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HOW DOES THE PRESIDENT’S FY 2005 BUDGET

REQUEST AFFECT SMALL BUSINESS?

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

WASHINGTON, DC, FEBRUARY 11, 2004

Serial No. 108–52

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

PATRICK J. TOOMEY, Pennsylvania 

JIM DEMINT, South Carolina 

SAM GRAVES, Missouri 

EDWARD SCHROCK, Virginia 

TODD AKIN, Missouri 

SHELLEY MOORE CAPITO, West Virginia 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

TRENT FRANKS, Arizona 

JIM GERLACH, Pennsylvania 

JEB BRADLEY, New Hampshire 

BOB BEAUPREZ, Colorado 

CHRIS CHOCOLA, Indiana 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

FRANK BALLANCE, North Carolina 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

GRACE NAPOLITANO, California 

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

DENISE MAJETTE, Georgia 

JIM MARSHALL, Georgia 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

BRAD MILLER, North Carolina 

[VACANCY] 

J. MATTHEW SZYMANSKI, Chief of Staff and Chief Counsel 

PHIL ESKELAND, Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Barreto, Hon. Hector V., U.S. Small Business Administration ........................... 4

Mercer, Mr. Lee, National Association of Small Business Investment Companies ........................................................................................................................ 18

Pilcher, Mr. David, Ted R. Sanders Moving & Storage ........................................ 20

Wilson, Mr. Donald, Association of Small Business Development Centers ........ 21

Crawford, Mr. Chris, National Association of Development Companies ............ 23

Wilkinson, Mr. Anthony, National Association of Government Guaranteed 

Lenders ................................................................................................................. 24

Pegg, Mr. Phill, Jr., 4D Solutions ........................................................................... 25

Sprague, Mr. John, Everglades Adventures .......................................................... 27

Moses, Mr. Elliot, Daco Enterprises, Inc. .............................................................. 29

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 43

Velazquez, Hon. Nydia ..................................................................................... 46

Bordallo, Hon. Madeleine Z. ............................................................................ 48

Prepared statements: 

Barreto, Hon. Hector V., U.S. Small Business Administration .................... 50

Mercer, Mr. Lee, National Association of Small Business Investment 

Companies ..................................................................................................... 56

Pilcher, Mr. David, Ted R. Sanders Moving & Storage ................................ 69

Wilson, Mr. Donald, Association of Small Business Development Centers . 70

Crawford, Mr. Chris, National Association of Development Companies ..... 80

Wilkinson, Mr. Anthony, National Association of Government Guaranteed 

Lenders .......................................................................................................... 87

Pegg, Mr. Phill, Jr., 4D Solutions ................................................................... 92

Sprague, Mr. John, Everglades Adventures ................................................... 95

Moses, Mr. Elliot, Daco Enterprises, Inc. ....................................................... 97

Follow-up letter requested at hearing by Committee: 

Bedell, Mr. Anthony R., U.S. Small Business Administration ..................... 104

(III) 

(1)

HOW DOES THE PRESIDENT’S FISCAL YEAR 

2005 BUDGET REQUEST AFFECT SMALL 

BUSINESS? 

WEDNESDAY, FEBRUARY 11, 2004

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The Committee met, pursuant to call, at 2:20 p.m. in Room 2360, 

Rayburn House Office Building, Hon. Donald Manzullo, [chairman 

of the Committee] presiding. 

Present: Representatives Manzullo, Bartlett, Kelly, Akin, Franks, 

Bradley, McCotter, Velμzquez, Udall, Ballance and Majette. 

Chairman MANZULLO. Good afternoon. The Committee will come 

to order. 

I will ask unanimous consent that my full statement be made 

part of the record. At this time, I will just summarize the high 

points. 

Today, we examine the President’s fiscal year 2005 budget request as it affects small business. Generally, the President’s proposed budget is helpful to small business owners. Given the budgetary constraints, with a few exceptions, small businesses should 

be pleased. 

I am especially heartened at the President’s request to make permanent the tax relief Congress has already passed, including phasing out the punitive estate or death tax and the lowered rates on 

capital gains, stock dividends and small businesses so as to create 

incentives for job creation. 

It is important to remember that 85 percent of small businesses 

pay taxes on an individual basis, so the rate cuts Congress passed 

into law in 2001 and accelerated in 2003, in addition to increased 

expensing and bonus deprecation, have provided critical assistance 

to our small businesses. 

With increased confidence in the economy, it was only natural 

that small businesses seeking access to credit would use the guaranteed lending and venture capital investment programs of the 

SBA more than in past years. In addition, the number of self-employed are growing dramatically. These newly self-employed need 

the SBA guaranteed lending and venture capital programs now 

more than ever. 

However, as the Committee and industry predicted, the 7(a) program experienced a cash flow crunch last month and is currently 

hobbling along. We need to fix this program now. That is why I 

2

was so pleased in the effort of Administrator Barreto to find another way to solve the 7(a) problem that does not involve raising 

borrower fees or requiring more appropriations or reprogramming 

accounts within the SBA. 

My goodness. We have a full house here today. That is nice. It 

is good to have all of you here. Hector, why do you not come every 

day? Maybe that is why we have a full house. 

Mr. BARRETO. I would be happy to, Mr. Chairman. 

Chairman MANZULLO. Thank you. 

This plan centers around raising the loan level from the SBA Express program so we will achieve the same goal—a zero subsidy 

rate—without having to raise fees. If we make this change apply 

now, it will also allow the SBA to restore the 7(a) program to its 

full statutory level. 

The rest of the President’s budget request for the SBA remains 

sound and reasonable, given the budgetary constraints, with a few 

exceptions. I have concern about the particulars of the President’s 

proposal as it affects the SBIC issue. 

I am also concerned about zeroing out SBA’s contribution to the 

USEAC network. Each $1 appropriated to the SBA’s export finance 

specialists in the USEAC since 1999 has supported loans generating over $200 in export sales, a sound return on any investment. 

We encourage the Administration to revisit its position on withdrawing support from the SBA for the USEAC system. 

Thank you, and I now yield for an opening statement from the 

Ranking Minority Member, Representative Nydia Velμzquez of 

New York. 

[Chairman Manzullo’s statement may be found in the appendix.] 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

With the fiscal year 2005 Bush budget for the Small Business 

Administration, we have a proposal before us that represents the 

deconstruction of the only agency with the sole purpose of assisting 

our economy’s most important sector—small business. 

At a time when the economy continues to struggle and job creation lags, we should be investing in these programs, not turning 

our back on them. Not since the days of Reagan budget director 

David Stockton when elimination of the agency was proposed have 

we seen such a destructive plan. 

At least in the early 1980s, the Administration was honest about 

its intentions. The current one, which is looking for the same outcome, is not being forthcoming; instead, hiding behind fake budget 

numbers and proposals that will never work. 

Clearly, the worst is how this budget will deprive entrepreneurs 

of the capital they need to start their businesses. It is unbelievable 

that in this budget not a single dollar goes to the SBA loan programs. Not a single dollar. Not a single dollar for the general loan 

program. Not a single dollar for the micro loan program. Not a single dollar for the venture capital. 

Adding insult to injury, the plan here is to pay for all these programs by hiking up the fees for borrowers. Even after we listened 

to this Administration harp on the need for the agency to make 

more small loans, it then turns around and eliminates the micro 

loan program, which does exactly that. It makes no sense. 

3

The proposal now on the table to fix the 7(a) loan program is too 

little too late. It proposes to lower the guarantee fee to 50 percent 

of loans of $250,000 and below, eventually extending that up to $1 

million. This would harm the very small businesses the program 

was created to help by blocking avenues of credit and will also deprive lenders out of the program altogether. This fix was either 

poorly thought out or it is an intentional way to destroy the program once and for all. 

Another area where this budget falls short is in helping businesses access the federal marketplace. President Bush put this at 

the top of his small business agenda in 2002, but we have been told 

time and time again that the resources just are not there to back 

it up. This budget is no exception. 

There are no enforcement dollars to hold agencies accountable for 

missing their small business goals. There is no funding for the 

women’s procurement program that was made law four years ago. 

There is no money to ensure small businesses get their fair share 

of federal contracting dollars. 

This budget has an unprecedented number of cuts to SBA programs. The rationale behind these cuts is to channel remaining 

funds to the agency’s core programs, discarding those that are 

deemed duplicative. The problem is that the SBA’s core program 

have been flat funded for three years now. When you account for 

inflation, this amounts to a more than $10 million cut. It is one 

thing to expect an agency to do more with less. It is another thing 

to expect it to make something out of nothing. 

It is a shame because these programs help small business to stay 

afloat, expand and create jobs. They help to save taxpayers money 

and then even generate tax revenue. The failure to invest in them 

is completely shortsighted. It puts our nation’s small businesses 

and our economy as a whole in jeopardy. 

I believe in these programs. My Democratic colleagues believe in 

these program. It appears that the Administration does not. Even 

though President Bush spends a lot of time talking about the important role small businesses play in our economy, he went to Missouri. He went to New Hampshire. He visited a manufacturing 

plant in New Hampshire and Missouri. That is all it is. Talk. Let 

me tell you. Talk is cheap. 

If this Administration really wanted to assist small businesses, 

it would have made the SBA budget whole. Without putting so 

much needed resources into small businesses, we simply cannot 

have a vibrant economy. We cannot put Americans back to work 

by creating jobs. We cannot spur economic development in our local 

community. 

I would like to ask the Bush Administration where are its priorities? Where is its commitment? It is certainly not with small businesses. 

Thank you, Mr. Chairman. 

[Ranking Member Velazquez’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you. 

Mr. Barreto, who has been one of the longest serving SBA administrators, now into his third year, and a person who was raised 

4

in small business and whose father started the Hispanic Chamber 

of Commerce appears again before us. 

Based on your background and your experience, I have every confidence that SBA is in good hands. I look forward to your testimony. 

STATEMENT OF THE HONORABLE HECTOR V. BARRETO, U.S. 

SMALL BUSINESS ADMINISTRATION 

Mr. BARRETO. Thank you very much, Mr. Chairman, Ranking 

Member Velμzquez, Members of the Committee. Thank you for inviting me here today to talk with you about the Small Business Administration’s 2005 budget and our strong commitment to continue 

to offer the very highest quality services to America’s small business owners. 

A lot has happened over the last few years both in America’s 

small business community and at the SBA. When I became the 

SBA administrator almost three years ago, I wanted to change the 

culture of the SBA. I wanted to create a new environment at the 

agency and a new environment for America’s entrepreneurs. 

That meant not sticking to the status quo. That meant not doing 

things the way that we have always done them. That is what I 

would like to talk to you about today. The SBA is ready to send 

legislation to Congress that could add as much as $3 billion to our 

7(a) lending program this year, while simplifying the application 

process and moving the program toward a permanent zero subsidy 

rate. 

The President and I believe that this proposal provides a clear, 

long-term vision for a better, more successful 7(a) program, a bold, 

new 7(a) that addresses the real issues of the new economic times. 

