Vice President, Arkansas Capital Corporation, Little

Rock, Arkansas ..................................................................................................... 15

Knight, Philip, Executive Vice President, Small Business Lending, Arkansas

National Bank (ANB), Fayetteville, Arkansas .................................................. 16

Hester, Kevin, Executive Vice President, First State Bank and Director, National Association of Government Guarantee Lenders, Conway, Arkansas .... 18

Hinton, Samuel W., Small Business Executive, Metropolitan National Bank,

Little Rock, Arkansas .......................................................................................... 19

Wilson, III, Odies, Intergovernmental Relations Manager, City of Little Rock,

Little Rock, Arkansas .......................................................................................... 20

Harris, III, Samuel L., Executive Vice President, Arkansas National Bank,

Springdale, Arkansas ........................................................................................... 22

Davis, Tyronne, Owner, Davis Oil and Petroleum, Little Rock, Arkansas ......... 23

King, Charles, Executive Director, Arkansas Regional Minorities Supply and

Development Council (ARMSDC), Little Rock, Arkansas ................................. 31

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Blair, Daniel

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 40

Davis, Tyronne

Testimony .......................................................................................................... 23

Prepared statement .......................................................................................... 42

Gomez, Eduardo

Testimony .......................................................................................................... 8

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

Grimes, Keith

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 46

Harris, III, Samuel L.

Testimony .......................................................................................................... 22

Prepared statement .......................................................................................... 47

Hester, Kevin

Testimony .......................................................................................................... 18

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

Hinton, Samuel W.

Testimony .......................................................................................................... 19

Page

IV

—Continued

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

King, Charles

Testimony .......................................................................................................... 31

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

Knight, Philip

Testimony .......................................................................................................... 16

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

Pryor, The Honorable Mark

Opening Statement ........................................................................................... 1

Roderick, Janet

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 56

Walls, C. Sam

Testimony .......................................................................................................... 15

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

Watts, Joe David

Testimony .......................................................................................................... 4

Prepared statement .......................................................................................... 61

Wilson, III, Odies

Testimony .......................................................................................................... 20

Prepared statement .......................................................................................... 63

(1)

SMALL BUSINESS ASSISTANCE IN ARKANSAS:

ACCESS TO CAPITAL AND SERVICE DELIVERY

THURSDAY, FEBRUARY 19, 2004

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 9:30 a.m., in the Reynolds Business Center, Room 350, University of Arkansas, 2881 S.

University Avenue, Little Rock, Arkansas, Hon. Mark Pryor presiding.

Present: Senator Pryor.

OPENING STATEMENT OF THE HONORABLE MARK PRYOR,

A UNITED STATES SENATOR FROM ARKANSAS

Senator PRYOR. Well, it looks like most everybody is here, maybe

one or two that will come in in a few minutes. First, let me go

ahead and call the meeting to order as the Chairman of this field

hearing for the Small Business Committee of the United States

Senate.

I am on the Committee in Washington, and you know as well as

I do how important small business is to this country, to this economy and certainly to this state. There is no doubt about the fact

that small business and agriculture really is the backbone of Arkansas’ economy. We have some great Fortune 500 companies here,

we are proud to have them and very proud of what they do, but

small business really is the backbone of Arkansas’ economy.

Before I get going, let me thank a few people. First, of course,

is Senator Olympia Snowe of Maine who is the Chair of this Committee. She graciously allowed this to happen, and also sent Gregory Wach, one of her staff members, to participate. Kevin Wheeler

is here as well from the Committee staff, and we appreciate Kevin

and Greg being here. Senator John Kerry could not be here today.

I don’t know where he is today. I’m not sure he knows where he

is today. He is out in other parts of the country doing what he is

doing, but he is actually what they call the Ranking Member of the

Committee. He is the leading Democrat on the Senate Committee

on Small Business and Entrepreneurship.

Also, I have to thank UALR. They have been so fantastic to let

us use their facility and just really rolled out the red carpet for us.

I mean everything from food to just all the logistics, whatever we

needed, they have been fantastic, and the Arkansas Small Business

Development Center. They have just been great. They have just

been really accommodating and very, very helpful in every way.

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Janet Roderick, Laura Fine, who I used to work with her husband, Milton Fine. Jennifer Bonds, John Harris, and Kim Fox and

Sandra Vail have all been extremely helpful, and a lot of other

folks here on campus.

Let me just run through some opening comments, and just say

good morning to everybody, and I want to thank everyone for being

here at the UALR Reynolds Business Center. I am proud of this

facility, because the Don Reynolds Foundation and UALR worked

together to make this a reality, and it is just going to do nothing

but help UALR and help Arkansas businesses grow. It is just fun

to watch this unfold.

The witnesses, we’re going to go through their names here in a

minute, but we really, really appreciate all of you being here, taking your time and working with us. I know you put a lot of work

into being here. You have had to carve out quite a bit of time and

effort on your schedule. Also for everybody else that is in the room

that is just here to watch and listen, I want you to feel like you

can participate in the sense that certainly we look forward to your

comments, and it would probably be most helpful if you could write

down your comments, maybe e-mail them or fax them to us.

We are going to leave the record of this Committee hearing open

after we adjourn today. We are going to leave it open for several

days and allow people to send in their comments and send in follow-up thoughts, etc. All that will be made part of the record and

will be given to the Small Business Committee. What we are doing

here is really taking the Arkansas business community as it reflects the national business community, and taking these good

ideas back to Washington for people there.

You know, one thing I have noticed is that we find ourselves in

a sluggish economy. We all know that. For the last 3 years we have

had some ups and downs in this economy. It is an economy that

does not have much job creation. That is really one of the things

that you keep hearing people talk about is the lack of jobs that are

created.

I have not seen the statistics from the most recent month, but

I know in December of last year, December 2003, this national

economy, the entire economy when you net it all out, the national

economy created 1,000 new jobs. That is not a lot of new jobs. A

thousand new jobs nationwide is stagnant job creation for the economy.

We all know the statistics, there is no doubt that small businesses in this country and in this state actually create jobs. Last

week we had a hearing in Washington, we had the SBA Administrator there. We talked to him about a lot of different issues, and

now this is kind of a local follow-up. This is a time for you-all to

have input. Your input is really critical to the process. I am going

to say that I am concerned that the President’s fiscal year 2005

budget does not serve small business in Arkansas or the Nation

very well.

The Administration definitely claims that they support small

business and want to help small business, but I think there is a

time when there is rhetoric versus reality, and the Small Business

Administration’s budget is one of those instances where the reality

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is that actually there are a number of cuts in the SBA programs.

I think that is unfortunate. I oppose those.

In fact, last week one of the questions I asked one of the panelists was ‘‘At the risk of sounding like a political pollster, tell me,

is the SBA, in your view, going in the right direction or the wrong

direction?’’ All of them just lined up there, and they said, ‘‘It’s the

wrong direction,’’ and they listed out the reasons why. I would like

to hear from you on that.

One thing that has concerned me, we have had a number of

questions and inquiries and even complaints about this, is the fact

that the SBA has been consolidating some of its staff, and what

they have done is they’ve cut out certain people in local offices.

This is particularly true with liquidation efforts around the country. People that specialize in that in SBA offices, and they have

downsized, and they have moved those jobs to Herndon, Virginia,

which is in suburban Washington, D.C. I think that Arkansas,

small businesses have had a significant reduction in the access to

staff and expertise in the SBA office in Little Rock.

One of the problems with this so-called work force transformation is the way it was handled. Man, we have heard a number of complaints from the business community in Arkansas about

the way this was handled. I can speak for Senator Lincoln and

Congressman Snyder, and I know they have gotten it, too, because

I have talked to them about it. You-all may know the story, and

you may not, but a number of employees around the country, including some here in Arkansas, was basically forced out of the local

office by giving them, I think it was, 7 days to respond to an offer.

If they took the buyout, so to speak, they could not work for the

government for 5 years. It really was coercion.

I have gotten e-mails and letters from not just here in Arkansas

but from around the county I want to share with you later. I think

that certainly we are going to see an adverse impact on the SBA

in Arkansas, and the small business development centers will inevitably be impacted, I think, as well because of this budget.

Also, something that is a real concern is the 7(a) loan program.

You-all know a lot about that. You know a lot more about it than

most people do, but certainly the 7(a) loan program, the developments there are very troubling. The fact that they are increasing

fees, they want to go to a zero appropriation budget. There are just

a lot of things in that 7(a) program that is supposedly the flagship

of the SBA administration.

It is very troubling to see the direction that we seem to be going.

They are doing this in Washington all in the name of savings. You

know, they say they are saving the taxpayer dollars. Well, I just

don’t really agree with that, because I think that when you can

strengthen small businesses, that means they are hiring people,

those people are paying taxes, those people are off the unemployment rolls, those families are working, they are buying cars, they

are making mortgage payments, etc., and I just think that, you

know, there’s just a very positive ripple effect from the 7(a) program.

As well, I wanted to tell you that the microloan program has

been totally eliminated under this new budget. This is something

that is of special concern to me because Senator Bumpers actually

4

created that program, and he based it—you-all may know this—he

based it on a program that was going on in Pine Bluff called the

Good Faith Fund. You know, he took this local idea that was a

good idea and brought it to Washington and reconfigured it a little

bit, but, basically, introduced it to the SBA, and it has been a very

successful program.

There are thousands and thousands of stories around the country

about the positive impact the microloan program has had, but, unfortunately, in this budget, it is eliminated. We will talk more

about that in a minute. I just think, given all the success that the

SBA’s had and all these programs and given the stimulative nature

of these programs, these loans, these guarantees to our economy,

and also the positive ripple effects that really help our economy

and help our country, I just don’t think it is wise to be cutting

these programs at this time, especially given the state of the economy that we are in right now.

What I want to do, is I want to sort of get out of the way and

introduce our first panel. What I would like everybody to do, if possible, we have about 2 hours here this morning, and what I would

like to do, if possible, is have people, the panelists identify themselves and kind of say who they are and what they do. Also, try

to keep your opening comments to maybe 3 minutes, 5 minutes

maybe at the most.

I know some of you have submitted written testimony, which is

great, it is already part of the record. We are going to include all

that as part of the record. We want to try to keep our opening comments somewhat short and then have plenty of time for questions

and answers and discussion.

If I may, I would like to thank everybody again for being here

and go ahead and introduce the first panel. That’s going to be Joe

Watts, Keith Grimes, Janet Roderick, and Eduardo Gomez. Joe, if

you don’t mind going ahead and leading off for us, and, again, talk

3 to 5 minutes, and we’ll go from there.

STATEMENT OF JOE DAVID WATTS, FORMER LIQUIDATION

OFFICER, SMALL BUSINESS ADMINISTRATION

Mr. WATTS. Thank you.

Senator PRYOR. I am sorry, David, did I say Joe? I am sorry.

David Watts. I am sorry.

Mr. WATTS. Either one. It doesn’t make any difference.

Senator PRYOR. Okay.

Mr. WATTS. Well, I happen to be one of the lucky ones that was

forced into retirement by the SBA. I was a former Liquidation Loan

Officer.

Back on September 10, 2003, I received notification via Federal

Express by the SBA that I was engaged in the systematic review

of its programs and business processes. As a result, it became apparent, that some of the longstanding processes could be streamlined and made more efficient.

The SBA reviewed and concluded that the loan liquidation practices and oversight of this activity conducted by participating lenders is outdated, does not reflect the best interest of the lending industry, does not take full advantage of the current technology, and

5

costs too much of the per loan basis. I would like to see this being

backed up, and I would like to know what this technology is.

The SBA targeted most everyone nationwide that spent at least

25 percent of their time doing liquidation activities and reassigned

them to Herndon, Virginia, with the exception of Alaska, Maine,

North Carolina, a few other states. This was based on an administrative cost allocation survey that everyone did back in April 2003.