The plan calls for the expansion of the successful SBA Express 

program, which accounted for a remarkable 33,000 SBA loans in 

2003 and has proven effective in reaching underserved and rural 

markets. Our proposals will move the 7(a) to a lower guarantee 

rate, allowing the agency to increase lending authority by 34 percent and remove the cap on 7(a) loans. 

It will also allow lenders to use their own forms and procedures 

to apply for 7(a) loans, reducing the burden of excessive paperwork 

and making 7(a) more accessible for rural and community banks 

and their customers. This plan also helps move the 7(a) program 

towards our goal of a zero subsidy rate. There is also a long-term 

potential for reducing fees on lenders and borrowers. 

But there is more. I am proud to say that the budget we are submitting also increases the 7(a) lending authority for fiscal 2005 by 

30 percent. Thirty percent. That will allow us to reach thousands—

perhaps tens of thousands—more entrepreneurs than we ever have 

before. There is an added benefit to these proposals because we are 

moving toward a zero subsidy rate for 7(a). 

These tremendous increases in loan authority come hand in hand 

with tremendous savings for America’s taxpayers. What is more, 

zero subsidy for 7(a) also translates into long-term stability for the 

7(a) program, something our partner lenders will appreciate. 

But that is not all we are doing. I am also extremely proud that 

this budget strengthens the SBA core service delivery system. We 

are investing in the successful delivery systems that we know get 

5

results for our customers—$88 million for small business development centers, $5 million for the Service Corps of Retired Executives, $12 million for women’s business centers, $750,000 for National Women’s Business Council, $750,000 for veterans outreach, 

$1.5 million for 7(j) technical assistance. 

These proposals are part of our commitment to a new SBA with 

new ideas and new ways of serving our customers, new ways of 

reaching out like our Spanish language web portal, negocios.gov, 

and our business matchmaking events, new ways of fighting for 

things that small business owners need like less burdensome regulations and association health plans, new ways to help create an 

environment of success for small business. 

That is the culture I want at the new SBA, and I am proud of 

the progress we have made. In 2003, the SBA approved 74,169 

loans in our two major loan programs, more than ever before in our 

50-year history, and almost a third of those loans went to minority 

business owners. In 2003, 2.1 million entrepreneurs received business counseling and technical assistance through SBA’s counseling 

and training programs. 

In 2003, the SBA’s Office of Advocacy saved small businesses 

$6.3 billion in regulatory costs. In 2003, the SBA website recorded 

more than 54 million visits. In that same year, the SBA’s disaster 

assistance loan program made almost 26,000 loans. 

Now, those are real results, and that is what matters the most. 

Let me tell you why. At a business matchmaking event in Houston 

a few months ago, a businesswoman came up to me with tears on 

her cheeks. She said to me Mr. Administrator, I am not a statistic. 

I am a real, living, breathing business owner, and I want to thank 

you. After 9–11, it was an SBA disaster loan that keep my business 

open, and now I am here learning and make connections to make 

my business grow. 

That is what is important. That reminds us of what our job really is. This is about real people and real lives. Our responsibility is 

great. I am proud of these proposals because I believe that they 

live up to that responsibility. I believe that they reflect an SBA 

that understands what is at stake. It is not about programs and 

statistics. It is about results measured by the success of our clients. 

I hope we can work together to get those results and help usher 

in more of that success for even more American entrepreneurs. 

I want to thank you again for having me here. I would be glad 

to answer any questions you may have. Thank you. 

[Administrator Barreto’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you, Administrator. The President’s 

agenda for small business affects more than just the SBA, does it 

not? Could you explain what other parts of the President’s budget 

request help small businesses? 

Mr. BARRETO. Absolutely, Mr. Chairman, and I thank you for 

that question. 

You know, we have had a wonderful opportunity this year to go 

around the country. In fact, I just came off of a trip where we did 

a regional event in Reno, Nevada. We did a business matchmaking 

event in Anaheim, and I flew in last night. 

6

I want to tell you some of the things that we have been hearing 

all around the country. First of all, the small businesses are thanking us, this Administration, for creating the right environment for 

them to succeed. One of the things that they mention to us often 

is the appreciation for the Jobs and Growth package. 

You know, a lot of people still do not understand that that Jobs and Growth package returned $10 billion into the hands of small 

businesses. Eighty percent of that benefit accrued to small business 

simply by lowering the top marginal tax rate. 

We also quadrupled business deductions for those small businesses, and that helped a lot in getting that confidence going back 

up again and really started creating those jobs that we have been 

needing in our economy and those purchases that were not being 

made by small businesses. 

I have to tell you that the top issue that we hear out there all 

across the country is association health plans. They still want access to affordable health care. They still feel that they have too 

many cumbersome regulations. They want us to do something 

about tort reform. They want us to do something about opening up 

new markets and new opportunities, unbundling contracts. There 

is a lot that is on small businesses’ minds. 

This budget helps us to advocate on behalf of those small businesses. We understand that they appreciate our programs and 

services, but they also expect us to be a champion for them. They 

want us to get it. They want us to understand what they go 

through every single day. 

That is what we are hearing, and that is one of the reasons I am 

proud to present this budget to you because I really believe that 

it is going to help us to continue the momentum that we have built 

over the last year. 

Chairman MANZULLO. Okay. Thank you. 

We will keep the questions to five minutes, but, Mrs. Velμzquez, 

I am going to give you 10 minutes. I will double the clock on that 

for you. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Barreto, can you please list for the Committee the names of 

the programs that you asked for an increase in funding over last 

year’s budget? 

Mr. BARRETO. Well, the first program that we are looking at 

making a significant increase in, as you know, is the 7(a) loan program. 

Ms. VELAZQUEZ. That is not an increase. You zeroed out. You did 

not ask for any money. 

Mr. BARRETO. As you know, Congresswoman, we have several 

very important programs—the 504 program, the SBIC program—

that also have zero subsidy. 

Ms. VELAZQUEZ. Why did you mention 7(a)? You know quite well 

that that is not the case. Tell me about the women’s business centers, the BDCs, venture capital, micro loan. 

Mr. BARRETO. Sure. I would be happy to. 

Ms. VELAZQUEZ. Let me go to the next question. 

Mr. BARRETO. Absolutely. 

Ms. VELAZQUEZ. In your January 8 response to the Senate, you 

wrote, and I quote, ‘‘Once SBA is able to reopen the program, we 

7

will take steps to ensure that every application is treated equally 

and fairly.’’ You also stated that you look forward to working with 

us to rapidly resolve this issue. 

Well, Mr. Barreto, many of those loans—over 750,000—were submitted on time before the cap was implemented, and yet they were 

returned by your agency. Three small businesses that are in this 

very situation will testify here today. 

What can you tell these people, these small businesses that have 

traveled here to Washington in hopes of finding relief to assure 

them that the SBA will resolve their situation quickly and fairly? 

Mr. BARRETO. I am very excited to tell them that we brought 

today a very important proposal that will help us greatly achieve 

many of the objectives that you just mentioned. This proposal that 

we are submitting today to expand the SBA Express program will 

mitigate a lot of the problems that you reference. 

Ms. VELAZQUEZ. Mr. Barreto, please answer my question. 

Mr. BARRETO. Yes, ma’am. 

Ms. VELAZQUEZ. My question is based on a response that you 

provided to the Senate where you said that you will deal with those 

applications that were submitted on time before the cap restriction 

was invoked,——

Mr. BARRETO. Yes. 

Ms. VELAZQUEZ [CONTINUING]These people made plans to expand 

their businesses, and they have been put on hold. So what are you 

going to tell them, that they have to wait until you submit a proposal? What do you know about the outcome of that legislative proposal here in Congress? 

Mr. BARRETO. First of all, I am sorry. I want to make sure that 

I am very, very clear on your question. 

First of all, we did have to return back applications that we received simply because we ran out of money. As you know, we were 

on continued resolution for the second year in a row. In other 

words, we did not have our budget approved, which would have 

helped us to be able to make some of those loans. We basically ran 

out of money. 

The good news is that most of those loan applications have already come back to us. Most of those loan applications have already been approved. 

I want to mention one other thing, Mrs. Velμzquez, Congressman 

Velμzquez. This is very, very important. Ninety-five percent of the 

loans that the SBA does are under $750,000. Only five percent of 

those loans are over the $750,000 cap. Unfortunately, those larger 

loans, which often times are for real estate and fixed assets, eat up 

a third of the money. 

I am happy to tell you that now that we have a budget, we are 

not going to have a problem serving 95 percent of the small businesses that apply for loans at the SBA. 

Ms. VELAZQUEZ. What are you going to do with those applications over $750,000 that were submitted before the restriction? I 

have an answer for you. I have a solution. 

Mr. BARRETO. First of all, we have already processed most of 

those applications. They have already come back to us. 

One of the things I want you to know is that as soon as we 

opened up the program, our lenders contacted us and said look, 

8

those applications that got sent back, can we send those back to 

you? We said absolutely, yes. 

Many of those have already come in and have been processed. 

We work on that every single day to make sure that that backlog 

has already been dealt with, and it has been dealt with. 

Ms. VELAZQUEZ. Okay. There are three business people that are 

here today. You are telling me that their situation will be resolved? 

Mr. BARRETO. Congresswoman Velμzquez, I am not sure of the 

specific cases that you reference, but in every case we will do everything that we can to make the loan. 

You know, one of the good things about the SBA is that it not 

only has a 7(a) loan program. We also have other loan programs 

as well that can accommodate those larger real estate loans. 

Ms. VELAZQUEZ. It is quite simple. Their applications are for 

loans above $750,000. 

Mr. BARRETO. We have a cap right now of $750,000. 

Ms. VELAZQUEZ. But they were submitted on time. What are you 

going to do with those? 

Mr. BARRETO. You know, one of the things is I think we have a 

chart here that I would like to show you. You know, one of the 

things that nobody could have anticipated is the spike in demand 

that we received during the holidays. 

You see, for us usually we will see $25 million in a normal day. 

You can see from this chart here the incredible swings that we saw 

there at the break. We had some days where we were over $80 million, $100 million. 

Ms. VELAZQUEZ. Excuse me. Excuse me. He gave me 10 minutes, 

and I have a lot of questions. 

Mr. BARRETO. Okay. 

Ms. VELAZQUEZ. For these three people, why can you not reprogram funding into the 7(a) program? 

Mr. BARRETO. Well, one of the things that we did, Congresswoman Velμzquez, is we looked at the possibility of reprogramming 

some dollars, but, unfortunately, what we found out is because of 

the rules and the limitations we were not able to reprogram 

enough to get us to the level that we needed to be at to be able 

to absorb a lot of those larger loans. 

It is one of the reasons why we still have a cap on the loans right 

now, and it is one of the reasons why we feel so strongly about the 

proposal that we have submitted today. You see, if Congress acts 

on that proposal we will be able to take that cap off immediately 

and be able to help those small businesses. 

Ms. VELAZQUEZ. So, Mr. Barreto, your solution to this SBA created problem is to make this small business start the process all 

over again, go to the back of the line and repay application fees? 