Not that this will make any difference, because I was the primary

liquidation loan officer, and that was my function, and, you know,

even though I didn’t do it properly, this was still my function, and

that’s exactly what I did.

In a small office such as ours, we all wear many different hats.

Of course, we all do different things on a daily basis. I don’t keep

time sheets on exactly what, however, I do fill in a lot of slots for

different people.

The SBA offered early outs to some employees back on September 30, 2003. My counterpart, Ray Chappa, which was the

other Liquidation Loan Officer, took the early out. He was coerced

into taking the early out, like you did mention. That left me as the

sole Liquidation Loan Officer, so I had to pick up his portfolios.

After Ray left, that left me with in excess of 275 loans in various

stages of liquidation.

The SBA requires us to purchase the loans, review the loans and

all the documentations, and try to get them ready for purchase.

Most of our lenders are small local lenders or small town lenders.

We don’t really have the major bank systems here in Arkansas. On

December 2, 2003, I received my notification that I had been selected for reassignment to Herndon, Virginia, and had until December 15th to either accept it or decline. On December 15, 2003, I did

accept the reassignment, but I did note on there that I did accept

this under extreme duress for fear of losing my job.

On January 6, 2004, I notified the SBA that I had changed my

mind and withdrew my acceptance and planned to retire. I wanted

to work until January 30th to help get things cleared out before I

left because the office was extremely shorthanded. The SBA would

not allow me to do this. They said that it was because I was supposed to report to Herndon, Virginia, on January 20, 2004, and

that I would be placed on inactive pay status effective January

20th. So, I retired on January 20th.

When I left, none of the files had been shipped, nor had they

been notified, that the files could be shipped to Herndon as of yet.

Since then, they had been notified the files could be shipped to

Herndon, but the files are still being held in limbo, and they’re

waiting to be shipped. Even if they could be shipped, it’s going to

be quite a while before they can be shipped to Herndon.

As of right now, it’s been over a year since the Arkansas district

office has had a District Director. Linda Nelson had been the acting

District Director and had done an extremely good job, but she has

also been transferred to Herndon. The Arkansas district office has

not had a Director for quite some time.

Senator PRYOR. Okay. Thank you. Like I said, I will follow up

with some questions on that in a few moments.

Keith.

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STATEMENT OF KEITH GRIMES, COMMERCIAL LOAN OFFICER,

PINE BLUFF NATIONAL BANK

Mr. GRIMES. I am Keith Grimes with Pine Bluff National Bank.

Senator, thank you for having me here today to comment on the

recent changes in the staffing of the SBA and resulting effects of

the SBA Lending Act, particularly on Pine Bluff National Bank.

Just to let you know, we were sort of caught unaware as to what

was happening here. Just to tell you how that came about, I telephoned the SBA Arkansas regional office in January to speak with

Mr. Watts on a loan we had in liquidation. I was informed at that

time that Mr. Watts and Ray Chappa, the other gentleman in the

Liquidation Department, had both retired and all present and future liquidations of SBA guaranteed loans would be processed

through the new facility at Herndon, Virginia. The liquidation files

in the possession of the SBA Arkansas regional office would be

transferred to the National Liquidation Guaranty Purchase Center,

and I will be informed at a later date by the staff at the center

when they’re able to accept my forthcoming purchase request on

this particular loan.

I would like to comment just real quickly and commend Mr.

Watts and Mr. Chappa. I see Jim Coffee and the rest of the SBA

staff here at the Arkansas district office, how well they’ve helped

us here, and I think that particularly in Jefferson County, it’s

helped our economy there.

Going on, I believe a delay in the processing on these liquidation

loans will affect us in several ways. The first three, particularly affect Pine Bluff National Bank. We have interest that will have to

be written off and we’ll have to treat them as nonperforming assets. Our reinvestment opportunities will be limited through the

guarantee not being fulfilled in a timely manner. Our delinquency

rates will be driven higher.

The fourth thing, I believe is not only important to Pine Bluff

National Bank and other lenders, but to the economy as a whole.

Here in Jefferson County and Pine Bluff National Bank, I believe

other lenders would be more hesitant to underwrite new SBA guarantee loan requests. This greatly affects us there.

Stating the obvious is Pine Bluff National’s opinion that the interest of all parties affected would be better served by expediting

the staffing of the National Liquidation Guaranty Purchase Center.

I would like to thank you again for letting us voice our concerns

here today.

Senator PRYOR. Thank you.

Janet.

STATEMENT OF JANET RODERICK, STATE DIRECTOR,

ARKANSAS SMALL BUSINESS DEVELOPMENT CENTER

Ms. RODERICK. Thank you. Senator Pryor, and representatives of

the Small Business and Entrepreneurship Committee, I’m Janet

Roderick, State Director for the Arkansas Small Business Development Center.

Senator Pryor, on behalf of the Arkansas SBDC, I’d like to thank

you and the Committee for inviting me to testify at this important

hearing. It’s an honor for me to represent the University of Arkansas at Little Rock College of Business and welcome you to this faVerDate 03-FEB-2003 12:42 Aug 19, 2004 Jkt 094955 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 D:\SBA\94955.TXT SSC2 PsN: SSC2
7

cility built with funding from Donald W. Reynolds, an entrepreneur, and certainly he started out as a small business person.

The Arkansas SBDC is a premier provider of small business assistance in Arkansas. As you know, the SBDC program is funded

by the U.S. Small Business Administration, the University of Arkansas at Little Rock, and six other University partners. Those

University partners are Henderson State University in

Arkadelphia, University of Arkansas at Fayetteville, University of

Arkansas at Fort Smith, Arkansas State University, Southern Arkansas University and University of Arkansas at Monticello.

The Arkansas SBDC program has been in existence since 1979

providing management and technical assistance to small business.

The program continues to contribute significantly to the economic

impact in the state through the small businesses we serve each

year. We are one of the few economic development programs that

measure our impact. For example, in the past 5 years, our Arkansas small business clients have created over 4,000 new jobs. These

small businesses have obtained over $200 million in funding for

their businesses.

Senator Pryor, you can be very proud of the Arkansas SBDC.

Each year, our economic impact, as measured by an outside consultant, has one of the most significant returns on investment of

the taxpayer dollars in the nation. For every one dollar in Federal

funds spent in the Arkansas SBDC, SBDC clients generated $4.86

in new tax returns. That’s a good investment in any economy, any

time I can put $1 in and get over $4 back in one years period of

time, I believe is a great investment.

The SBA funding for the SBDC program nationally has remained

at a level funding since 2000. Prior to that, the last SBA increase

was in 1994. In 2000, the funding formula was adjusted, and approximately half the states received a decrease. We actually got a

slight increase, $6,000. Not near the rate of inflation.

In order for the ASBDC to continue to provide services to the

small business community, we have relied heavily on reorganizing,

working smarter, using technology to deliver our services, and, of

course, an increase in support and funding from our universities

and banking partners.

Two examples of how the Arkansas SBDC has been working

smarter are, first, the SBDC is one of the early adapters of the

Internet and website utilization. With the assistance of Aristotle,

a small business here in Little Rock, the SBDC recently redesigned

our website to provide information so the small business would use

it. In 2003, we had over 300,000 visitors. The most popular

downloads were the feasibility workbooks, with nearly 26,000

downloads. Of course, ‘‘New Venture Guides’’ and ‘‘How to Start

Your Business.’’

We also send out e-news bulletins, which are sent out electronically to people who have requested to be subscribers. One provides

basic business information, government regulation updates, and details on upcoming training events. The other is a technology related

e-news letter providing technology news, grant opportunities, and

SBIR SBTR information. We continue to work smarter, as I mentioned, but we’ve also had to reorganize.

8

This is a map of our service areas. You can see that one service

area has over 12,000 square miles to serve. At one time, we had

twelve offices; now we’ve gone down to seven offices with our reorganization. At that same time, the universities and banks have

come to the plate and helped us with additional funding. Our funding from the SBA has increased 4.1 percent in the last 10 years.

Just the basic rate of inflation certainly has increased more than

that.

Senator Pryor, our program is authorized nationally for $125 million. Yet, it continues to be appropriated at $88 million, which is

level funding for the Arkansas SBDC. Arkansas universities and

banks recognize the importance of small business assistance to the

state. Where is the SBA? Thank you.

Senator PRYOR. Thank you.

Eduardo.

STATEMENT OF EDUARDO GOMEZ, OWNER, ANDINA CAFE ́ &

COFFEE ROASTERY, LLC

Mr. GOMEZ. Good morning. My name is Eduardo Gomez. I am a

small business owner, and I guess my comments are probably most

relevant to the microloan program.

Senator Pryor, representatives, ladies and gentlemen, good morning. I thank you for soliciting my comments. I’m proud to live in

a democratic country governed by the rule of law where the government represents the will of the people and listens to them. I also

want to thank UALR and the Small Business Development Center

for hosting this meeting. I have had the opportunity to use their

consulting services locally and have found them to be both available, professional, reliable and serious.

I was born in Colombia, South America. I am a naturalized U.S.

citizen. I have a Bachelor’s degree in Economics and a Master’s degree in Social Work from the University of Wisconsin, Milwaukee.

My wife and I recently celebrated 33 years of marriage. We have

two grown children who are both college educated, married, and

most importantly are good moral contributing citizens. We have

two grandchildren. I came to Arkansas in 1983 as an International

Marketing and Sales Manager with a multi-national corporation

headquartered in Arkansas.

In the summer of 1988, due to corporate reorganization, my wife

and I were faced with the decision of uprooting our then teenage

children or staying in Arkansas. We chose the latter. In order to

support our family, I started an export management company

which exported U.S. manufactured products abroad. These products were commercial water systems. Our main market was in the

Middle East. In August, 1990, when Iraq invaded Kuwait during

the first Gulf War, I watched the undoing of our business with the

rest of the world on CNN.

Although I had to find another job, the entrepreneurial spirit

drove me to start another company some years later. This was

about 7 years ago. This new business concept was a coffee shop and

retail coffee roastery located in the river market district, which was

then empty, and which the city wanted to use as a spark for the

redevelopment of downtown Little Rock. A couple of years later, we

9

had to open a separate roasting operation in a different location to

develop the wholesale side of our business, our third company.

When I was going to start my coffee shop, I needed start-up capital. I spoke to the SBA at that time, and was told that my new

company lacked a track record to qualify for an SBA loan. At this

time I wanted to borrow about $50,000. Although that did not deter

me from my final objective, it did make the road quite a bit more

difficult. Most entrepreneurs lack the capital to start a business.

Many times the capital is not very much because the entrepreneur

is willing to invest sweat equity, which usually far exceeds the

amount of the small loan and which is probably more important to

the long-term success of the business than any other single factor.

Based on my own personal experience, the entrepreneur’s business acumen, his personal tenacity, discipline and sacrifice, are the

most important predictors of success. The second predictor is probably knowledge of the particular business. The third is probably

knowledge of the business administration principles in general.

None of these criteria were used to determine whether or not I

could qualify for this small loan. Instead, the criteria used were

based on conventional thinking of what a lender considers the lending parameters for minimizing the risk with an ongoing business.

Let’s face it, start-up capital is risk capital, but it can also be a

doorway into the land of opportunity for those who are willing to

make the effort. The question is how to invest in those who have

the most potential for success. Someone said, ‘‘we become what we

measure’’, and then traditional lenders are not set up to measure

these types of parameters. Certain subcultures within the United

States have actually recognized this and provide start-up capital

through a peer managed system where business peers and mentors, not bankers, help each other develop new business opportunities. The assurance of payment is based on the personal commitment of the business person to his or her peers and on their own

support and assistance to the business person. I have often thought

that this could be somehow replicated in the community at large.

Small business start-up loans can be key to get the small entrepreneur started. They are a way in which a society can prime the

productive capacity of some its entrepreneurial citizens. Maybe

rather than eliminating them, we should consider how to make

them more effective. Maybe if they were managed differently, they

could be a way for society to invest rather than spend in its future.

Thank you again for giving me the opportunity to make these comments.

Senator PRYOR. Thank you Eduardo.

Now, let me start by asking some questions. If it is okay, David,

I thought I would start with you.

The SBA has said to the Committee in Washington, centralization has—the pilot programs, that is, have reduced liquidation time

of loans to 49 days compared to an average somewhere between

252 days to 987 days. Now, you worked in liquidation loans every

day, and that was one of your day-to-day responsibilities there. Do

those numbers from the SBA sound right?

Mr. WATTS. No.

Senator PRYOR. Now tell me why not.

10

Mr. WATTS. I don’t even know where they get those numbers

from. There is no way, Senator, that you can have those kind of

numbers. Once you put a loan into the liquidation status, once a

lender tells you that this loan is going to liquidation status, if properly done, as you put the loan in liquidation status, then you send

the lender a checklist of items that are going to be required by the

SBA to purchase the loan. Then the lender puts all the information

together, and sends it to you.

Once you receive that, you have to do a complete review of it,

and you hope that the lender has sent you everything that you

have requested. Which nine times out of ten is not going to be a

complete package. Then you have to go back to the lender and ask

for additional information. You’re sitting there waiting for additional information to get back to you, and the clock is still ticking.

Once you have received the complete packet, then you have to go

through the purchase package, you have to get legal, you have to

run it through legal, get their approval on it, then you have to go

through and get approval authority on it. All that takes approximately 2 weeks. Then you can do the actual purchase. The actual

purchase process can be done in a day or so.

It’s a long drawn out process. It’s just a matter of how much time

it takes the lender to get you all the necessary paperwork.

Senator PRYOR. Yes. In other words, each situation is different.

Mr. WATTS. Each situation is different.

Senator PRYOR. Yes. Do you know what your average was in the

Little Rock office?

Mr. WATTS. I would say the average was roughly about 150 days.

Senator PRYOR. Let me also ask this. The SBA also in this Committee hearing last week said the lenders do most of the liquidation

already and that the employees were mostly obsolete and that the

service to lenders would improve and service to small businesses

would not decrease with this consolidation. What is your view of

that?

Mr. WATTS. Well, the lenders are required to do the liquidation.

The SBA has to review all the documents the lender submits, and

do the purchase. But the lender submits all the liquidation information that the SBA requires.

Senator PRYOR. Yes.

Mr. WATTS. The SBA people are not obsolete.

Senator PRYOR. Let me, if I can, jump to Keith on a related question. First, if I may, could you characterize your bank, for the

record, as small, large, urban, rural?

Mr. GRIMES. It’s a small community bank.

Senator PRYOR. Okay. Tell me in your view, if you have heard

Mr. Watts’ answer there, if the quality of service and all would improve and the workload would improve or increase or decrease for

your bank if you are expected to do all the consolidation. Could I

hear your comments on that?

Mr. GRIMES. Yes, sir. First of all——

Senator PRYOR. I mean liquidation. I’m sorry.

Mr. GRIMES. Yes, sir. Sure. I would like to say I completely agree

with what Mr. Watts just said in response to your answer. Second

of all, answering your question, I don’t see how it would be any

11

more efficient to centralize that out of state as far as liquidation

is concerned.

We had a staff here in Arkansas that was familiar with the area,

with the lenders, with the process, and I believe that each region

would be different throughout the country as to how you have to

liquidate collateral sometimes in these loans, and sometimes you

may get 10 cents on the dollar in Jefferson County, where you may

get 50 cents on the dollar around Dallas.

How does somebody in Herndon that knows nothing about Arkansas and the economy going to know how to work with that? I

don’t believe it would be—I believe at least on our end, the banks

with us liquidating, completing this, it would be much less efficient

for us to do that.

Senator PRYOR. Do you have the staff to do that right now.

Mr. GRIMES. It’s me.

Senator PRYOR. It is you.

Mr. GRIMES. Yes.

Senator PRYOR. Also, have you—from your testimony, I was not

quite sure, but have you had any contact with the Herndon office

yet?

Mr. GRIMES. No, sir. I went ahead and let them know that my

package would be coming some time soon on this particular loan,

that I have in liquidation. Other than that, I haven’t heard anything back—well, I take that back. When I e-mailed the Herndon

office, they acknowledged that they had received my e-mail and

that they would let me know when they were ready for me to send

in the purchase request.

Senator PRYOR. All right. Let me ask you if you know, and you

may not, about the Herndon office for the SBA, are they going to

assign certain people to Arkansas, and will you be talking to the

same people all the time?

Mr. GRIMES. That, I don’t know. I know Linda Nelson is there,

I believe, but I don’t know whether she was going to be assigned

to Arkansas, and whether she would be familiar with Arkansas. As

far as a particular person would be over a particular region, I do

not know. They haven’t communicated that to me.

Senator PRYOR. Have they communicated anything to you about

the Herndon operation?

Mr. GRIMES. No, sir. Nothing whatsoever.

Senator PRYOR. All right. If I may, Janet, I would like to jump

to you just for a second here, a few questions.

That is, I know that under this proposed SBA budget, the President’s proposed SBA budget, they are cutting funding for SBDCs

by a million dollars. They are cutting women’s business center

funding by 500,000, the 7(j) technical assistance also has a cut.

There is level funding for SCORE and veteran’s outreach, which

just based on inflation, could be considered a cut, and they also are

reducing budgets for staffing and resources at the district offices.

Saying all this, then at the same time, the SBA has come out

and they’ve said:

‘‘The SBA believes it can provide a full range of technical assistance more effectively by using its core national delivery programs. The agency will work

through its primary infrastructure of women’s business centers, veteran’s outreach, 7(j) technical assistance, SCORE chapters, and small business development centers and district offices to meet the needs of all small businesses.’’

12

I was wondering if you have any comments on, again, the direction the SBA is heading under this White House proposed budget,

and if you have any comments on how you think that will actually

work here in Arkansas.

Ms. RODERICK. Yes, sir, I certainly do have opinion on that. The

SBA has on a national basis, been trying to get everybody to, as

far as the technical assistance program, to work harder with less

money, and deliver more numbers, not necessarily impact.

One of the goals seems to be to say if you shook hands with

someone, then you had an impact on their small business. Here in

Arkansas, for example, our SBDC spends an average of about 11

hours with the clients because that’s where we believe we can have

some impact. We can help them put their loan package together,

we can help them access other capital. If they want to expand, we

can help identify those markets. If you’re asking people to work

faster and do more numbers, you’re certainly not going to have the

impact.

Also, about the veterans’ program, I have a particular soft spot

in my heart for that program. It’s not here in Arkansas. It’s located

in another state. We get referrals occasionally out of Texas. The referrals are round about, and I resent that. I don’t believe that our

veterans deserve to get a phone number to call a phone number to

call a phone number to finally call somebody else to get a contact

to provide assistance for them.

The veterans’ program, because it’s underfunded, has simply not

been effective for our veterans here in Arkansas. It’s just given

them more numbers to call and less response.

Senator PRYOR. One concern I have with the consolidation and

the cutting of resources is it is almost as if maybe SBA is taking

a one-size-fits-all approach. They think maybe they can consolidate

it in different offices, and whatever, and take employees out of the

local community to try to do that. My experience is that businesses

are very diverse, their needs are very diverse, what they are doing

is very diverse, and it seems that we may be losing some of that,

for lack of a better term, kind of finesse in helping businesses if

we just consolidate.

You mentioned that you spend about 11 hours per business, or

something like that.

Ms. RODERICK. Yes.

Senator PRYOR. That’s great. I think that is a lot of time. Do you

have any comments on this one-size-fits-all concept?

Ms. RODERICK. Well, you’re exactly right. The SBA central office

has been trying to give the impression that one size does fit all.

Certainly, as you listen to the bankers’ testimony around here and

you listen to the small businesses who are going to testify, you’ll

see the wide differences of clients we serve and the small businesses that we serve throughout the state of Arkansas. No, one size

does not fit all, and you’re absolutely right in your perspective of

what you envision.

I would like to make one statement, too. It may sound like I’m

bashing the SBA, and I certainly don’t mean to do that. We have

had the best district office to work with here in Arkansas for years,

and we work in partnership with them. We go out and provide

lender training, and we provide opportunities for businesses

13

throughout rural Arkansas and access the expertise that’s available

at our district office.

With the drastic cutbacks that they’ve had, it’s becoming more

and more difficult for them to get out and work with our individual

bankers throughout the state and to work in partnership with us.

We have an extremely high success rate in working with our businesses to obtain capital. That’s due in great deal to the partnership

we have with this district office.

Senator PRYOR. Good. One last thing, you had a little statistic in

your comments that you said for every dollar spent there is—one

dollar equals four dollars. Tell me how that works again.

Ms. RODERICK. Okay. We have an economic impact survey that’s

conducted. We ask that to be conducted every year for our Arkansas businesses. We report how much money we put into the consulting, how much money goes into training, what our total budget

is, as some of the measures for the economic impact. One of the

measures is how many Federal dollars go into our program. Then

the private consultant from Mississippi surveys our clients since

it’s self-reported. They report how much they paid in taxes.

For example, in the year 2001, and how much did they pay in

taxes in the year 2003. They indicate whether the SBDC helped

them or not. If they believe that we did not help them, we don’t

count their statistics. 95 percent to 98 percent always say we’ve

been extremely helpful. We then measure what their taxes were

one year and what their taxes were the next year, how those have

increased, and then how much we spend in Federal money in this

program and how much they’ve paid in additional taxes.

Senator PRYOR. That is good. Eduardo, I do have a question for

you, and that is, how many employees do you currently have?

Mr. GOMEZ. I currently have about seven employees.

Senator PRYOR. You know, it seems to me that what you were

saying earlier about risk and the need for capital in small business,

even your experience, underscores the need in some cases to have

the government there to stand behind some of these loans, too, because some of these loans are risky. Using the proper, you know,

financial criteria, a lot of those loans can be made if the government’s standing behind those loans.

I know that you have had a big impact on the River Market, and

you were one of the first tenants down there, weren’t you?

Mr. GOMEZ. I was the first.

Senator PRYOR. Yes. I remember when you were down there kind

of going solo, and it was a construction zone down there. I remember that well.

I just want to thank the panel for being here. We are actually

going to change panels. We are going to try to move along, and I

am going to take about a 3 or 4 minute break just to let you-all

get set up and get situated.

Mr. WATTS. Senator Pryor.

Senator PRYOR. Yes.

Mr. WATTS. Could I have about 30 more seconds.

Senator PRYOR. Sure. Go ahead.

Mr. WATTS. I’ve got one other comment I would like to say.

My largest concern, and this is a real major concern, is what is

going to happen to the Arkansas district office of the SBA? Also the

14

small business community and the SBA lenders. As it stands right

now, the Arkansas district office has 13 employees that are currently left. Nine in a professional position, and four in a clerical position. One of those professional positions is going to retire in April

or May of this year, which is going to leave 12 SBA employees.

Rumor has it that the loan division is going to be the next division

that’s going to be getting their notices, and that’s going to be coming up real soon.

They are going to try to set up two processing centers; there’s

going to be one in California and one in Kentucky. If that happens,

you’re going to lose four more professional positions. That’s going

to leave eight people left in the Arkansas district office.