Mr. BARRETO. Absolutely not. 

Ms. VELAZQUEZ. Lenders have already stated that under your 

new proposal they would not be able to make this type of loan, so 

a small business owner would be left to search for a new bank that 

is willing to provide them a loan. How is this fair? This is a nonstarter, Mr. Barreto. This proposal is a non-starter. I can tell you 

that. 

Mr. BARRETO. Well, I would like to explain because I think there 

may be some misunderstandings about the proposal. 

9

You see, if this proposal is able to be enacted, we will be able 

to do some of those large loans because we are going to get about 

another $3 billion in budget authority, so I think there may be 

some confusion, especially in the short term, of our ability to do 

some of those larger loans. 

Ms. VELAZQUEZ. Well, you have a lot of work to do because a lot 

of the banks are saying that they will not agree with it. 

Mr. Chairman, this proposal would be submitted to us. We will 

have to conduct hearings, and we will have to mark it up. 

Mr. BARRETO. I would be happy to continue to provide any information around this. We spent a lot of time thinking about this. 

By the way, one of the reasons that we came up with this proposal is because of the things that the industry was telling us. 

They were telling us look, we need to do something to remove that 

cap. We need to do something that is going to make this program 

consistent and will be immune to these spikes in volume. We need 

to do something so that this program can grow this year; not only 

next year, but this year. This proposal allows us to do all those 

things. 

Ms. VELAZQUEZ. This is a problem that was created by SBA. 

Quite clear, the Members of this Committee told you in your last 

budget that the funding that you were requesting was inadequate—you said no, it is fine—that you would be running out of 

money, and this happened. Now we are punishing small business 

for that. 

Mr. BARRETO. One of the things I did was I brought a chart with 

me as well—I wanted to be prepared for these questions—that really shows you what the level of lending has been over the last five 

years. 

You see, over the last five years, we have never had the kinds 

of volumes that we have had this last year. In a way, we are kind 

of a victim of our own success, but the reason that we had the 

problem is not because we decided to close down the program. The 

reason that we had the problem is we were on a continuing resolution because we did not have a budget approved for the second year 

in a row. 

The reason that we had the problem is because five percent of 

the loans eat up a third of the budget authority, and that is why 

this proposal———. 

Ms. VELAZQUEZ. Do you not have a budget now? Do you not have 

a budget now? 

Mr. BARRETO. We do have a budget now. 

Ms. VELAZQUEZ. But you still have a problem. 

Mr. BARRETO. We are open for business now, and 95 percent of 

the loans are being made. 

Ms. VELAZQUEZ. Let me go to the next question. Prior to the release of the budget, Mr. Barreto, could you explain to us at what 

point during your testimony before the Committee, during our negotiations with the SBA over the reauthorization or in any communication, either formal or informal, have either you or the Administration advocated allowing the claimed fee structure for the 7(a) 

loan program to lapse? 

Mr. BARRETO. First of all, I want to be very clear on that point 

as well, Congresswoman Velμzquez. We are not increasing the fees. 

10

What is happening is the legislation that Congress put in is expiring at the end of this fiscal year. All we are doing is going back 

to the original fee structure. 

My understanding is the reason that legislation was put forward 

was to be able to incentivize these kinds of loans and to be 

able———. 

Ms. VELAZQUEZ. What about the 504? Did it not expire too? 

Mr. BARRETO. The fee structure on the 504? 

Chairman MANZULLO. Talking about expiring, the time has expired. 

Ms. VELAZQUEZ. Are you going to do the same with that? 

Mr. BARRETO. I am sorry. With regards to the 504 program? 

Ms. VELAZQUEZ. Yes. 

Mr. BARRETO. We have actually a tremendous opportunity with 

the 504 program because we have $2 billion of additional budget 

authority that we never spent in the 504 program. 

In fact, what is happening now is more of those larger real estate 

loans that were in that 7(a) portfolio are moving over to the 504 

loan program, so we think that is a very important opportunity to 

help small businesses with the real estate and fixed asset loans. 

Chairman MANZULLO. Mr. Bradley? 

Mr. BRADLEY. Thank you very much, Mr. Chairman. It is certainly a pleasure to be here and certainly a pleasure to see you, 

Mr. Barreto. 

I would like to just start out, first of all, by thanking you personally for intervening during this crisis time several weeks ago and 

making sure that a constituent of mine was given prompt treatment. It was an emergency closing and a lot of money at stake for 

him as it was a small business and a lot of personal savings. 

Without your help and the help of your staff, it would have been 

a very real problem, so thank you. I know that given the budget 

situation and how we are waiting for the omnibus to pass, it was 

a very difficult situation. I just wanted to thank you. 

As we look at difficult budget decisions and as certainly I have 

traveled around New Hampshire and there has been a lot of attention to New Hampshire recently, the small business owners I have 

been talking to have emphatically indicated to me that the bonus 

depreciation, the greater expensing limits, the reduction of the top 

individual rate which the small business owner pays, are critically 

important to their economic health. 

Perhaps you would like to comment on that and how, you know, 

these incentives, these tax incentives for businesses that are hiring, 

that are trying to keep employees, are critically important, as well 

as the loan program and that we have to have a balance of both 

and that scarce resources cannot just be focused in one area. 

Mr. BARRETO. Absolutely, Congressman Bradley. It is an honor 

to be able to help your constituent. 

By the way, I would be happy to help those other constituents 

that are in this room to personally discuss their situation with regards to the 7(a) loan. If I could have their names and numbers, 

I will personally make sure that we follow up with them. 

I appreciate your question and your comment, congressman, because you are absolutely right. A lot of people do not understand 

that small businesses shoulder some of the highest tax burdens. 

11

You know, sometimes when you hear people talk about this tax relief it is like they do not understand that 23 million small businesses in the United States will get a tax relief of about $2,209. 

Now, for some that may not seem like a lot, but for that small 

business who is trying to keep pace with the health insurance premiums or give an employee a raise or buy a software program, it 

is huge. You throw on top of that when you quadruple that business deduction, those kinds of purchases that were not being made 

before are being made now. 

It is not an accident that the economy is starting to increase. You 

know, the President says all the time that small business is the engine that is fueling that because they are buying equipment. They 

are buying vehicles. They are buying technology. They are creating 

jobs. That did not happen by accident. It happened because this 

Congress, this President, worked together to create the environment for those small businesses to succeed. 

If we really believe in small business, then we will give them 

back more of their hard-earned money because we know what they 

will do with it. They will put it back to work, and that is what we 

should be doing. That is what small businesses tell us, and that is 

what they tell the President of the United States. 

You know, when the President of the United States goes around 

the country and meets with small businesses, he is not the one who 

is doing all the talking. He is talking to these small businesses and 

asking them the questions, and these are the kinds of things they 

are telling him. 

I could not agree more with you. I think that we need to make 

the tax relief permanent for the small businesses so they can continue to fuel the economy forward. 

Mr. BRADLEY. Thank you very much. 

Chairman MANZULLO. Thank you, Congressman. 

From the land of enchantment, Congressman Udall. 

Mr. UDALL. Thank you. Thank you very much, Chairman Manzullo. 

Chairman MANZULLO. From the Prairie State. 

Mr. UDALL. From the land of enchantment. That is right. 

Administrator Barreto, let me just begin by saying, and I think 

this in a way echoes what our Chairman and our Ranking Member 

just said, that we are very disappointed, I think, in certain respects 

with this SBA budget. I mean, you are talking about $120 million 

below what was requested last year, a 10 percent decline in program funding, zeroing out micro loan, 7(a), prime, business link, 

SBIR, rural outreach. I mean, these are significant changes in programs that I think many of us believe up here are good ones that 

help businesses. 

Let me, first of all, just focus on one of those. In May of last year, 

a hearing was held on SBIR FAST, that program and the MEP program. In testifying about the FAST program, the SBA said, and I 

am quoting here. This is in the testimony. ‘‘The result is a strong 

knowledge base backed up by a network of professionals who support small businesses to become expert researchers and innovators 

and commercialize their innovations.’’

This testimony from your agency, this testimony certainly implies that SBIR FAST program is successful. What happened in the 

12

intervening months that led you to believe that the SBA should not 

request funding for this program? 

Mr. BARRETO. Thank you for the question, Congressman. It is not 

really what happened in the last few months. It is really what has 

been happening over the last couple of years. 

You see, we do believe in these programs, but one of the things 

that has been so difficult for us is that sometimes we will request 

funding for these programs and they will get zeroed out, and yet 

we still have the responsibility and there is an expectation that we 

are going to run these programs with no funding. 

As you know, the SBIR program is an important program, and 

all agencies of government participate. This is a set aside program 

for research and development grants. Our part of it is really to help 

facilitate those opportunities, to really inform and educate small 

businesses how these programs work, and we are going to continue 

to do that through our incredible network that we have. 

So, our commitment to the program is not necessarily going to 

end, but one of the things that we had to do is just face the reality 

that often times the appropriations for some of these programs are 

not there, and yet we need to continue to do the job for the small 

businesses that they expect us to do. 

Mr. UDALL. The reality, Administrator Barreto, is that the appropriations were there. You did not ask for the money, and that is 

the fact of it. 

A recent report of your Inspector General highlighted that the 

SBA had not provided sufficient measurable outcomes for FAST 

grant recipients. Further, the IG pointed out that the SBA had yet 

to receive performance reports from several grant recipients. 

How do you respond to my concern that any failure of the FAST 

program has more to do with the failure of the SBA to implement 

the program adequately rather than any failure of the program 

itself? 

Mr. BARRETO. You know, we work very closely with the IG. They 

obviously put out a lot of reports that we can be doing better. You 

know, a lot of times what we realize is that they are not aware of 

some of the things we are doing, so we have to sit down with them 

and make sure that we educate them on the deliverables and the 

results that we have accomplished on these programs. 

Again, it is not to say that we are not committed and do not believe that there is benefit. You know, small businesses can play a 

very important role in the research and development that the government needs, remembering that 97 percent of all research and 

development that the government does is not part of the SBIR program and can still go to small businesses. 

Mr. UDALL. The other part of this that you mentioned in your 

earlier testimony is the issue of continuing resolution. You have 

said several times here we have had no budget approved for the 

second year in a row, and we were on a continuing resolution and 

how it hurt your agency. Basically I think what you would probably 

tell me is a continuing resolution is a hard freeze. It hurts our ability to plan. We cannot move out and do things. 

I think there are many of us on this Committee that are very disenchanted with our budgeting process, the fact that we are going 

13

into the fiscal years and not giving you a budget and then having 

that kind of thing happen. 

You should know that that disenchantment is out there by many 

of us I think on this Committee, and I think we would be wise if 

we believed in SBA programs to fund these at the start of the fiscal 

year and give you the ability to plan. 

Mr. Chairman, I just want to ask you to put my opening statement in the record and with that yield back and thank you very 

much. 

Chairman MANZULLO. Without objection. I appreciate that. 

Dr. Bartlett? 

Mr. BARTLETT. Thank you. 