Now, do you honestly and truly think that they’re going to keep

an Arkansas district office? I mean, can you honestly sit there and

tell me that they’re going to keep an Arkansas district office, per

se?

Our office worked hard over the number of years that I worked

for the SBA to gain the trust and admiration of the lending community here in this state. We were able to provide close personal

service to these lenders. I must remind you, this is Arkansas; this

is not New York or Washington. It’s my opinion that this is only

going to alienate the local and small lenders from the SBA.

That’s all I’ve got to say.

Senator PRYOR. Well, thank you. I think I share those views with

you. That is one of the reasons we are here. That is one of the reasons we wanted you here, because you have got that experience out

in the trenches. We appreciate your time and your commitment

that you gave to not just this country, but certainly this state and

all of our communities.

Let’s switch the panels. Thank you for your time.

[Recess.]

Senator PRYOR. Okay. Let’s move forward. If I may introduce

this next panel, we have the same type set up. If we could do

maybe 3 to 5 minutes, and then I will answer any questions. I

guess, Daniel, you are going to go first. Is that right? Is that okay

with you, Daniel, if you go first?

Mr. BLAIR. That’s fine.

Senator PRYOR. Why don’t you go first, introduce yourself, talk

a little bit about what you do, give your comments, and then let’s

just work our way around the room.

STATEMENT OF DANIEL BLAIR, GENERAL MANAGER,

DANIEL UTILITY CONSTRUCTION, LITTLE ROCK, ARKANSAS

Mr. BLAIR. I’m Daniel Blair. I’m the General Manager for Daniel

Utility Construction here in Little Rock. It’s a second generation

family business. My parents started contracting in 1964. My comments are relative to the 7(a) program.

Some brief history is our industry and company experienced a lot

of growth in the 1990s. Then following the bubble burst in 1999,

there’s been 3 years of pretty serious decline, following generally to

our general economy. We were hurt pretty bad. The industry was

hurt pretty bad. In 2 of those 3 years, we were fine. Had a great

year, in fact—in 2000, 2001, 2002. Last year was a challenge. We

laid off about 50 employees, and really just waited for the economy

15

to start improving. Around the fourth quarter of last year, we

started seeing that, and as the economy was improving, so did our

outlooks for 2004.

That was when I actually approached Mr. Wall’s company about

helping us to consolidate some debt and help our cash flow problems. As you move from a period not doing extraordinarily well to

growth opportunity, cash is going to be a problem. So we hustled

around.

I was informed that the program was going to change after the

first of the year. We spent some time right between Christmas and

New Years’s trying to get this in place, and everything seemed to

look good. As of the middle of January, we were informed that no

fundings were going to happen. We didn’t know what the deal was.

The people that were helping us didn’t know what the deal was.

Then they came back and said, ‘‘Okay, we have a lower debt maximum that we can deal with.’’ Basically, the loan as we applied for

it, was denied.

They did offer us a different package that wasn’t acceptable to

us. As it stands for me right now, we really expect 2004 to be a

record year for us in terms of growth and receipts and income. I

expect that I’ll place about 50 new employees.

Senator PRYOR. Fifty?

Mr. BLAIR. Yes. That’s about what I have now. We really expect

to see a tremendous year. It’s going to be a real challenge for us

from a cash flow standpoint to be able to achieve that without this

help.

The rough numbers for us were decreasing our cash flow needs from around $40,000 to about $10,000, and stretching the loan out

over a longer period of time, but it was just really going to give us

a break near term.

I suspect that because the economy is improving, there may be

perhaps thousands of people like me, tens of thousands, around the

country that are in similar patterns. Ready to take off, and, yet,

are challenged with some of the economic issues that we’ve had in

the last few years.

Senator PRYOR. Thank you.

Mr. Walls.

STATEMENT OF C. SAM WALLS, CHIEF OPERATING OFFICER,

ARKANSAS CAPITAL CORPORATION

Mr. WALLS. Thank you, Senator, and thanks for the opportunity

to talk about something that I believe has enormous importance to

the Nation. It’s not just Arkansas, but it’s across the Nation.

I am the Chief Operating Officer of Arkansas Capital Corporation. It is a private non-profit business development corporation

that on occasion is the largest SBA 7(a) lender in the state. Like

the U.S. Small Business Administration, Arkansas Capital Corporation was formed during the 1950’s to assist small businesses

with long-term financing options that were going unmet in traditional capital markets. Also, like the SBA, our parallel missions

continue to this day.

In Arkansas, as in numerous other states, small- and mediumsized businesses had the highest potential for growth of any sector

of our economy. Although improving, the current economic climate

16

continues to be a very difficult one for small businesses to successfully navigate, it is in that light that Arkansas small business can

ill afford an underfunded small business loan guarantee program.

Let there be no misunderstanding. Arkansas Capital Corporation

fully supports the SBA’s mission and understands the agency’s importance and impact on Arkansas’ business community. We cannot

afford another lending holiday or further cuts to this vital program.

It is imperative that Congress and the current administration

agree to fully fund this economic development stimulus program.

In order for the SBA to fulfill its mission, it must have partnerships. It must have the SBDC, it must have lenders, and it must

have borrowers who act as good partners with the agency. There

are certain rules about partnerships, and one of those rules is good

partners do not do things that harm their partners. It is extremely

important that we understand where the agency is headed, what

its long-term plans are, because lenders are businesses, and our

borrowers are, obviously, businesses, and businesses must plan in

order to know how to conduct their affairs in the future. Much of

the disarray that the agency exhibits today is very difficult for all

of us to continue to count on our relationship with it to benefit the

small business community.

Senator PRYOR. Thank you.

Mr. WALLS. Thank you.

Senator PRYOR. Mr. Knight.

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

BANK

Mr. KNIGHT. Thank you, Senator Pryor. I appreciate the opportunity to meet with you today and speak to you on current and proposed changes to the SBA.

Let me begin by introducing my bank and myself. My name is

Philip Knight. I’m the Executive Vice President over small business

lending for Arkansas National Bank. We’re a locally owned community bank in Bentonville, Arkansas. We consist of nine branches at

nearly $500 million in assets, and we serve Benton and Washington Counties primarily.

For the past 2 years, ANB has been the leading SBA lender in

Northwest Arkansas, and in fiscal year 2003, ANB made 22 loans

for $7.8 million. Thus far in the first 4 months of 2004, we’ve made

nine loans for $2.3 million. This made ANB the fourth in loan volume and third in dollars in 2003, and fourth in loan volume and

fifth in dollars currently throughout the state of Arkansas.

At ANB, we’re dedicated to helping small business. The recent

actions taken by the SBA have given us reason for great concern.

The following will summarize some of these concerns.

The stability of the SBA 7(a) loan program, we felt like, is paramount. Caps and suspensions of lending are detrimental to the

overall program goals and the credibility of economic development

and stimulus. They cause lending partners and small business constituents to lose confidence in the SBA and its overall viability.

Will it be there when we need it, is the question. If we can’t count

on it, why try to keep up to date with the training required to be

SBA savvy and why market it to our customers.

17

Personnel reassignments have caused delays in the liquidation

process, without any indication from the SBA as to when case resolution will resume. There’s been no communication from the SBA

since the local Liquidation Officer, who we now know, Mr. Watts,

was forced to retire, and loan files were supposedly forwarded to

a central office right in the middle of the process. The word’s out

that the SBA no longer wants to discuss the liquidation cases, and

it’s discouraging their personnel from talking to us on the phone.

We’re to be directed to a website for assistance.

Not only is this not very good customer service, it creates an adversarial relationship and will ultimately cause a lack of confidence

in the guarantee process and will no doubt cause a lender to think

twice about making future SBA loans. Again, the result will be less

capital available for Arkansas small business.

SBA transformation plans, apparently, include moving all loan

processing functions from our local district offices to a central office

or expanding the 7(a) program into an SB express with reduced

guarantees for the lenders. Neither option is good for small business, because it will most likely result in fewer loans being made,

less capital being available, again, for small business.

The SBA has not communicated with its lending partners, especially the local community banks. I read the testimony of Mr.

Bredsoe that said that they had talked to banks. I would suspect

if they did, it was not the small community banks. We have to rely

on third parties to keep us informed on what constantly is changing in the SBA. The SBA did not seek our input on reduced guarantees. Most small banks are not willing to accept that much risk

on these types of loans.

The Arkansas district office loan personnel provide daily assistance, both lenders and applicants. They’re available to answer any

technical questions, as well as provide advice as needed, often conferring with us on eligibility issues, on structuring of loans, and

other specifics, and on particular complex loan issues. Not everything fits in a black and white box. They conduct training for lenders and informational seminars for clients. Without their help,

many lenders would be unwilling to participate in SBA lending and

will certainly be unwilling to accept the higher risk of flying solo

with a reduced guarantee.

SBA district personnel talk to and meet with small business

owners and potential owners every day. Without them, these people

would be left with no resources available locally and would be directed to a website. Again, not very good customer service. Nothing

can substitute for a friendly face when you’re looking for help.

Senator what would your constituents think if they had no way

to contact you for assistance other than a website? Not everyone

uses the Internet. While there are a multitude of other issues surrounding the current proposed changes to the SBA including the

present lowering of the maximum loan size to 750,000 and denying

the use of piggyback loans, I do appreciate the opportunity to address these changes that I believe will have a definite negative impact on the small business community in Arkansas and those lenders who try to serve it.

Senator PRYOR. Thank you.

Kevin.

18

STATEMENT OF KEVIN HESTER, EXECUTIVE VICE PRESIDENT,

FIRST STATE BANK, CONWAY, ARKANSAS AND DIRECTOR,

NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEE

LENDERS

Mr. HESTER. My name is Kevin Hester. I’m with First State

Bank in Conway, Arkansas, and I would like to thank you for the

opportunity to testify today.

We’ve been involved in the SBA program our full 5 years we’ve

been open, and we have achieved preferred lender status with the

SBA. I’m also a Director of the National Association of Government

Guarantee Lenders. They are the trade association for the participants of the SBA 7(a) program, and our members account for approximately 80 percent of the 7(a) loans made annually. Commonly

called the SBA’s flagship program, the 7(a) program has proved to

be an excellent public/private sector partnership.

Today the 7(a) loan program is operating at less than full capacity as a result of an inadequate 2004 budget request. Due to a

funding shortfall, the SBA closed its 7(a) program for a week earlier this year. When the SBA reopened the program, they imposed

a $750,000 cap and other lending restrictions. Sudden program

stoppages and administrative changes make it difficult for both

lenders and borrowers to use the 7(a) program.

Since the 7(a) program is such an important source of long-term

capital for small business, we ask for the Committee’s assistance

to see that the 7(a) program gets appropriately funded and managed to avoid the program disruption experienced this year.

On the heels of the inadequate 7(a) program budget request for

fiscal year 2004, the administration has proposed raising 7(a) program fees even more for 2005. The President’s 2005 budget calls

for a zero subsidy rate and no appropriation. This proposal is a

non-starter. It is disturbing that the program would face further

fee increases, given that the Office of Management and Budget has

documented the fact that 7(a) lenders and borrowers have already

returned over $1.2 billion in excess fees to the treasury.

It does not seem to matter that the administration had a budget

bust this year, requesting too little program authority resulting in

loan caps and program restrictions that have harmed many small

businesses. It appears that in addition to many borrowers being

told ‘‘Too bad’’ this year, next year’s borrowers will be told ‘‘More

fees.’’

With the 2005 estimate of demand of $12.5 billion, the administration has finally recognized that small business loan demand has

grown, albeit a year too late. We question, however, the need to

limit the program. If the administration wants to support the 7(a)

loan program and its mission to provide long term capital to small

business, why limit the program to anything less than the authorization limit of $16 billion, as proposed in the pending reauthorization bill?

Our small business customers need a reliable source of long term

capital, not rhetoric about how important they are. Small businesses need to be treated fairly, and they need the administration

and Congress to support the SBA and its 7(a) loan program. Thank

you.

Senator PRYOR. Thank you.

19

Mr. Hinton.

STATEMENT OF SAMUEL W. HINTON, SMALL BUSINESS

EXECUTIVE, METROPOLITAN NATIONAL BANK, LITTLE

ROCK, ARKANSAS

Mr. HINTON. Senator, I want to thank you for holding this hearing in Little Rock today, and thank you for allowing me to participate. My name is Sam Hinton. I’m the Small Business Executive

for Metropolitan National Bank here in Little Rock.

I want to take this opportunity to recognize a very special guest

that’s with us today, Mr. Tony Wilkinson, the head of NAGGL, the

National Association of Government Guarantee Lenders, in Stillwater, Oklahoma. I personally appreciate the fact that he came to

Little Rock to support small business in Arkansas today.

Based on my understanding of the scope and nature of this hearing, I will briefly address four different areas. First being the Little

Rock SBA district office. We work very, very closely with the SBA

district office. We ask the question, ‘‘What do they do?’’ ‘‘Are they

necessary?’’ ‘‘Do we need them here?’’ Absolutely. They provide so

much assistance and direction of a personal nature. They assist in

packaging, analyzing, and approving 7(a) loans.

As a lot of us who have been in this game for a long time know

a little bit more about it, but if we expect other banks in this state

to participate in SBA lending, it is critical that the SBA district office continue at this point.

They provide information and educational assistance to small

business. Information is the key to success. Most businesses fail

due to lack of management ability. We have got to have additional

training and support to help small business succeed. We’ll find access to capital if we’ve got the information and the management

ability to make them successful. That’s what the SBA helps with.

They support and sponsor two very important groups, the Service

Corps of Retired Executives, and the Small Business Development

Center.

I’ve had the opportunity to work with small business development centers all over the Nation, and I promise you, we have one

of the best right here in Little Rock, Arkansas. We need to continue that sponsorship and that support. They help small businesses be successful. They provide information and knowledge on

a local level to a lot of different organizations and they sit on a lot

of different committees. We need a human being there, not a computer site. We need an SBA representative to help in what we’re

trying to do in Arkansas. They’re a key point of contact for all

small business.

I, personally, at Metropolitan National Bank strongly support the

continuation of the SBA district office here in Little Rock.

The second point, 7(a) loan program. We are very heavily involved in the 7(a) loan program. Metropolitan National Bank did

not have a specific small business department until I came on

board. We are now developing that, and there’s currently nine

members of our team. A large part of our focus is SBA lending.

I had a customer that had been approved for a loan that had

some cost overruns. I would normally have the authority to go into

a little bit of cost overrun with a percentage increase. I was not

20

able to do so in this case. He could not order his equipment, and

had to slow down his opening. We had another client that was approved for a $990,000 deal. Cutbacks brought us back to $750,000. The deal just wouldn’t work

at that level. Don’t forget the fact we’re actually hurting people out

there. We’re hurting business owners. I encourage that we fund the

SBA program. We need to get it back to the full maximums, we

need to allow for piggyback loans to allow banks to do creative financing on some of this and let us see what we could have.

The SBA express program, in my opinion, is not necessarily the

answer. I think we need the funding to make the program work.

I’m all for efficiencies and synergies, and economies of scale, and

we’ll participate at any level. The smaller banks in Arkansas don’t

have the knowledge and expertise to participate at an express

level. We strongly encourage that you keep 7(a) as a viable, simplified, and affordable option for the borrowers in Arkansas.

As it relates to the microloan program, that’s a tough program.

It’s one that’s hard to administer. I think the issues with microlending is the administration of it. If we come up with some kind

of simplified scoring mechanism, and treat it almost like a credit

card service that can be fast and furious and down and dirty, that

could be something we can do.

Overall, I don’t believe that the microloan program would have

that much of an impact. If we lose the SBA and the 7(a) program,

we’re in much greater hot water.

Finally, assisting the SBA and the Arkansas business community. We need to continue to create efficiencies and economies of

scale as appropriate, but we need the SBA here. Let’s don’t forget

the human factor. It is very important to utilize high tech things

as much as possible, but keep the human factor here.

We, at Metropolitan, are willing to assist in any way. We’re willing to carry our fair share. Besides the University and the SBA,

we are the largest supporter of the SBDC, because we believe in

them. They’re doing a great job, and you’ve heard that already. We

will continue to support in any way and help and do our part. I

just encourage you to help us help them. Thank you, sir.

Senator PRYOR. Thank you for being here.

Mr. Wilson.

STATEMENT OF ODIES WILSON, III, INTERGOVERNMENTAL

RELATIONS MANAGER, CITY OF LITTLE ROCK, ARKANSAS

Mr. WILSON. Senator Pryor, and other distinguished members of

the panel, my name is Odies Wilson, and I’m the Intergovernmental Relations Manager for the city of Little Rock. As part of

that stead, I manage the city’s small business development activity

for small minority-owned and women-owned businesses. I also have

the distinct pleasure to serve as the Chairman of the Minority

Business Development Roundtable, which is a demonstration

project funded by the U.S. Department of Commerce for the development of small minority businesses.

Most of the comments that I would make in support have been

made by several members and the guests. I think I work very well

with Sam, I work very well with Arkansas Small Business Development Centers, but the basic comment I would make is that the supVerDate 03-FEB-2003 12:42 Aug 19, 2004 Jkt 094955 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 D:\SBA\94955.TXT SSC2 PsN: SSC2
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port and survival of small and minority businesses throughout this

state and this country are dependent upon the continued support

of the small business development administration projects and the

minority business development administration projects that we

work with so consistently.

I would say that one of my real pleasures in the last couple of

years, for instance, we’ve been working with Arkansas Small Business Development Centers on the entrepreneurial package. One of

the things that we really focus on is that one of the real challenges

in business, and particularly in Arkansas, is the African American

businesses, the business participation rate, as defined by the U.S.

Department of Commerce is one of the lowest in this country. Arkansas, Alabama, Pennsylvania, and Wisconsin are average—the

business participation rate is based on average number of business

per one thousand. Arkansas is the 17th.

One of the things we focused on in the city of Little Rock is trying to focus on how we can increase the entrepreneurial participation of African American and other minority businesses within our

jurisdiction.

One of the real challenges has been aided by our partnership

with the Arkansas Small Business Development Centers. In the

last 2 years, for instance, we’ve had 131 businesses enrolled in that

program. 101 of those businesses have come out with full business

development plans that focuses on expanding and growing their

business.

Across the Nation, I think the business participation of Business

Development Centers is about 28 percent. We are about 78 percent

because of the focused intent on doing business with people. Also,

an outgrowth of that association with Arkansas Minority Business

Development Center is based on that demonstration project. It’s a

2-year funded, $175,000, a year, and we put in about $45,000 per,

so about $220,000 over the last 2 years, the roundtable is Business

Development Center, we got all the participants that are actually

dealing with capacity building services throughout central Arkansas, but the State, Federal elements, but actually what we do is

every month, we give out mini grants, subgrants between $1,000

and $10,000 on best practices, on innovative approaches to enhancing business development activities.

In the last year, for instance, first year of the project, we did 18

projects, and those 18 projects accrued. We are tracking our activities between contracts and sales and activities over $32 million

worth of business activities. For a little under $200,000 Federal

money and the net. I’m saying the dollar multipliers are just phenomenal, because we really do believe in the power of collaboration

and cooperation.

I think one of the things we’re missing, and I think Sam so ably

made the point, is that when you start depersonalizing, when you

start desympathizing, when you start downsizing and computerizing, you take out the human elements. I think why does our

system work better than other systems that we’re dealing with is

because there’s a face, and there’s a person. There’s a personal contact that’s involved in what we do. People know that they can come

to our center, and they’re going to talk to someone that’s going to

be able to give them some help, going to be able to negotiate the

22

list of phone numbers and referrals and resource people, who does

what, and who can most ably assist them most expeditiously.

Because one of the things that really we focused on and one of

the realities that—and I work with Sam a lot, but I differ with him

a little bit, U.S. Department of Commerce assigns microenterprises

as enterprise that gross $10,000 or less. Roughly in the United

States of America, 35 percent of all small businesses, 35 percent of

all small businesses has $10,000 or less gross receipts. Then 39

percent of all African American business is similarly situated. I

think it’s very important that my closing comments would be that

we support not only the 7(a) loan program, also the SBA local office

and the personal contacts, but that we also support the concept of

microlending.

We are a Federal empowerment zone, we have a microlending

program, for instance, where we work with local lenders and Metropolitan Bank and others that we did—the SBA 80 percent, we

did the other 20 percent, so a hundred percent funded microloans

whereas we gave out over $500,000 worth of loans, and we had

zero defaults. We did a hundred percent loans, we did very liberal

credit requirements and those kind of things, and we had zero defaults on those loans.

The point that I’m making, I think local participation, the focus

on partnerships, and the real focus on the viability of small and—

because there’s so many rippling effects when we talk about microenterprises, because we’re talking about the working poor, people

who are in business not because they’re not making a lot of money,

but because they believe in the business, because, like I said,

$10,000 microenterprises, one-third of most of the business in this

country and this state, and people are working to make a living,

and we should support them all we can.

I will close my comments with that.

Senator PRYOR. Well, thank you. That is one of the reasons we

are here today; to hear from folks out in the real world.

Mr. Harris.

STATEMENT OF SAMUEL L. HARRIS, III, EXECUTIVE VICE

PRESIDENT, ARKANSAS NATIONAL BANK, SPRINGDALE,

ARKANSAS

Mr. HARRIS. Thank you, Senator Pryor. My name is Sam Harris,

and I’m the Executive Vice President of Arkansas National Bank

in Springdale, Arkansas. It’s my pleasure today to have the opportunity to address the U.S. Senate Committee on Small Business

and Entrepreneurship on such an important issue and contributions made by the U.S. Small Business Administration.

In particularly, the SBA district office here in Little Rock. I represent Arkansas National Bank, one of Northwest Arkansas’ leading producer of SBA loans, and one of the top producers statewide,

as my friend Philip Knight mentioned earlier. My comments are a

little bit different than Philips, but along the same lines.

Our financial institution originates millions of dollars in SBA

loans each year. The SBA loan programs are an important part of

our efforts to reach out to our business communities and fund the

entrepreneurial spirit and momentum that is so very pervasive in

Northwest Arkansas. We could not be as effective in these endeavVerDate 03-FEB-2003 12:42 Aug 19, 2004 Jkt 094955 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 D:\SBA\94955.TXT SSC2 PsN: SSC2
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ors without the valued assistance of the SBA district office in Little

Rock, Arkansas, and its outstanding staff of loan specialists and

servicing personnel.

I’m here today to share with the Senate Committee as to why I

think it’s critical for the SBA to continue to have independent district offices in each state, and especially here in Arkansas.

Although it might appear that the SBA district office consolidation would on the surface solve program funding issues, in the long

run, I believe it would be detrimental to the program and cause future losses that would more than offset any savings that might be

realized by the consolidation of the program and the offices. Here

is why.

Having such fine representatives such as lending chief Bill Horn,

and his staff, in the Little Rock district office gives the SBA a local

presence that allows the agency to make solid lending and servicing decisions based on local knowledge of issues and the economic

climates of areas of commerce and different communities throughout the state. Also, a local office is in a better position to make suggestions to lenders, which leads to better structured loans, better

decision-making for the SBA, the bank and the customer. It has

been my experience that higher asset quality will yield fewer losses

in the business of finance.