Mr. Secretary, I would like you to know that your stewardship 

of the programs is recognized and appreciated. Thank you very 

much for your hard work and great successes. I have a couple of 

questions that deal with some of the detail of the budget and your 

program. 

As you know, I, along with most of my colleagues on this Committee, are very supportive of the HUB Zone program. As America 

transitions through the so-called jobless economic recovery, far too 

many Americans are without work. The HUB Zone program targets 

the poorest areas of every state and brings good jobs and economic 

develop where we need it most. 

That is particularly true in my district where in a very economically depressed area we have brought some jobs of very high calibre 

where they are being paid three and four times the average wage 

in that community, so it is a very successful program. 

In my district, 36 HUB Zone certified firms produce more than 

$60 million in goods and services each year. These firms represent 

the job engines that create jobs where we need them most. Unfortunately, your 2005 budget submission cuts HUB Zone funding by 

nearly seven percent from 2004 levels, while increasing 8(a) funding by eight percent and increasing small disadvantaged business 

program funding by more than six percent. 

Even more significant are the absolute numbers in these programs. The 8(a) program will receive $37 million in 2005, while the 

HUB Zone will receive less than $7 million, and that is in spite of 

the fact that there are 8,800 certified HUB Zone firms and only 

7,300 8(a) firms. 

For the past five years, the federal agencies have only achieved 

a small fraction of the statutory required minimum level of contracts for HUB Zones. Why will the Administration not adequately 

fund the HUB Zone program, which is an enormously successful 

program? 

Mr. BARRETO. Thank you very much for that question, Congressman Bartlett. 

First of all, let me say that we agree with you that the HUB 

Zone program is a very important program. What this budget does 

is it incorporates the funding that we would have for HUB Zone 

and puts it where we believe that it should have been all along—

inside the government contracting and business development line 

item. 

We are very proud of the increases that we are seeing in HUB 

Zones. We work very closely with HUB Zone firms and the HUB 

14

Zone association. One of the things that we were concerned about 

is that sometimes that funding was going to be zeroed out altogether, and so to prevent that, to mitigate that, we have included 

the funding that we will put in HUB Zone inside of our GCBD 

area. That is included in there. 

We think it is fantastic that there is more HUB Zone firms that 

are being signed up all the time. We think it is great that there 

are 8(a) firms that are being signed up all the time. As you know, 

we consider both of those programs at parody, not one more important than the other, even though 8(a) has been around a lot longer, 

the contracting is much larger there, even though there are less 

firms. One of the reasons there are less firms is the process of 

being certified for 8(a) takes a lot longer and is a little bit more 

cumbersome. 

We are seeing some very good signs, Dr. Bartlett. Last year, the most recent figures available, we did an extra $1 billion to HUB 

Zone firms than the year before, and we see that trend continuing. 

We work very closely with the industry. Yesterday I was in Anaheim at a business matchmaking event, and the HUB Zone organization was represented. HUB Zone firms were there meeting with 

buyers at the federal level and corporate level to get access to those 

contracts. 

I want you to know that we are committed to this program. It 

is an important program for small business. 

Mr. BARTLETT. Are you saying that you really have not cut the 

funding; you have simply moved some of it to another category? 

Mr. BARRETO. That is right. 

Mr. BARTLETT. Okay. You need to do two things. One is tell the 

world, the HUB Zone world, how much total money is available; 

that you really have not cut their budget if it is true that you have 

not cut their budget. 

Mr. BARRETO. Right. 

Mr. BARTLETT. The money is really there, and the program is 

being even better supported now than it was before. Will you provide us with the documentation for that, because our HUB Zone 

people are very concerned? 

Mr. BARRETO. Yes, sir. 

Mr. BARTLETT. Second question. If time runs out, you may submit this for the record. 

Why was Mr. Maurice Swinton, who had strong support from 

small business technology companies, transferred from the Office of 

Technology where he managed the federal SBIR program to the Office of Management and Technical Assistance? 

Is the transfer temporary and voluntary? If not, why not? Why 

is Mr. Swinton being transferred to a program that he may have 

little or no experience with? 

Mr. BARRETO. First of all, Maurice Swinton has done a very good 

job for us in that program. One of the things that we have been 

doing over the last couple of years is moving people around. This 

is part of our transformation effort, our new SBA. 

You know, the SBA is very fortunate to have some very talented 

individuals that can do a number of different things. One of the 

things that we have been very focused on is succession planning. 

We cannot always expect the people to always have to carry the 

15

load. We need to be able also to train people and make sure they 

can do a variety of different things. 

The bottom line is we really needed Maurice in another program, 

and we were fortunate enough to have two individuals that could 

trade roles, if you will, to help us out. We appreciate the service 

that Maurice has given us. He has done a fine job. His replacement 

will do a fine job as well. 

Please understand that this is no reflection on our commitment 

to that program. 

Chairman MANZULLO. Mr. Akin? 

Mr. AKIN. Thank you. Thank you, Mr. Chairman. 

I think what I am picking up is that part of what we are seeing 

here in your proposal is an attempt to streamline the operation and 

to be able to deliver services more efficiently without the red tape 

and the hassle to the people that we are really serving with this 

sector of the budget. 

Is that, first of all, an accurate summary of what you are trying 

to accomplish? 

Mr. BARRETO. That is absolutely correct, Congressman Akin, and 

I appreciate the comment. 

This is what SBA has been doing now for a long, long time. It 

is incredible, and I do not think that part of the story gets out. SBA 

has been doing incredible things, and yet it has been streamlining 

now for over a decade. 

We break records every single year because we have good people, 

we have good programs, and we just do it better than we have ever 

done it before. We believe that we have not hit capacity yet. We 

can still do a lot more with this budget. 

Mr. AKIN. With your track record of number of loans, in that way 

you are doing a better job. You are taking a look with this proposal 

at being able to do not only more loans, but more loans with less 

hassle and less paperwork. 

To some degree, just because of the legislative process we create 

these stovepipe special programs. What you are saying is we can 

service those markets. We can do a good job for those people, but 

we are just not going to put it all into these stovepipe programs. 

We are going to put it all together and manage it more efficiently. 

I think that is what I hear you saying. 

Mr. BARRETO. That is absolutely correct, Congressman. You 

know, with the small businesses, and we talk to thousands of them 

every year. They do not pay attention to the stovepipe. They do not 

care about the stovepipe. They just want to know is it going to be 

easier for me to get a loan, and, by the way, I may not need $1 

billion. I may need $50,000 or $100,000. They want to know if they 

can get technical assistance when they want it, not when we want 

them to have it. 

Last year we trained 2.1 million people. They want to know if we 

are bringing more opportunities to them, not something that is in 

a stovepipe, but maybe a new initiative like business matchmaking 

or some of the things that we are doing on line. 

Mr. AKIN. In the case of these loans, are they pretty well distributed across the country in terms of geographically so it is not all 

just loans to Washington, D.C. business, but it is kind of a spread? 

16

Is there good mix also in terms of the larger and smaller, the 

range, so that we are not just doing everything right at the max 

because it is easier from an administrative point of view to just do 

maximum loans? 

Do we have good variety both geographically and in size of the 

scale of the loans? 

Mr. BARRETO. That was one of the things I was the most proud 

of last year, Congressman Akin. We did more everywhere. We did 

30 percent more loans to all American small businesses, but we did 

38 percent more to minority small businesses. 

There is a chart right here that I would like to share with you. 

Across the board, we did more to minorities and the African-American community last year. We did something in excess of 75 percent 

more loans. Yellow is the last year that we did. You can see how 

that spikes up over the previous two years. Hispanics, we did about 

45 percent more loans. Asians, 30 percent more loans than the year 

before. We did more Native American. Women, 30 percent. Veterans, 20 percent. 

We did more everywhere, and we got our average loan size down. 

When I first came on board, the average loan size at the SBA was 

a quarter of a million dollars. The average that a small business 

needs for working capital is $50,000 if you believe Inc. Magazine 

and their studies of it. That does not mean that we cannot do large 

loans. By the way, we did 20 percent more in our 504 loan program 

last year than ever before. 

These changes that we have made are working, not because we 

say they are working, but because the outcomes we are getting for 

small business are so great, and the customers are telling us that. 

Mr. AKIN. I really appreciate what you are saying, and I appreciate your taking an aggressive, and it may be that it is somewhat 

misunderstood because everybody has their little pet thing, but if 

the bottom line is you are able to do this kind of performance, you 

are getting more loans and it is for a diversity of different kinds 

of markets, a diversity of sizes of loan requirements, I think that 

is what we are all about. I really appreciate your good management. 

Ms. VELAZQUEZ. Would the gentleman yield? 

Mr. AKIN. No. You can go ahead and have your next 10 minutes 

if you would like, but I think my five are done. 

Ms. VELAZQUEZ. It is still yellow. I just want the record to reflect 

that——

Chairman MANZULLO. There are 30 seconds left. Go ahead. 

Ms. VELAZQUEZ [CONTINUING]The 7(a) loan program did $200 million less. 

Mr. BARRETO. That is misunderstood, Congresswoman. Did you 

know what happened to those $200 million? A lot of the minorities 

that were getting those $200 million, they wanted larger loans. 

They wanted real estate loans. They wanted fixed asset loans. The 

$200 million went to the 504 loan program. We did $200 million 

more to minorities in the 504 loan program, so that is a little bit 

of a misnomer. 

That $200 million did not disappear. The good news is we helped 

more minorities than ever before. We are very proud of that. 

Chairman MANZULLO. Mrs. Kelly? 

17

Mrs. KELLY. Thanks. Nice to see you here. Thank you very much 

for being here. 

Mr. BARRETO. Thank you, Congresswoman. 

Mrs. KELLY. I have really just one question, and that is in your 

budget I want to know if you have done anything that can help our 

returning service people. 

When you are in the National Guard, if you are the owner of a 

small business and maybe you employ two or three people, when 

you go your business is gone. Is there something in there that is 

going to help those people reenter the business market as an entity? 

Mr. BARRETO. Thank you very much for that question, Congressman Kelly. 

You are absolutely right. I mean, we know this more than ever 

before. The people that are sacrificing the most for us right now 

are serving us in the armed forces. We have taken a very proactive, 

aggressive approach to making sure that they understand what 

their benefits are, what the opportunities are. 

I will give you a couple of examples. We put a program together 

that we call MREIDL, military reservists economic injury disaster 

loans. It is a mouthful, but those are loans, low-interest loans for 

those businesses where an owner of a company is serving in the 

armed forces or maybe one of the employees are. 

We did a tremendous amount of marketing and outreach. We did 

a lot of interviews on TV, radio. We are doing more than that. We 

are working very closely with the Department of Defense, with the 

Veterans Affairs. We have put in the hands of all returning veterans—not just the ones that we think are in business; all returning veterans—an SBA kit with all of the information on all of our 

programs and a couple of little mementos that we put in there. We 

have distributed 250,000 of those kits. 

We are working right now with the Department of Defense to put 

kits together for 500,000 more service personnel, so this is very, 

very important to us. Last year we reversed a trend, a seven year 

trend of declining veterans loans. Last year we had an increase in 

veterans loans, and we are going to have an increase this year as 

well. It is one of the most important things that we can do. 

If we are asking so much of these people right now in serving 

our country, protecting us, protecting our homeland security and 

fighting international terrorism, then we have to be there for them 

when they come back. I pledge to you the SBA will be there for 

them. 

Mrs. KELLY. Thank you. I really want to applaud you on the 

business matchmaking program because I have found in my district and in other places where I have been small businesses get 

themselves certified, and then they do not know how to get in on 

the bid contracts. It is one of the reasons I have real problems with 

bundling. 

I would applaud your efforts on that, and I hope that what you 

have done here is extend more toward educating the small businesses of America how they, too, can get in on the federal contract 

bids and win those bids. I think that is very important. 

Mr. BARRETO. Thank you very much, Congresswoman. 

Mrs. KELLY. Thank you. 

18

Chairman MANZULLO. Thank you. We will take about a five 

minute break and then have the second panel. 

Mr. BARRETO. Thank you. 

[Recess.] 

Chairman MANZULLO. The Committee is called to order. 

The first witness will be Lee Mercer, president, National Association of Small Business Investment Companies. The red light, you 

know how it works. When it gets to yellow, you have one minute. 

When it gets to red, you are done. 

Lee, I look forward to your testimony. There you are, right in the 

middle. 

Mr. MERCER. In the middle of the group. 

Chairman MANZULLO. If you could talk very closely to the mike, 

that would help. 

Mr. MERCER. How is that? Am I being picked up now? 

STATEMENT OF LEE MERCER, NATIONAL ASSOCIATION OF 

SMALL BUSINESS INVESTMENT COMPANIES. 

Mr. MERCER. Mr. Chairman, Ranking Member Velμzquez, Members of the Committee, the point I want to stress today is that the 

Participating Security SBIC program, by far the most active part 

of the SBIC program as a whole, will end effective October 1, 2004, 

if the Administration’s proposal is adopted by Congress. We agree 

legislation must be passed. A restructuring must occur, but not the 

proposal of the Administration. 

Today’s hearing is the beginning of a critical path for the Participating Security program. My goal is to help the Committee understand why SBA’s proposal will not work and why the proposal we 

have filed with the Committee will work for all stakeholders. 

The Participating Security program is critical to the success of 

the SBIC program as a whole. Over $7.4 billion in Participating Security investments have been made since the start of the program 

in 1994. During the past 17 months, a critical period as U.S. business fought to recover from the recession, Participating Security 

funds invested $2.8 billion, a full 47 percent of the $6 billion invested by SBICs during the period. 

Through January 23 of this fiscal year, Participating Security 

SBICs have accounted for 55 percent of all SBIC investments. 

Twenty-six of the 36 new SBICs licensed by SBA in fiscal year 

2003, a full 72 percent, were Participating Security funds. 

Clearly, the program is providing the equity capital Congress intended when it created the program in 1992 and increasingly so. 

NASBIC supports the $4 billion in Participating Security leverage 

authority for fiscal year 2005 that is proposed by SBA. However, 

NASBIC strongly opposes the program restructuring proposed by 

the Administration. That proposal simply will not work for talented 

management teams and knowledgeable investors. I cannot say it 

more plainly. 

The current structure has worked for the private sector because 

there is a potential, and it is only a potential, for substantially enhanced returns to private investors investing in Participating Security funds versus non-SBIC funds if, and it can be a big if, the 

SBIC performs above an annual 12 percent level of profitability. 

19

That potential for significant enhancement in the current structure is required to offset the many negatives associated with the 

program. Not the least of these are substantial up front fees paid 

to SBA, substantial risk posed by capital impairment and restricted 

operations regulations, SBA’s preference in any liquidation event 

and the very real fact that private investors fare substantially 

worse than they would in a non-SBIC if the level of profitability 

falls below 12 percent. 

S.B.A.’s proposal would destroy the balance of the current program in the following ways: First, SBA’s proposal would require a 

current pay interest charge that is unheard of in funds making 100 

percent equity investments, investments that provide the fund with 

no cash flow to pay current interest. The resulting mismatched 

cash flows is what got the SBIC program in trouble in the 1980s, 

leading to the creation of the current program. 

S.B.A.’s proposal would result in UBTI, unrelated business taxable income, for tax exempt institutional investors, driving away 

the very investors SBA should want in the program. SBA’s proposal would substantially increase the up front fees and preferred 

payments made to SBA before any payments to private investors. 

It would raise the level of profitability required for private investors to break even to at least 18.3 percent per year. The hurdle rate 

is a non-starter. 

S.B.A.’s proposal would substantially reduce the percentage of remaining profits that went to private investors. Thus, SBA’s proposal would increase all negative elements in the program while 

substantially reducing benefits for private investors. 

N.A.S.B.I.C. proposed a restructuring that is simplicity in itself, 

prorata sharing of all profits and losses by all economic interests 

in the fund, including SBA. Based on 20-year venture capital industry returns and Treasury rates, this would work for all parties. 

Structured as we propose, the new Participating Security program would stimulate investment in small businesses to the greatest extent possible during times of scarce capital availability. It 

would accomplish the mission at no cost, likely a gain to the government, attract the largest possible percentage of knowledgeable 

private investors and high-quality fund management professionals 

and create no distortion in private capital markets. 

Chairman MANZULLO. With that, we are out of time. 

Mr. MERCER. I am done. 

Chairman MANZULLO. Thank you. 

Mr. MERCER. I just did not get to read my thank you paragraph. 

Chairman MANZULLO. That is okay. That is okay. I will note that 

for the record. 

[Mr. Mercer’s statement may be found in the appendix.] 

Chairman MANZULLO. I am going to recognize Congressman Jim 

Cooper, who will introduce his constituent, David Pilcher from 

Nashville. Mr. Pilcher will then be the next witness. 

Mr. COOPER. Thank you so much, Mr. Chairman. I appreciate 

this opportunity. I think that this Committee and this Congress 

can benefit from the testimony that you are about to hear. 

David Pilcher is a fine man and a fine small businessman who 

has been seriously mistreated by the recent changes in the SBA 

7(a) program. Mr. Pilcher is CFO of a 109-year-old, family-owned 

20

small business, a moving and storage company, a typical American 

firm. They were in the process of getting one of these loans when 

not only was the program capped, as you all are well aware of, but 

they outlawed piggybacking. 

To me, two other very insulting and harmful things happened. 

Number one, as I understand it, this announcement was made at 

5:00 in the evening of December 23, 2003. Now, is that a coincidence? No. I think that is an injustice. It is a slap in the face of 

every small business in this country that they could abuse the 

Christmas holiday to take away a valuable program like this. 

Moreover, it is my understanding this company—you know, these 

SBA loan applications are not short and simple. It is a stack about 

six inches high. A lot of work goes into that material. They have 

not even been able to get the application back. 

They applied for the loan. All this stuff happens. It is not their 

fault at all. We are going to lose the opportunity to create jobs in 

the Nashville area, and then they will not even give them their application back. This is a terrible injustice. 

I know that this Committee is working hard to improve the program, to get the funding that it needs, but I am just embarrassed 

that this happened anywhere in America, much less in the Nashville, Tennessee, area. 

Mr. Pilcher is here to give his outstanding testimony, and we appreciate that very much. 

Chairman MANZULLO. Mr. Pilcher, we look forward to your testimony. If you could move that mike as close to you as possible? 

With the lights, when it is yellow you have one minute. Is this your 

first time testifying before Congress? 

Mr. PILCHER. Yes, it is. 

Chairman MANZULLO. You have a total of five minutes. 

Mr. PILCHER. Thank you, sir. 

Chairman MANZULLO. Thank you. You thought I said a total of 

one minute? 

STATEMENT OF DAVID PILCHER, TED R. SANDERS MOVING & 

STORAGE 

Mr. PILCHER. Thank you, Representative Cooper, for that introduction. 

Chairman Manzullo, Ranking Member Velμzquez and Members 

of the House Small Business Committee, thank you for this opportunity to address you today regarding the SBA funding cap and related matters. 

My name is David Pilcher, and I am the financial officer of Ted 

R. Sanders Moving & Warehouse, Inc., an agent of Allied Van 

Lines. We are a family run business, as you heard, with active participation by most of the owner’s family, and we employ approximately 30 to 40 people. In fact, this will be, as he said, the family’s 

109th year in the business. 

I joined the company about a year and a half ago. Shortly after 

that, we realized we could significantly improve our cash flow by 

refinancing the mortgage on our building. We were halfway 

through the 10-year term of our current mortgage, and interest 

rates were and continue to be very favorable. 

21

After talking to several lending institutions without success, we 

contacted the SBA division of U.S. Bank in Nashville. We met with 

them and spent many hours accumulating the required paperwork. 

The outlook appeared positive for us. 

In mid December, after doing virtually everything asked of us 

and within the required timeframe, we were told our application 

looked good and would receive approval for a new mortgage in the 

amount of about $1.5 million through the SBA 7(a) program. 

Suddenly, in January, we learned that everything had been put 

on hold because of the SBA shutdown. Worse, when the program 

resumed, there was a cap of $750,000 with no additional participation or piggybacking allowed to make up the needed difference. 

That was only half of what we needed. 

I cannot adequately express to you how devastating this bad 

news was for our company, but I am going to try. In effect, the rug 

had been pulled out from under us. Because this was a refinance, 

no alternative is currently available to us, including the 504 program. This SBA guaranteed loan would have freed up over $7,000 

per month of real cash flow, almost $85,000 a year at the present 

interest rate. 

To a small business like ours, this is a very significant amount 

of money. This money could be used in several ways—to improve 

and grow our business, which is hiring additional sales people, hiring labor staff, upgrading and adding to our truck fleet so we could 

bring in new business or upgrading our warehouse facilities. 

I do not have to explain to you that this growth would also generate new tax dollars as well. Small business, as you know, is the 

lifeblood of this country, and it needs to be supported in positive 

ways wherever possible. 

I realize we are not alone in this struggle. In one of our local papers, I read last week about a businessman who was trying to close 

an SBA loan also in a timely manner in order to purchase and remodel a building for a new business. I believe the reporter is here 

or was earlier. It was reported that he might lose a six figure 

downpayment because of these delays. That is a lot of money. 

On behalf of Ted R. Sanders Moving & Warehouse and all the 

small businesses throughout this country, we urge you to restore 

the full funding for this program, restore the cap to the $2 million 

loan level and especially lift the piggyback prohibition. 

Thank you for your time and attention, and I will answer any 

questions. 

[Mr. Pilcher’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you for your testimony. 

Our next witness is Don Wilson, president and CEO, Association 

of Small Business Development Centers. I look forward to your testimony. 

STATEMENT OF DONALD WILSON, ASSOCIATION OF SMALL 

BUSINESS DEVELOPMENT CENTERS 

Mr. WILSON. Mr. Chairman, we appreciate being back with you 

again. On behalf of the 5,000-plus Small Business Development 

Center counselors and trainers around the country, we are very 

grateful for this opportunity. 