Having the SBA district office here in Little Rock, Arkansas provides a higher quality product for the SBA and a better return on

the investment of the U.S. Government with a loan portfolio of

higher asset quality and fewer losses. The SBA has a long and distinguished record of being in touch with entrepreneurs and the

small business community as a nation. It would be well served to

remain a locally-based program with locally-based professionals.

Thank you.

Senator PRYOR. Thank you.

We also have Tyrone Davis here, who is a small business owner.

Tyrone, would you like to say a few words?

STATEMENT OF TYRONNE DAVIS, OWNER, DAVIS OIL

AND PETROLEUM

Mr. DAVIS. Thank you, Senator Pryor. Personally, I have written

a response to your Senate Hearing that I’d like to put in the

records. I am an avid participant of all the SBA programs. I started

my firm back in 1992 after a long history with an oil company.

Someone had mentioned SCORE, I participated in that.

One of the first things that I started my business—I started out

at the Arkansas Small Business Development Center going

through every training program they had. I would suggest any new

businesses that start off in business go through those training programs. In addition to that, the University had another program

called the Small Business Academy where they took graduate students to come over and look at my company and gave me a strategic plan so that I have something to follow. I’m all for the SBA

and, Congressman, anything that you can do to save our district

office, I’m all for it.

Senator PRYOR. Thank you so much.

You know, we have a lot of witnesses on this panel, and I’m just

going to go through and put questions to the witnesses, kind of alVerDate 03-FEB-2003 12:42 Aug 19, 2004 Jkt 094955 PO 00000 Frm 00027 Fmt 6633 Sfmt 6601 D:\SBA\94955.TXT SSC2 PsN: SSC2
24

most randomly here, and—I don’t know exactly where to start, but

if I may start I will in the middle with Kevin.

I have a few follow-up questions on what you said in your testimony. One thing is, you said that you have an outstanding 7(a)

loan portfolio of about $13 million at your bank. Do you know

about how many businesses that translates into.

Mr. HESTER. It would be about 60 businesses.

Senator PRYOR. Do you have any sense of how many employees

are involved in those 60 businesses? Would you know that off the

top of your head.

Mr. HESTER. I’m going to guess between 750 and 1,000.

Senator PRYOR. Yes. Also, you mentioned the SBA having a flagship program, a 7(a) program. One thing you touched on is it is an

excellent public/private sector partnership. It seems to me that we

need to be looking for those type of partnerships where we can

work with the public sector and the private sector and get out here

and do some good for some people. Seems to be a smart way that

we can spend our tax dollars, because the lenders have the risk,

and, you know, you have a guarantee from the SBA, but nonetheless, the way it is established is that we share that risk. You have

every incentive in the world to get out and make good strong loans

to companies that can get out and do some good with it. Still the

government provides that safety net.

Do you have any comments on that partnership you have with

the SBA?

Mr. HESTER. The partnership is very good. The lenders are asked

to do a lot of things, and we have increasingly taken more responsibility, but the SBA does need to be there to do certain parts of the

process. I think that changes that are being made in the system

and in the operations will take them out of that. They will not be

able to do the job that they’ve done in the past. Especially without

the district offices. Arkansas being one them. They won’t be able

to perform the parts of the partnership that they’ve done in the

past.

Senator PRYOR. Right. I agree with you on that. You also mentioned in your testimony that the zero subsidy and the non-appropriations is a nonstarter for you. Tell me why that is. Why do you

feel so strongly about that.

Mr. HESTER. It just will not work. Two years ago we had a reduction in fees, and now we’re going to go back and ask the borrowers

to go back to the fee structure we had before. The zero subsidy

rate, we really don’t have a whole lot of information of how they

calculate the subsidy rate at this point, and that’s another problem,

an issue we have to deal with. The zero subsidy with no appropriations just will not fund the program. The program will not fund

itself.

Also, with a 50 percent guarantee, you’re going to lose a lot of

banks. Philip mentioned it. It’s the same situation with us. You’ll

have a lot of banks that will not participate in a program, the fees

that they’ll generate will be lower, and the program just will not

work.

Senator PRYOR. Right. I share that concern as well.

Mr. Wilson, let me ask you if I may. You mentioned the

microloan program, and I want to ask you about that, but also you

25

talked about minority-owned businesses and the statistics here in

Arkansas. I think I know the answer to this, but I would like to

hear it from you.

Why is it important that we should try to have minority-owned

businesses in this state and in this country? What is the value of

that to our economy and to our society?

Mr. WILSON. I think the biggest point—just take the Arkansas

references. Roughly 20 percent of business—I mean, the population

of Arkansas is minority, and we’re talking about African Americans, Hispanics, Asian Pacific Islands, American Indians, the Federal definition. Right now, that business participation rate that I

was referring to is about—it’s less than 6 percent. In reality, one

of the things you find that—in good times and bad times, people’s

economic status and participation in the American dream really establishes how they view their whole lifestyle.

I think that it has a very strong implication, and you have contributing factors on crime rates, on unemployment rates, on poor

health, on education. I think it has a rippling effect as how that

impacts us.

I think the best approach to equity in America or in our income

is not so much to focus on civil rights but silver rights. It’s actually

trying to do all that we can to make sure that everybody participates as best they can in the economic depressed prosperity of our

country. I think that’s one of the things that we really try to do.

If those special efforts are not encouraged, just like desegregation

of education, and some other historical things would not have occurred without the assistance of the strategic and very pointed assistance of the Federal Government. I just don’t think it occurs naturally. You have to do extraordinary efforts to remedy extraordinary deficits.

I also think that statistical anomaly you have to do all over this

county. If that’s the case, just like we’re putting extraordinary resources in the rebuilding the infrastructure of Afghanistan and

Iraq, I think that same concept, we can justify putting some extraordinary remedies to addressing those disparities.

Senator PRYOR. Well, let me ask then a follow-up with the

microloan program which you referred to in your testimony a few

moments ago. Given your experience with the program, do you

think—and by the way, as background, you know the President’s

budget would eliminate the microloan program and fold it into

some other programs, but do you think the microloan program as

it exists today has been satisfactorily implemented to help those

people who really need the help?

Mr. WILSON. No, I do not. Simply because—and I think Sam

made a good point. I mean, in good banking operations, microloans

does not make good banking sense, because of the size of the loan,

the service on the loan, and all those things.

That’s what I’m saying, the whole focus on doing extraordinary

things. Like the programs that we dealt with in Pulaski County,

for instance, like I said, we went above the 80 percent SBA guarantee, and we did the other 20 percent. It’s a 100-percent guaranteed loan. In other words, the bank has no risk, zero risk.

Then we had ADFA, Arkansas Development and Finance Authority, a public and another state agency to do the administration of

26

the loan. There was no added administrative over here to the bank.

In other words, you made it easier for them to service those loans.

We service those loans through Metropolitan Bank, a local bank.

Like I said, at this point in that program, zero defaults.

The whole program is based on the fact that they already had

to go to a bank and been turned down. Then we would get them

after they got turned down. We would look at them individually,

case by case, on the viability of their business concept and the profitability of their loans and so forth.

A number of those loans were no defaults, and a number of them

have become traditional loans from Metropolitan Bank. Our point

is that you have to have extraordinary efforts on the bottom end,

and this may not really be due to the business participation rate,

because we start talking about people working, and we’re talking

about less than 10 employees, and they might have a large growth

revenue for their business. They might go through a couple of hundred thousand dollars, but when you start talking about their gross

receipts at the end of the day, with those people with less than 10

employees, their gross receipts is $10,000 or less. That’s what the

point is. That’s 35 percent of small businesses in America.

That is the danger that we talk about when we start talking

about the job creation. It creates a lot of jobs on the lower end of

the spectrum, a lot of people that would be left out of the process

otherwise.

Senator PRYOR. Mr. Sam Walls, let me ask you, if I may. I think

you said you are the largest SBA 7(a) lender in the state?

Mr. WALLS. Yes, sir.

Senator PRYOR. Do you know off the top of your head what the

average size of your loans are? Do you have an average on that?

Mr. WALLS. Senator, we’re somewhat different than a bank in

that we are by legislation prohibited from competing with banks.

We are, like SBA, a gap filler, between what can be obtained from

the traditional capital markets and what the borrower needs. As a

consequence, we do not do the small loans.

Senator PRYOR. I see.

Mr. WALLS. Small, being defined as less than a hundred thousand dollars. Unless it is for a minority or a women-owned business. We will do those. Our average generally is going to be something like $300,000–$500,000. It will vary between, say, $250,000

and $400,000 in any given year.

Senator PRYOR. Yes. Tell me the challenges from your standpoint, the challenges that smaller businesses have in getting capital. What makes it so hard for small companies to have access to

capital?

Mr. WALLS. Well, I think in the context of the SBA, it’s clearly

a matter of risk for the lender. A lot of small businesses don’t have

the track record or a long enough track record that the lenders can

get comfortable with. Sometimes it’s a matter of collateral, the inadequacy of collateral.

The fundamental tenant of lending is that your first way out is

through cash flow and, hopefully, profitability, and the second way

out is collateral.

Senator PRYOR. Yes.

27

Mr. WALLS. If you make a loan that does not have any collateral

or a guarantee, you’re not lending, you’re venture capitalizing. A

lot of bankers find that out the hard way.

Senator PRYOR. That is right.

Mr. WALLS. I think that’s where the SBA product steps in and

makes a deal doable for a lender that otherwise would not be doable. The typical small business, much like has been referred here

today, generally doesn’t have a lot of assets that would shore up

a larger credit.

In our case, we’re dealing with bigger numbers, we’re talking

about pieces of capital equipment, buildings real estate, things of

that nature.

Senator PRYOR. Yes.

Mr. WALLS. One the hardest types of capital to get is working

capital, regardless of the size of the enterprise. I think that’s an

area where the SBA is particularly important.

Senator PRYOR. Good. Now, I am going to ask Philip Knight this

next question, but I’m going to base it on something you said, Mr.

Walls a few minutes ago. You said that good partners do not do

things that harm their partners, and that is one of the principles

in partnership, but, Mr. Knight, you, I think, referred to in your

testimony about how closely you work with the SBA and some of

the concerns you have.

Describe for me your working relationship and your partnership,

with the SBA here in Arkansas and how that relationship has been

progressed.

Mr. KNIGHT. Okay. Couple of different avenues. Let me start

with the loan processing side. It is very typical for me to contact

one of the loan officers. We’re fortunate to have in our area a loan

officer in Fayetteville that serves Northwest Arkansas, and, yet,

sometimes he doesn’t have all the answers, and we’ll come to Little

Rock to loan officers here. It is very typical to call and ask eligibility questions.

If you’ve seen the SOP, you know it’s a substantial manual, and

there are all kinds of rules and regulations we’re to follow in order

to ensure that we’re getting our guarantee on our loan. Sometimes

there are issues that come up that fall somewhere between the

white and the black, and we have to make judgment calls.

I can tell that you right now—I’ve worked in SBA in two different districts, and the Arkansas district interprets things different than the Dallas district that I came from. I think that that’s

true largely because of the uniqueness that is our state. That’s

probably the same way across the country. I would guess that each

of the district offices tailor their interpretations around their local

regional economies.

Now, if we go to a centralized processing, than what we have

here is someone who is looking at a loan in Arkansas, at the same

time someone is looking at—that same person may be looking at

a loan in Los Angeles. There’s just a myriad of different.

Senator PRYOR. Right.

Mr. KNIGHT. I mean, we don’t need to go into it——

Senator PRYOR. Right.

Mr. KNIGHT [continuing]. But all of the difference we have there.

28

Senator PRYOR. This kind of goes back to having that familiar

working relationship with people in a so-called local office——

Mr. KNIGHT. Absolutely.