22

I could not help but be struck by the comments of the Administrator, in which he kept talking about the struggles that SBA had 

in dealing with the continuing resolution--how being frozen at last 

year’s levels or the previous year’s levels was a burden that posed 

for them. Astoundingly, they are now proposing a budget that will 

allow them to spend even less. 

It is shocking, in my opinion, to see the downgrading in funding 

for management and technical assistance programs at a time when 

the demand is greater than ever. The issue, Mr. Chairman, is really jobs and who creates them. 

The reason we have a budget deficit is because people are not 

working. If they are not working, they are not paying taxes. Congress is absolutely strapped in how to fund education, health and 

so forth because for three consecutive years revenues to the Treasury have declined. That is the first time since the 1920s. 

Now, if small business generates 52 percent of the GDP and 

nearly two thirds of the new jobs, and we do not have jobs for people to pay taxes so you have the dollars to appropriate, why do we 

keep cutting programs for small business? Small businesses are appreciative of the tax cuts that they receive. But if they cannot afford to buy $25,000 worth of equipment, raising the expensing allowance to $100,000 really does not do them much good. 

Look at the numbers in my statistics that I provided in the testimony. I ask that my complete testimony be included in the record. 

Look at the small business sector of this economy compared to the 

world economies, and then look what we are investing in small 

business. 

The Administrator spoke of the tremendous increase in loans 

that the SBA is making. Where do you think people go to get help 

filling out the forms that Congressman Cooper was just talking 

about? They go to the SBDCs and the Women’s Business Centers. 

SBDCs are being cut. Women’s centers are being level funded. 

The New York SBDC, the Missouri SBDC, the Ohio SBDC, the 

Indiana SBDC, the Illinois SBDC-- They have dramatically less 

funding today than they did in 2002, and now we are proposing to 

cut them again. 

SBDCs are flattered that we are viewed as one of the core programs, but as we watch management and technical assistance programs being eliminated, who is going to take up the slack? 

Take, for example, Congressman Bradley’s District. The SBDC in 

New Hampshire has not had a funding increase since 1997. There 

are 14 SBDCs in this country, including Delaware and the District 

of Columbia, which are here in the audience today. They have not 

had a funding increase since 1997, and SBDCs are expected to pick 

up the slack? We are closing centers and laying off counselors. 

Two million Americans have been jobless for 26 months or more, 

the highest level of long-term unemployment in two decades. These 

people are out of desperation turning to self-employment. They do 

not know how to start a business. They may have a skill, and they 

are coming to the SBDC. Our productivity levels are the highest we 

have ever seen. We cannot continue to do more with less. We have 

been doing that for the last six years. 

This Committee is the only committee that can get the attention 

of the budgeters and say you are simply not allocating enough for 

23

small business. It is not a matter of whether we get a tax cut. The 

issue is what is small business getting out of the dollars that are 

going into the Treasury. Every year, they are declining. We would 

submit that is the wrong message to send to small business in this 

country. 

Mr. Chairman, we implore you and this Committee to speak to 

the budgeters. Ask for a fairer allocation of funding for management and technical assistance programs, so that those men and 

women who are unemployed, and those men and women who are 

trying to keep their businesses alive in the face of higher energy 

costs and higher health insurance costs can survive and create the 

jobs this economy must have. 

Thank you very much. 

[Mr. Wilson’s statement may be found in the appendix.] 

Chairman MANZULLO. Thank you, Mr. Wilson. 

Our next witness is Mr. Chris Crawford, executive director of National Association of Development Companies. I look forward to 

your testimony. 

STATEMENT OF CHRIS CRAWFORD, NATIONAL ASSOCIATION 

OF DEVELOPMMENT COMPANIES 

Mr. CRAWFORD. Thank you, Mr. Chairman. Good afternoon. I am 

pleased to provide a comprehensive written statement on the SBA’s 

2005 504 program budget request and ongoing performance objectives. I would like to comment this afternoon on 504’s desperate 

2004 reauthorization situation. 

N.A.D.C.O., CDC members and first mortgage partners provided nearly $8 billion in long-term capital to job creating small businesses last year representing a 27 percent increase from 2002. This 

is a clear tribute to the growing demand for the SBA 504 program 

and the capital needs of America’s small businesses. 

Our industry thanks Chairman Manzullo and Ranking Member 

Velμzquez for your support by temporarily reauthorizing the 504 

program until March 15 of this year. Your actions have kept our 

program open. Our program receives no appropriation and is solely 

dependent on fees which must be reauthorized or we will be shut 

down on the 15th. 

The number one issue for the 504 industry is House passage and 

enactment of the SBA reauthorization bill. Mr. Chairman, we understand that your negotiations with the staff of the Government 

Reform Committee have proved successful and that all the issues 

have been concluded on the contract bundling question. 

We urge you to work directly with Chairman Davis to finalize 

the deal and then move the bill to the Floor under an open rule 

if necessary to ensure its timely passage to keep 504 alive. 

Thank you. 

[Mr.Crawford’s statement may be found in the appendix] 

Chairman MANZULLO. Thank you. 

Our next witness is Anthony Wilkinson, president, National Association of Government Guaranteed Lenders. 

Anthony, you have an apartment out here now? 

Mr. WILKINSON. I am working on it. 

Chairman MANZULLO. You are working on it. We look forward to 

your testimony. 

24

STATEMENT OF ANTHONY WILKINSON, NATIONAL 

ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS 

Mr. WILKINSON. Thank you, Mr. Chairman, Ms. Velμzquez, for 

having me back. As you know, I testified before this Committee a 

couple of weeks ago about the SBA shutdown of the 7(a) program 

and how many applicants have been adversely impacted by the actions taken by the Administration. 

Since that hearing, basically nothing has changed. There are still 

many, many small businesses who cannot access capital due to the 

lending restrictions on the 7(a) program. You have already heard 

from one, and you are going to hear from three other small businesses who have been harmed by the 7(a) program restrictions. 

I want to personally thank all of them for taking the time away 

from their families and businesses and coming to Washington to 

represent small businesses. Their stories will put in real life terms 

just what the unfair actions taken by the Administration have done 

to them. They are very, very interesting stories. 

These businesses are from all over the country. They are different types of businesses, but the one thing they have in common 

is that they needed SBA assistance to meet their financing needs, 

and the SBA, who we thought was there to help them, is now not 

there. 

Rather than cover my written testimony, I thought I would take 

the balance of my time and just respond to some of the statements 

made by the SBA Administrator. He said that the industry has 

said we need to get the cap lifted, that we need to get restricted 

lifted. He is exactly right. There are borrowers all over this country 

who do not have access to capital, and we need to find a solution 

quickly so that we can get the loan cap lifted and the piggyback 

restriction lifted and we can get back to meeting their financing 

needs. 

The Administrator also said: ‘‘We had to return loans.’’ That is 

simply not true. There have been other funding shortfalls in the 

past. The SBA never returned the loan applications. They simply 

would process them up to the final point of approval, put them in 

a queue and as funding became available start funding those loans 

in the order that they were processed. 

The Administrator said that we processed all loans that have 

been resubmitted. I can tell you that there are some folks sitting 

at the table with me today whose loans were not processed. 

The Administrator said we never had volume like this. There 

was no way to anticipate the kind of loan volume we had. Mr. 

Chairman, from their website it says they did $11.3 billion in lending last year, and there was a $500,000 loan cap in place for five 

months. They probably would have done close to $12 billion last 

year, so, yes, they knew what loan volume was. 

There was some talk today about a new proposal being rolled 

out. We have not been briefed, nor were we consulted about what 

impact the changes in the proposal might have. I am beginning to 

wonder if this was an attempt to deflect any kind of heat that the 

Administrator might have gotten because their fiscal 2004 budget 

was a bust and the fact that the actions taken by the SBA earlier 

this year have financially harmed many small businesses. We canVerDate 0ct 09 2002 12:04 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\HEARINGS\93891.TXT MIKEA
25

not get away from the fact that many small businesses have been 

financially harmed by the actions taken by the Administration. 

The Administrator said five percent of the number of loans or 30 percent of the dollars fall in loans of $750,000 or more. That number would have been higher had we not had a loan cap in place this 

year and for the five months in last year. 

The Administrator said the new proposal is a savings for the taxpayer. From the fiscal year 2005 budget information, you will see 

that borrowers and lenders in the 7(a) program have been overcharged $1.2 billion—that is B for billion—in this program since 

the start of credit reform. 

This program has been in effect at a zero subsidy rate for quite 

some time. Before we consider alternatives to address the funding 

shortfall, I think we need to take a look at the subsidy model. I 

am under the impression that Congress had asked GAO to validate 

and do a study of the econometric model to make sure that it was 

statistically valid, to make sure that it was fair, that it was reasonable. 

Last I heard, the SBA had not been cooperative in providing the 

information that GAO needed. I know that Senator Snow’s staff 

had to contact the White House asking them for help in getting 

SBA to turn over the data necessary for them to do their study. 

I think before we discuss any options, we need to make sure that 

the model is validated, that it is fair and it is reasonable. 

Mr. Chairman, I would be happy to respond to any other questions. 

[Mr. Wilkinson’s statement may be found in the appendix] 

Chairman MANZULLO. Thank you very much. You know, Anthony, that I held the SBA Administrator and the head of OIRA 

hostage here to bring about a resolution on an issue that involved 

disaster loans to travel agents. 

We have always considered ourselves to be a very active organization here. The budget parameters are there. Stuff is going to be 

moved around within the budget itself, okay, so nothing is set in 

stone just based upon the President’s budget itself. It is simply a 

guideline. 

The next witness is Mr. Phil Pegg, Jr. from 4D Solutions in 

Boyertown, Pennsylvania. 

Mr. PEGG. Thank you, Mr. Chairman. 

Chairman MANZULLO. We look forward to your testimony. 

Mr. PEGG. Thank you, Mr. Chairman. 

Chairman MANZULLO. Thank you. 

STATEMENT OF PHIL PEGG, JR., 4D SOLUTIONS 

Mr. PEGG. Good afternoon, distinguished Members of the House 

Small Business Committee. On behalf of 4D Solutions and the 

small business workforce of the United States, I appear before you 

in a time of crisis seeking your assistance; a crisis that has originated from the very government administration which was formed 

to support and protect the small business community. 

As you know, the SBA has imposed a recent cap on the 7(a) loan 

guarantee program. This imposed cap will have devastating consequences for small businesses like ours. Please allow me to explain in the hope that this cap may be immediately repealed. 

26

We have three specialized export working capital program loan 

guarantees through the SBA’s U.S. Export Assistance Center located in Philadelphia, Pennsylvania, as well as an SBA disaster 

loan. For the last seven years, the SBA has told us that we could 

renew our loans as many times as necessary. We subsequently 

built our business model around that understanding. 

Two of these loans were signed and approved for renewal on January 4, 2004, and had received a loan number. It was only after 

we had received approval that the SBA informed us that there was 

a cap, and we would not be renewed. We were told that SBA upper 

management decided to cap the 7(a) loan program to $750,000. Our 

loans exceed the $750,000 cap. 

It is one thing to give borrowers a 12 month warning and a fighting chance. It is something entirely different when you present 

companies with no warning at all. The manner in which this cap 

has been imposed is effectively designed to hurt or mortally wound 

those small businesses that currently hold loans that are in excess 

of $750,000. 

In other words, if these loans cannot be renewed due to the cap, 

they would subsequently become unguaranteed, and the lenders 

would undoubtedly call them in, effectively putting us out of business. 

The EWCP loans have been the lifeblood of our firm. For over 

seven years, 4D has worked with the SBA, from the firm’s inception to one of our crowning achievements, being presented in Harrisburg with the Pennsylvania Governor’s Exporter Excellence 

Award for 2001. 4D has even been used repeatedly by the SBA as 

a success story in their own newsletter. 

Our firm provides mission critical, interactive computer based 

training to the Royal Saudi Air Force. Most of these contracts are 

18 to 24 months in duration and worth in excess of $1.5 million. 

Our solutions have been chosen over Lockheed-Martin and British 

Aerospace, just to name a few. 

Make no mistake. The larger companies still have a huge advantage. They have money to spend in up front costs of developing and 

training programs for a major military aircraft. The SBA leveled 

that playing field. Without them, we could have never borne the 

initial start up or operating cost from one contract to another. 

Now the irony is overwhelming. The SBA, who was so instrumental in our growth and success, in one stroke will be responsible 

for our demise and certainly many others like us. 

Everyone knows that small businesses are the number one job 

creator in this country. Our business is located in Boyertown, 

Pennsylvania, a community that survives on small businesses just 

like ours. We hire people and buy goods and services all within 20 

miles of our office. There is little doubt that this cap will impact 

our community and others. 

This cap also sends a clear message to the Saudis we work with 

that the United States is pulling back on their financial support of 

international business relations with Saudi Arabia. It has taken us 

years to build up a track record of trust with them. 

We examined all the other options, including EX-IM Bank, but 

they cannot legally finance military projects. As a result, my bank 

and the SBA are my only resource. I must add that our track 

27

record as a borrower has been excellent. We pride ourselves on 

being responsible corporate citizens, and today our firm has never 

missed a loan payment or by our own action put in jeopardy one 

of our guaranteed loans to the SBA. 

In conclusion, at a time when America is losing its isolationist 

way of doing business and expanding our great economy globally, 

it just does not make logical sense to drop the funding to a program that has made a huge impact on my firm’s ability to expand 

internationally. 

Therefore, I ask you to immediately remove this newly imposed 

cap and expedite the funding of the SBA’s 7(a) program, as well as 

the funding of the Division of International Trade and USIACs 

across the country. 

Thank you. 

[Mr. Pegg’s statement may be found in the appendix] 

Chairman MANZULLO. Thank you very much. 

The next witness is John Sprague, managing partner, Everglades 

Adventures at Pahokee, Florida. 

Mr. SPRAGUE. Yes, sir. Pahokee means grassy waters. 

Chairman MANZULLO. It means grassy waters? 

Mr. SPRAGUE. Yes, sir. 

Chairman MANZULLO. We look forward to your testimony. 

STATEMENT OF JOHN SPRAGUE, EVERGLADES ADVENTURES 

Mr. SPRAGUE. Chairman Manzullo and Ranking Member 

Velμzquez, thank you very much for the opportunity to testify before this House Small Business Committee. 

I am a managing partner of Everglades Adventure Company, 

LLC, that is based in Pahokee, Florida. To give you a little bit of 

quick background, this is in Palm Beach County’s other coast. It 

is basically rural glades. We rely primarily on agriculture, a lot of 

sugar. 

The city itself has a population of about 6,000. It is a poverty 

level of 29.4 percent of the population, a per capita income of 

$10,346. The mayor and city council felt that the only saving grace 

that the city may have to be able to pull itself up from this poverty 

is its location on Lake Okeechobee. Because it did not have the expertise to develop the waterfront, it did an RFP to bring a company 

in. We came and answered that. 

What we are attempting to do is build a first-class recreational 

resort on the edge of Lake Okeechobee and bring tourists as the 

dollars needed for the city to build the city back up to what it was 

at one time. We have been doing very well in the development. It 

is ahead of schedule. However, one slight problem has arisen. 

We are located on state lands. When you go for conventional financing, you cannot encumber state lands, which means the normal finance package for us we cannot obtain through traditional 

banks. 

The SBA 7(a) program was the program that fit exactly what we 

needed. Our loan for $1,709,000 would have pretty much put the 

project very close to completion and additionally on toward doing 

25 direct full-time jobs and 90 created in total in the area. 

However, to give you an idea if we could get the other financing 

based on the $750,000 cap, our payments for that $1.709 million 

28

under the 7(a) program would be about $11,807 per month. If we 

did it with a $750,000 cap and went to conventional based on the 

short terms we would get, those payments now climb to $24,057 a 

month, which basically makes the project untenable and unprofitable to do. 

We are very concerned that this type of action by the Administration at this point is very harmful to business aside from our individual project. It affects minorities. It affects actually the City of 

Pahokee to be able to pull itself out of its economic condition and 

bring it back to the area where so many of its residents presently 

are not on subsidies. 

Secondly, it is very important to the State of Florida. Governor 

Bush has given us economic grants, along with Palm Beach County. Of course, he spearheaded the project in getting us the permission to do it on state lands and also waived all of their fees so the 

City of Pahokee would be a 25 percent profit maker as part of our 

company. 

The project is coming along fine. We are hoping that everybody 

on both sides of the aisle, as well as the Administration, looks at 

this program and says you know, we might have made a mistake 

here. This is actually harming small business. It is harming minorities. It is harming companies all over this country. 

Then to have us find out that really there is no subsidy to this 

program, that the overpayment in fees has made it self-supporting, 

definitely I believe would make it a reason that you need to relook 

at this program and put it back to where it was before so my company, along with the rest of them around the country that need 

this kind of funding to be able to provide the jobs for our towns 

and our cities and allow people that live in poverty to pull themselves up to a decent wage can continue to happen in this country. 

Also, I would like to say that Mayor J.P. Sasser has come with 

me, and if possible I would like to give him a minute. 

Chairman MANZULLO. Why do you not have him stand up so we 

can recognize him? There you are. Thank you. 

Mr. SPRAGUE. Would it be possible, Mr. Chair, to have him just 

speak for a minute from a city perspective? 

Chairman MANZULLO. You have 50 seconds left. Come on down. 

State your name and spell it for the record, Mayor. 

Mr. SASSER. Okay. I am Mayor J.P. Sasser, and that is S-A-SS-E-R. I want to thank you for this opportunity. 

What Mr. Sprague said is very true. We are a very small city, 

predominantly African-American and Hispanic. Our primary employer is sugar, and the 90 jobs that Mr. Sprague will offer have 

just been offset by U.S. Sugar laying off 97 people this past week. 

What we are doing is we are sinking, and we are sinking fast. 

We have hitched our wagons, so to speak, on our development of 

our marina and campground, and we are hoping our downtown redevelopment and our economic revitalization will be successful because of that. 

Thank you very much. 

[Mr. Sprague’s statement may be found in the appendix] 

Chairman MANZULLO. Mayor Sasser, thank you very much for 

adding to the testimony. 

29

Our next witness is Mr. Elliot Moses, CEO of Daco Enterprises, 

from Sandy, Utah. We look forward to your testimony. 

STATEMENT OF ELLIOT MOSES, DACO ENTERPRISES 

Mr. MOSES. Thank you, Mr. Chairman, Congresswomen, Congressmen, ladies and gentlemen. Thank you for this opportunity to 

tell my story. I hope this effort will result in areas of change and 

possibly even some rectification of the issue for my company. 

My wife and I had been nearly a year in negotiations to buy Daco 

Enterprises, Inc. We had a letter of intent, and we were very close 

to signing the final deal. Applications were made at several banks 

for $1.3 million. Our presentations were very strong, showing over 

$1.5 million of equipment and collateral plus a sizeable amount of 

cash that we were injecting. 

Funding proposals were entertained, and we down selected to 

two. One was an SBA 504 and the other an SBA 7(a) loan guarantee. By mid December of 2003, we had everything together and 

submitted to the commercial loan officer. It was processing through 

Bank One’s preferred lender program. This program expedites the 

processing since the bank’s approval criteria has been preapproved 

by the SBA to meet the SBA’s underwriting requirements. 

We were told that the SBA’s stated service level agreement to 

provide a funding number is 24 hours. On December 23, the SBA 

notified Congress of their intent to establish a loan cap for loans 

approved by the SBA on or after January 8, 2004. This is 15 days, 

as required by Congress. The choice to include so many holidays in 

this notice period is unmistakable. 

On the 26th, Bank One approved our application for SBA eligibility. The final SBA application package was sent to Utah for our 

signatures on December 30. Four business days later, on January 

5, the originals arrived at the Tempe, Arizona, Bank One loan coordinator’s desk. She requested the SBA authorization number, and 

the SBA faxed back a control number the same day indicating they 

had received the package and it is in their funding queue. 

Based on the assurances that funding would indeed be there, we 

closed on the business on January 8. The next morning, we received the shocking news of what the SBA did. On January 6, the 

SBA shut down funding. On the 8th, the SBA faxed a notice dated 

January 5 to Bank One with a control number indicating that the 

funding had been stopped, that the application package would be 

returned to Bank One and removed from the SBA queue. 

It is very strange that the notice would be dated January 5. It 

is not clear whether that was inadvertent or deliberate. If the latter, it conflicts directly with congressional mandate. 

By being bumped out of the queue, it is the SBA’s intent to delay 

the dissipation of their funds, but in actuality it denies us legitimate opportunity to funding due to the loan cap which we no 

longer fit under. 

In order to rescue our deal, we obtained bridge funding for the 

full amount. The concept was that the full authorization bill would 

restore funding and the old caps. The bank incurred and advanced 

us the funds. When the bridge funding is due to be paid back in 

less than three months, we must either have new funds in place 

30

or be foreclosed upon. I understand that we cannot apply under the 

504 program because we have received bridge financing. 

In the worst case, this will mean 25 persons will be out of work. 

We will be financially ruined, if not totally bankrupted. The previous owner does not have the funds to step in in front of the bank 

and also stands to lose a sizeable sum in deferred payments, thereby decimating his retirement plan. 

In the best case, Congress will cause the SBA to remedy the effects of their misapplied funding curves or, even better, raise the 

funding caps to allow more significant business formation than 

ever before. 

For ourselves, we wish the SBA would place us back in the queue 

where we originally were and simply fund that which we were 

mere hours from funding. This is the fair and correct method that 

should be applied in what I am to understand is about 200 cases. 

The lower funding cap should apply to those that apply on or after 

January 8, as Congress intended the notification method to operate. 