Senator PRYOR [continuing]. That understand the terrain, so to

speak, and not some toll free number or website. I think that you

mentioned that no one knows what kind of service you are going

to get there.

Mr. KNIGHT. Absolutely. On the liquidation side, you know, I’ve

worked with David through liquidation, and, in fact, I worked

through my very first liquidation with David. I called him, and I

said, ‘‘David’’—knowing David for quite a while before we had that

situation, I said, ‘‘This is my first one. Would you hold my hand

and walk me through it?’’ I can’t do that——

Senator PRYOR. Right.

Mr. KNIGHT [continuing]. Going to Virginia or Kentucky or Sacramento, or wherever it’s going to be.

Senator PRYOR. Across the country.

Mr. KNIGHT. That’s right.

Senator PRYOR. Now, let me, if I can, switch over to another witness here quickly.

Mr. Hinton, I was going to ask you about your testimony, I think

you were very clear that you think it’s important that we continue

to have an Arkansas presence for SBA and how important the local

offices are, and many of your comments addressed the 7(a) program. In your written comments, you touch on the microloan program. Let me ask this: As I understand the microloan program,

these people who—these microborrowers sometimes have average

credit scores around 500, or something around that number, but I

think the average size of these loans may be around $11,000. Do

you think that if the microloan program is eliminated at the Federal level, do you think that private entities will come in and have

a market there for those borrowers?

Mr. HINTON. No, I do not.

Senator PRYOR. The economics do not work. Is that right?

Mr. HINTON. Yes, I mean, we’re talking about success, and success for a small business owner encompasses many things, and

we’re kind of preaching to the choir here, but experience, management ability, equity injections, cash flow, profit, and credit worthiness are the considerations.

When you’re trying to consider how to make a $5,000, $10,000, $15,000 loan, first of all, you worry about the equity injection. Most

success stories are based on the fact that it does require some ownership or equity in the business, that the fact that having a personal ownership does ensure a little bit better chance of success.

You know, you start questioning someone that really can’t come up with $5,000, then the economies of scale, the fact that most traditional financial institutions just cannot do this. It’s not something

that can be afforded. I am all for that, and I work very diligently

to help smaller clients. That’s where I think you make the most impact. It’s not about maybe the number of jobs, it’s that father or

mother that has a child, and they’re trying to do good and make

a living in this country, and I always try to simplify things down

to the basic level, and I think that’s what dictates our decision, or

should. I still say there’s a smarter way to do this.

29

We keep trying to do the same old thing, and that keeps on failing. You know, certain groups have figured out how to do this. I

mean, you know, there’s ways to do mass type of financing based

on scoring mechanisms that we can help a broader segment. You

know, you get a credit card application almost every day. They take

much lower credit scores, they operate on a system of numbers. It

has to be fast and efficient.

For me to invest time that it would take to lend someone $5,000

or $10,000 is not necessarily the most reasonable way. I am all in

favor of microloans supporting the smallest of small business, but

in a much more creative way.

Senator PRYOR. Right.

Mr. HINTON. It still gets back to let’s save the 7(a). It will be a

moot point if we don’t save the SBA and the larger loan programs.

Senator PRYOR. Yes. Mr. Harris—by the way, we have three

Sam’s on the panel. Sam Harris, you came down from Springdale

today. Correct?

Mr. HARRIS. That’s correct.

Senator PRYOR. People in Arkansas are sensitized to the fact that

that part of the state has a robust economy, that, really, there’s

some exciting things happening there in terms of population

growth, and opportunities there. Nonetheless, today you’ve come in,

and you talk about how important the SBA is, even in that environment.

I would like, if you could, to comment on that, because I know

the Northwest Arkansas economy, and the economy where you are,

has suffered some in the last couple of years, 3 years, there’s no

doubt about that, but also it’s still considered a very strong economy by Arkansas standards, and so I would like to hear a little bit

more about the SBA in a growing economy, a strong economy. If

you could comment on that, I would appreciate it.

Mr. HARRIS. I think some of the comments have already been

made with respect to why it’s important to have the guaranteed

loan program for the lenders; to entice us to get out there and

make loans. Even in a good economy, that doesn’t mean that there

aren’t projects that aren’t going to require the loan program. A

good economy doesn’t mean that everyone can go to a bank and get

a conventional commercial loan.

I think many of the situations are the same in a good economy

as they are in maybe an economy that’s not quite so robust. People

still need working capital loans for their businesses, and some of

the points that were made earlier about some of the things that

Sam talked about, about the collateral issues can be an issue.

The Low Doc program and the 7(a) program are excellent programs that allow lenders to get out there when a business has an

excellent cash flow, but maybe they have some other weaknesses,

but it’s still a strong business that creates a lot of jobs, it’s a profitable business, the bank decides to go ahead and do the project, and

that company grows.

I know Philip and I could sit here for hours and talk about our

success stories as well as the rest of the lenders in the room from

these programs. I think now more than ever we need to, you know,

focus on this issue. Let’s get it restored, let’s get the full funding

on the programs, and move forward with that.

30

I don’t think because we’re in a robust economy that we should

back off of the programs.

Senator PRYOR. Right. I appreciate that. Yes, sir.

Mr. KNIGHT. I might add, Senator Pryor, that with a robust economy, there is more needs for service-oriented business. I mean, yes,

Wal-Mart is the largest retailer and the largest company in the

world, but they have to have a whole array of different support

businesses around them. Those businesses come to us and don’t

have the collateral, and they don’t have the history, start up businesses.

One of the things Mr. Walls didn’t talk about, but is notorious

in lending, there are certain types of businesses that are more risk

oriented. Without the SBA, we’re not going to make these loans to

these types of businesses. That is one of the areas that the SBA

is very important for. In a robust economy, there are more businesses starting, and they are more risky.

Senator PRYOR. All right. Mr. Blair, I am going to finish these

questions with you on this panel, and that is, you have just gone

through a process with the SBA which was not fruitful, as I understand it. How was it dealing with the SBA? Were they helpful? Did

you run into any bureaucratic red tape, so to speak? I mean, how

was it to deal with the SBA?

Mr. BLAIR. Well, actually, I guess the process was made easier

by Sam Walls’ company, so, you know, my dealings with them was

pretty good.

Senator PRYOR. Yes.

Mr. BLAIR. You know, the bottom line, however, became they

weren’t going to fund the loan——

Senator PRYOR. Right.

Mr. BLAIR [continuing]. In the manner that we needed it funded.

I guess, ultimately, it didn’t work out, and it wasn’t good, but——

Senator PRYOR. Do you have that access to capital now? Are you

going to go back to the SBA or have you already figured out another way——

Mr. BLAIR. We’re scrambling right now.

Senator PRYOR. Okay.

Mr. BLAIR. I don’t know. I don’t know just exactly how we’re

going to approach that.

Mr. WILSON. Senator, if I may.

Senator PRYOR. Yes, sir.

Mr. WILSON. There’s some public policy implications. I think

Janet made the point that the authorization first, the appropriations, I think is real important, in that, you know, like for instance,

the SBC Centers, the $125 million authorization versus $88 million

appropriation. I think that to continue to fight to have those authorizations fully funded, when there’s extraordinary efforts. Also,

the flip side of that, too, is even within the $88 million appropriation is actually to focus on setting priorities.

Senator PRYOR. Yes.

Mr. WILSON. And put pressure on those administrative agencies

to set priorities, and I think that’s one of the things I would like

to bring forth even with limited knowledge and limited time. Certain things in the hierarchy of needs are more important than others.

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Senator PRYOR. Okay. Let’s go ahead and change panels. I appreciate you-all coming in and your time. Again, the record will remain open. Anything you think about later that you may want to

add, that’s great, and we may have some questions that we may

present to you here in the next few days because we did run out

of time today.

Let’s go ahead and change panels. We’re going to have our last

panel come in. We’ll just take a couple of minutes to break as we

do that.

[Wherein a break was taken from 12:25 to 12:36.]

Senator PRYOR. Let’s reconvene. We have Charles King and

Janet Roderick on the panel. Again, you-all know the format. Try

to talk maybe 3 minutes, 5 minutes at the most.

Mr. King will you lead off?

Mr. KING. Yes. Thank you, Senator. Janet and I were just talking, I want to thank you, first of all, for saving the best for last.

Senator PRYOR. Exactly.

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

Mr. KING. We would like to say thank you, first of all, for bringing this hearing to Little Rock, as well as say thank you for the

support we receive not only from you but your office staff in particular. All of them have always been very responsive to every request we’ve had, and I think that’s important as we move forward

in this type of process.

My name is Charles King, and I am the Executive Director of the

Arkansas Regional Minorities Supply and Development Council.

Our organization is a private, nonprofit organization. We were established in 1978, and our mission is to promote the development

of business opportunities between minority business enterprises,

corporations, and government agencies.

We undertake a number of activities to accomplish our mission,

and these activities include but are not limited to certification of

minority businesses, facilitation of business and contract opportunities, between minority vendors and the business community, training workshops, annual minority business opportunity trade fair,

networking opportunities, technical assistance, and advocacy efforts.

I want to say up front that through all of these efforts, not one

week goes by that we do not have the opportunity to refer at least

one client to the SBA. Our membership consists of some of the

most recognized and respected corporations in the world.

We’re a membership-based organization, corporate membership

based. That includes Wal-Mart Stores, Tyson, ALLTEL Communications, Comcast, Nestle, and Enterprise Rent-A-Car, just to

name a few. I say that because actually what we’re talking about

today in capitalizing minority-owned and small-owned businesses,

these corporations are really the end users. Many of them are end

users simply because some of them have reporting responsibilities

to different Federal agencies that they work with. These corporate

members rely on us to produce qualified, certified, minority businesses to respond to procurement and contract opportunities. These

32

companies are very reliant on small business administration programs.

The support offered by the SBA, in many cases, is the only assistance available to allow small disadvantaged businesses to compete. The programs that are most crucial to the minority business

community in Arkansas is the 7(j) and (a) program, the microloan

program, and the outreach officer. It is our understanding that

these programs are at risk of severe cutbacks or total elimination.

We believe that this would be a death blow to most of the minority

businesses that are poised for growth in Arkansas.

Most business owners would tell you that the No. 1 need for minority business owners is access to capital. However, we believe

that the true No. 1 need is access and information, much like that

offered by the 7(j) program. Small and minority business owners

are in need most of learning how to access available resources.

They don’t have the resources to hire someone to do what a large

majority firm would do to hire others while they continue to run

their businesses.

The assistance offered leads to success in minority business applying for badly needed capital.

Now, I was reading that in Senator John Kerry’s remarks that

40 percent of the loans that are done across the country are 7(a)-

based loans. In Arkansas, the SBA 7(a) loan guarantee program

provides over 80 percent of the loans to small businesses in our

area. I would also add that the microloan program, which I believe

is critical to Arkansas-based small and minority-owned businesses.

Though it’s not heavily utilized, it’s something that is very, very

well needed in Arkansas, and I believe it would be a crime if that

program were to be eliminated.

The 7(a) loan program, the terms are easy on the already

strained pockets of small businesses. One example is one of the minority businesses we have with us today in this room, and that’s

the Davis Petroleum Company. Davis Petroleum Company is a

small supplier of antifreeze and petroleum-based lubricants. In

1999, he received a 7(a) loan of $250,000. This loan allowed him

to expand his business and hire additional employees.

As a result of the assistance that Mr. Davis received, he was

eventually named by the U.S. Defense Systems in Richmond, Virginia, as a top quality supplier. That’s the organization’s highest

award. The assistance the Davis Petroleum Company received

along the way allowed him to be prepared to receive this recognition, as the defense system was able to receive top quality service

from a supplier who just happened to be a small disadvantaged

business. It is likely that without this loan, he possibly would not

be in business today.

In Arkansas, over the last 5 years, the SBA has issued approximately 1,744 loans. These loans had a value of over $422 million.

300 hundred of those loans were to minorities, 473 were to women,

and 276 were to veterans. So far this year, the agency has issued

158 loans with 17 minority, and 30 women loans, and 28 going to

veterans.

As a rural state, Arkansas has over the last 2 years, issued 194

loans to rural areas. Two years is the longest available tracking for

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rural loans. I would note that Arkansas is considered mostly a

rural state with only 14 areas being considered urban.

Now, it’s our opinion that the overall budget request, which is

less than 15 percent of last year’s budget, is a terrible disappointment. The small businesses account for a majority of the jobs created in this country each year, the quality of work is high, and the

pay allows families to pay their bills, pay their taxes, and provide

for the betterment of the community. The SBA has become the lifeblood of this industry of small businesses. Continued cuts would

only serve as a death blow to the continued growth and development of one of the country’s most vital resources, the small business.

We humbly request that the SBA not be cut, but rather be fully

funded to allow the continued operations of an important program

that we talked about.

Senator PRYOR. Thank you. Janet.

Ms. RODERICK. Thank you. Again, my name is Janet Roderick,

and I’m the State Director for the Arkansas Small Business Development Center, and I appreciate the opportunity to speak and address this group one more time. I want to talk about the lowering

of the cap and the temporary freeze and how that impacted our clients.

When the freeze went into effect, we did a quick and dirty survey

of our clients throughout the state, and we found out that we had

25 SBDC clients with over $8 million in loans that were somewhere

in limbo, somewhere in the process.

Senator PRYOR. I’m sorry. How many again.

Ms. RODERICK. Twenty-five businesses with a little over $8 million that were frozen. The SBA district office here in Little Rock

worked very hard to do what I would call ‘‘the right thing’’ by those

clients and keep them informed—and those were just our clients.

Those are not all the SBA loans there were. They did the right

thing by trying to keep everybody informed as best they could, but

they were not receiving any information out of the central office.

Since that time, the freeze has been lifted; however, the lower

cap of $750,000 remains in effect and still has negative impact on

our clients.

More often than not, these are businesses that have the potential

to have a significant impact on job creations. Let me give you an

example.

An Arkansas-based technology business is poised for tremendous

growth. This business has been in operation for more than a decade

and has a nationwide customer base, and it employs about 30 people. After years of research and development, the business is now

ready to launch a new product. This new product has already generated national exposure on news outlets such as CNBC and fuels

excitement in their customer base and beyond. In order to finance

the growth, this business worked with one of our SBDC consultants

to develop an SBA loan proposal in the amount of a million dollars.

This was right towards the end of the year. Then, without much

notice at all, and around the Christmas holidays, the SBA lowered

the cap.

This new SBA loan cap of $750,000 is a barrier to this business,

as well as many other businesses in Arkansas and across the NaVerDate 03-FEB-2003 12:42 Aug 19, 2004 Jkt 094955 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 D:\SBA\94955.TXT SSC2 PsN: SSC2
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tion. These businesses need capital to grow and prosper, and the

SBA loan program provides access to capital that might otherwise

be unavailable. This new loan cap punishes successful established

businesses that aspire to take their businesses to the next level.

The second issue I want to speak about, concerns a news release

from the SBA dated February 14, 2004. The SBA proposes to cut

the SBA guarantee to 50 percent, increase the cap to two million,

and have lenders apply using their own forms and processes instead of ‘‘lengthy and burdensome government forms.’’ The SBA

says this will add 500,000 jobs. This might be true in big cities

with large banks, but it’s certainly not true in rural America.

Senator Pryor, as you’re aware, start-up funding provides a real

challenge to small businesses—to the small community banks.

While these banks are active members of the community that the

small businesses will operate in, and they have a vested interest

in helping provide capital for economic growth, the lenders are also

well aware of the risks involved in the small business operation,

start-up particularly. These problems of survival rates for small

business start-up, the inherently limited collateral of assets available to be pledged to secure loans, equity injection requirements,

and in some cases, previous credit issues, makes it extremely difficult for the lender to provide commercial loans without a guarantee program.

Many of the commercial loans made to start-up businesses in Arkansas are for $150,000 or less, which the SBA currently provides

an 85 percent guarantee. For many of these SBDC clients, it’s the

bank’s ability to receive the guarantee that is a critical element to

receiving bank participation in the venture.

Although lenders hope they will never have to liquidate the loan,

and the business will be successful, they are well aware of the survival rates of small business start-ups and generally rely on this

guarantee to secure the loan.

The end result of this proposal for small businesses in rural Arkansas will be significantly fewer small community banks using

the SBA loan program with only a 50 percent guarantee, significantly fewer start-up businesses being funded, which will have a

negative impact on community economic vitality, more small businesses establishing and expanding operations by using the dreaded

credit card form of financing their business with the excessive interest rates, and those small businesses that do not receive a commercial loan, receive a commercial loan without the SBA guarantee, may jeopardize the company futures by accepting unfavorable terms such as short term maturities with balloon payments,

and having no assurance that these bank notes will be renewed

when they’re due.

Senator Pryor, I have e-mails from several banks located in the

northeast part of Arkansas who responded to an e-mail from Herb

Lawrence who is our center director at Arkansas State University

concerning the SBA proposal. I’ll be happy to submit them for the

record. In closing let me say, Senator Pryor, you have repeatedly

spoken out against government policy groups that were not in the

interest of Arkansas’ small business sector. I hope you will speak

out against what I fear is the gradual dismantling of the SBA and

35

the continued failure of the government to adequately fund small

business management assistance programs. Thank you.

Senator PRYOR. Thank you. And rest assured, I will speak out

against it.

Now, let me ask you, Janet, you know, I asked earlier, is the

SBA going in the right direction or the wrong direction? Have I already asked you that question?

Ms. RODERICK. No, but I’ll be happy to provide you an answer

to that.

Senator PRYOR. I would like to hear your comments on that, because, like I say, I asked this question in Washington, and there

was a panel of probably four or five, I do not remember right now,

and they all had very strong opinions on it. I would like to hear

your opinions because you have a different perspective than most.

Ms. RODERICK. Well, certainly, I would say, ‘‘No, I don’t believe

they’re headed in the right direction.’’ Here in Arkansas and

throughout the country, particularly in rural states—I’ve been the

State Director of probably the most rural state, I was the State Director of the Small Business Development Center in Alaska.

We know that people need the one-on-one contact. We know that

we still work with, ‘‘Excuse me. I know that you work here. Can

you help me out?’’ We talked about using the Internet and we use

it a lot. However, there are many of our small businesses who still

do not actively use the Internet, particularly those who are located

in rural parts of our country because they don’t have access to high

speed Internet. That’s changing, but it’s changing slowly.

Doing away with the district offices, and I do believe they’re looking at the dismantling of the SBA as we know it now with district

offices, is absolutely the wrong direction for our business community.

Senator PRYOR. Let me just run through for the audience, so you

will understand what we are talking about here, some of the cuts

that we are looking at in the President’s budget for the SBA, and,

therefore, cuts in trying to help small businesses in this country.

The 7(a) loan guarantee program would have zero funding under

the President’s budget. The microloan program which we have

talked about to some extent today, will be eliminated under his

budget. There will be several programs eliminated for entrepreneurial development, counseling, business resources, and outreach.

In fact, of 20 programs, the President’s budget eliminates 10 of the

programs. You know, we could run through a long list of what they

are—we’ll submit this for the record. Certainly, it is of great concern to small businesses.

We hear about it all the time in our office, and just talking to

people, I hear about it every time I come back, it seems like.

Also, Mr. King, a few moments ago you talked about 7(j) and how

effective it has been and what a good program it has been. Under

the President’s budget for fiscal year 2005, they will cut it by

$500,000. You may think, ‘‘Well, what does that really mean?’’

Well, that is a 25 percent cut. That is a 25 percent cut in that program.

In fiscal year 2004 it was a $2 million line item, and in this fiscal

year that we are talking about now, it will be a $500,000 cut on

that. It will be $1.5 million.

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Mr. King, let me, if I can, focus on you for just a moment. We,

actually, are pretty far over time here, so I am going to keep my

questions very brief.

In your view, how is the SBA helping Arkansas and helping the

Nations’s economy? I mean, just in general terms, how does it help?

Mr. KING. It’s a tremendous help. Let me just piggyback on the

comment you made just a minute ago about the 7(j) and the type

of outreach. It’s my understanding from reading that the outreach

offices will be eliminated. I’ve spent a great deal of the last 6

months of last year on the road with who would be considered the

outreach officer here in the Little Rock office, just educating our

citizens across this state on what is available to them and then

how they should apply for the assistance that they can get through

the SBA.

Something that these bankers really appreciate, I know you’ve

talked to a lot of great bankers, and we worked with a lot of them

that were here today, but what they don’t have time to do is something that really the rural part of Arkansas really needs a lot of,

and that’s a lot of hand holding, a lot of hands-on approach. That’s

going to be lost because that person is going to be eliminated.

Because we are such a rural state, and someone said that all politics are local, all business is local, too. People want to be able to

reach out and touch someone, especially a state like this where you

don’t have people that are accustomed to thick forms and things of

that nature. The overall impact is just tremendous, within the minority business community.

You asked the question of one of the other panelists, and I was

sitting there going, ‘‘Say something.’’ That is that in minority businesses, 90 percent of the employees of minority business is a minority. You’re talking about the very basic of employment, family

support, community building, and things of that nature. The SBA

is very much a part of that foundation.

Senator PRYOR. Well, that is my impression as well. I thank for

you that answer. I am going to ask you a question that I asked

Miss Roderick just a moment ago, except a little different twist.

I asked her if in her view the SBA was going in the right direction or the wrong direction. You talk to a lot of businesses in this

state every day; what is the word out there in the business community about the direction the SBA is going in light of this President’s

budget proposal.

Mr. KING. People are very nervous. If programs like the

microloan program is eliminated and the 7(a) loan program is severely cut back, what it’s going to lead to, I believe, is a lot of small

and particularly minority businesses becoming subject to more

predatory lending practices. The factoring organizations will grow,

the small amount of profit that they’re making now will be taken

away by those factoring organizations. They’ll go to these—they

may even resort to check cashing places to get loans just to make

payroll.

Because the average minority business has less than two employees right now, but they’re poised for growth more than that.

They’re going to be going to practices that won’t allow them to

grow anymore, if that happens.

37

Senator PRYOR. Well, thank you. I want to thank everybody for

participating in this hearing. We have had a lot of people here

watching, and I am glad you-all are here, and appreciate you-all’s

input as well. We have gone over our time here.

UALR has just been fantastic about letting us use their facilities.

Again, we want to thank UALR and all the people involved in this

hearing. The staff that came down from Washington, we appreciate

you as well. I wanted to remind everyone that the record for this

hearing will remain open for 2 weeks, and we welcome any submissions that anybody wants to make, any thoughts, comments, whatever it may be.

Let me give you one bit of advice, though. Do not mail your submissions to Washington, because our mail system up there, due to

the Ricin and anthrax-laced letters, is kind of all jumbled up right

now. I would highly recommend that you mail those to our Little

Rock office, and our office in Little Rock will be sure that we get

it to the staff in Washington. Please just mail that to the Little

Rock office, or you can contact Derrick Freeman, who is sitting

here behind me, or Walter Pryor, who is sitting here behind me,

too, the folks I have working up in Washington who do a great job

and who really helped organize this whole thing.

Anything else that we need to cover?

With that, this meeting is adjourned. Thank you so much.

[Whereupon, at 12:58 p.m., the Committee adjourned.]

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