Let me tell you a little bit about Daco with the spare moments 

remaining. We are located about 15 minutes from downtown Salt 

Lake City, Utah, in a high tech corridor that has invented television and the first implanted artificial heart. It has also been the 

birth of WordPerfect and Novell and many other companies. 

Therefore, it is no surprise that Daco is a high tech, high tolerance machine company with laser welding and engraving capabilities. We serve the aerospace, electronics and primarily the medical 

industry. Your next x-ray may come from equipment with our parts 

in it. Your relative’s chemotherapy may come from an implant we 

machined. The Air Force can get some parts only from us. 

Our employees make good skilled labor wages. None of our em- ployees are paid less than $10 an hour. We have the benefits in the 

top five percent of our state. We added one new employee last 

month and are adding another this month. Our backlog has already jumped 25 percent this year. We are looking to spend more 

than $100,000 on new equipment this year and half a million dollars over the next two or three years, all financed conventionally. 

We and companies like us are the ones putting jobs into this recovery. Well, that is, unless things are allowed to remain as the 

SBA has made them. 

I beseech you, the Members of this Committee, the SBA and all 

Members of Congress to allow businesses like ours to do what we 

do best, which specifically includes creating new jobs, paying significant taxes and growing our economy further with capital spending. Many countries would like to have these manufacturing jobs. 

Please do not make another reason to send them there. 

I thank you for this opportunity to address this Committee and 

thank the staff for their most kind treatment. 

[Mr. Moses’ statement may be found in the appendix] 

Chairman MANZULLO. Ms. Velμzquez, I am going to let you ask 

the questions here because we are going to run out of time. 

Ms. VELAZQUEZ. Why can we not go vote and come back here? 

Chairman MANZULLO. We can come back, but why do you not go 

ahead? 

Ms. VELAZQUEZ. I would prefer for Mr. Ballance to go first. 

31

Chairman MANZULLO. Mr. Ballance? 

Mr. BALLANCE. Thank you very much, Mr. Chairman and Ms. 

Velμzquez. 

Gentlemen, I did not hear all of your testimony, but I think I 

know the issue. Some have told us that you can get this money 

from regular channels, regular banks. Is that true? You do not 

need the SBA 7(a) program. 

Mr. SPRAGUE. In our particular case, sir, we cannot because we 

are located on state lands. You cannot encumber state lands. 

Therefore, normal banks will not do most of the things that we 

need to do there—infrastructure, buildings, sewer extensions, the 

kinds of things that we need to do to expand the building. Where 

normally you could finance that conventionally, they will not do it. 

Mr. WILKINSON. I would venture a guess that none of these gentlemen would be here today if they could have gotten conventional 

financing. 

Mr. BALLANCE. Well, that is my thought. How do you feel, and 

I am just going to ask a couple of general questions. How do you 

feel that you have been treated in terms of getting notice regarding 

the cutbacks and the cutouts and the fact that the loans would not 

be available? 

Mr. SPRAGUE. Putting this project together has been very lengthy 

because we are also located on the dike or the U.S. Army Corps 

that surrounds the dike, so we had to go through months and 

months of engineering for the Corps to make sure that we would 

not in any way cause any breaks or whatever in their dikes. 

This process of putting everything together with grants, with 

Florida, Palm Beach County, getting approvals, permits and everything else, of course, has gone through a very long process. Of 

course, the final designs could not be completed until we knew 

what permits and how exactly we could design and what we could 

do. We had to go through that process before we could even apply 

to SBA. 

I have been a Republican my whole life. I just never thought in 

my entire life cycle that what I believed stands for that we support 

small business, that they would look at a program that actually 

hurt small business. I just never thought that anything would happen with this program. It is a good program. It fits a niche need 

in this country that you cannot necessarily get with conventional 

financing. 

It came as a total surprise, and I will say the number of days 

with Christmas probably is not the way to treat free enterprise and 

additionally that they would need that short—I mean, they must 

have known that they were headed for problems. I would say that 

they could have given a lot further notice than what they gave 

business. 

Mr. BALLANCE. Let me ask one specific question. I did not hear 

your testimony, but as an exporter could you elaborate on why financing from the Export-Import Bank is not an option for 4D Solutions? 

Mr. PEGG. Yes, of course. EX-IM Bank will not allow us to 

produce any kind of military training, military product and export 

it within their financing guidelines. 

32

Mr. BALLANCE. I am getting a little help from my staff here. Mr. 

Pilcher, how will not receiving this loan affect the long-term viability of your company? Is the 504 program an alternative for Sanders 

Moving? What about a conventional loan? 

Mr. PILCHER. Well, for starters, the 504 program does not even 

apply to our situation because it is a refinancing, so we do not even 

meet the guidelines for 504. 

This time of the year is traditionally a slow time for the moving 

industry, the moving and storage industry. We were really counting on this loan being in place last month because it would have 

made this month a lot more bearable than it has been and it is 

going to be. 

As I indicated earlier, every month of delay is costing us over $7,000 that we are having to spend maintaining our current loan 

situation. That is money that could be used to add new employees, 

to add a truck, put another crew on the road, take on new business 

and help make our company more profitable. 

Mr. BALLANCE. Thank you. 

Chairman MANZULLO. We are going to have to break and then 

come back here. We live by the bells here. We hope to be back in 

about 15 minutes. 

[Recess.] 

Chairman MANZULLO. Mrs. Velμzquez? 

Does anybody here have to catch a plane right away? 

[No response.] 

Chairman MANZULLO. All right. Go ahead. 

Ms. VELAZQUEZ. Tony, people assume that if you are a successful 

business, small business, you do not need the 7(a) loan program. 

Can you tell us why successful businesses do need the 7(a) loan 

program? 

Mr. WILKINSON. Yes, ma’am. There would be a host of reasons. 

It could be that it is financing of collateral that will have a very 

specific nature like a single purpose facility or collateral that would 

not be readily liquidated if it was repossessed. 

It is businesses where they are doing well, but they have some 

kind of credit deficiency that the lender turns to the SBA and that 

guarantee that the SBA provides to mitigate whatever the risk 

might be. 

Yes, we hope they are successful businesses because that is why 

we are financing them. We use the SBA guarantee to mitigate the 

risk in the transaction. 

Ms. VELAZQUEZ. Thank you. The Administrator said SBA’s solution will permit the small businesses that are here today to get 

their loans approved. 

I know you do not know the details of the proposal or the particulars of these businesses’ applications, but can you tell us from 

what you know today whether these businesses will get their loans 

approved? 

Mr. WILKINSON. With a 50 percent guarantee, I would bet at 

least two of them would be denied. Again, I do not know all the 

details of the application. 

Ms. VELAZQUEZ. What is the percentage? 

Mr. WILKINSON. Two of the four. 

Ms. VELAZQUEZ. Two of the four? 

33

Mr. WILKINSON. I think a third one could have perhaps been 

served if the piggyback restriction had been lifted and they could 

have gotten a piggyback first mortgage even with the cap in place. 

Ms. VELAZQUEZ. Thank you. 

Mr. Sprague, it is my understanding that your community was 

designated as an area for economic development by the State of 

Florida, and they contributed a significant amount of resources to 

this project. 

What was the state’s response when they found out that the federal government was pulling funding? 

Mr. SPRAGUE. They do not know. I am meeting with Governor 

Bush’s staff on Monday in Tallahassee. I think this has been one 

of the best kept secrets at this point. 

I think it is a matter that a lot of the Members just do not understand this is going on, number one, because they just have not 

looked through all the budget at this point. Secondly, even if you 

read something, unless you are familiar with the program you may 

not necessarily understand the impact. I think it is a matter of 

educating both sides of the aisle on this issue. 

We have a declaration that Pahokee is an area of critical economic concern, and they have helped us the best they can. The 

county has done the same thing. I am quite sure that when the 

Governor’s office finds out about it, hopefully we will be soliciting 

his help. 

Ms. VELAZQUEZ. Maybe the Governor of Florida knows someone 

here in Washington. 

Mr. SPRAGUE. I am going to ask him that question. 

Chairman MANZULLO. Mr. Moses? 

Mr. MOSES. Yes? 

Ms. VELAZQUEZ. If you were to lose SBA financing for your 

project, what are the chances that some of your customers will look 

elsewhere and take their business to some of your foreign competitors? 

Mr. MOSES. Without the financing from the SBA, we will not 

have the working capital available to buy the machines that we 

plan on buying. We are talking about some pretty sophisticated, 

high tech machines. They are very close tolerance. They are multiaxis machines. We try and buy American wherever possible. Sometimes the stuff is not available. 

I will tell you. There are foreign countries that would love to 

have that kind of equipment and that kind of stuff located in their 

country and produce it there. We are trying to make it American 

made. 

Ms. VELAZQUEZ. Mr. Moses, can you please elaborate on why you 

are not eligible for the 504 program? 

Mr. MOSES. Being caught between closing and pulling the funding right thereafter, we had to do something quick because we were 

in the middle of the contract period. We had to fund the purchase. 

The 504 program does not allow for the bridge financing that we 

received. It would then be determined to be a refinance. 

Ms. VELAZQUEZ. So if you do not receive the funding through the 

7(a) loan program, what effect will this have on your employees? 

34

Mr. MOSES. In the worst case, we would have to shut down. We 

would lose 25 employees. If we were able to find some other financing of some nature, it is not going to look nearly as good. 

The cost on our working capital would probably eliminate our entire capital budget. We would not be buying any more machine 

tools and doing any more business, and we probably would also 

have to do some layoffs because we may not have the equipment 

to replace other equipment and continue producing what we 

produce. 

Ms. VELAZQUEZ. You mentioned that this was a unique product. 

Can you please explain to the Committee why a conventional loan 

would not work? 

Mr. MOSES. With a conventional loan, they rate buyouts as much 

more risky, and they assign a much higher interest rate to them. 

We also get much shorter payback terms. 

One of the things we were looking for from the 7(a) program was 

the generous payback period. That payback period made the difference between growing or shrinking if we had to go even partial 

conventional, which a 50 percent guarantee program would do as 

far as weighting of the components. 

Ms. VELAZQUEZ. Mr. Sprague, can you please explain to the Committee why a conventional loan would not work for you? 

Mr. SPRAGUE. There are two parts to that. The biggest part is 

that the infrastructure which we are expanding in all areas in cabins and buildings and sewer connections and electrical and upgrades to the marina, building buildings, our development is 

spread over many, many facets. Part of them we have pieces of 

grants for and whatever, so it is kind of complicated, number one. 

Number two and the biggest reason is when we turned to conventional financing they looked at the project. They looked through 

our paperwork. They looked at our balance sheets. They looked at 

income, our business plan, and said you are excellent. Wait a 

minute. You are on a lease. You are on state lands. I am sorry. We 

cannot do your loan. 

Here is who can. The federal government has a loan program 

which is really designed for this type of thing. That is where you 

need to go because we are unable to fund you. 

Ms. VELAZQUEZ. The small business people that are here who applied for a 7(a) loan and have not been able to successfully get it 

because of the unique circumstances, are your employees aware of 

what is going on? What is the morale? 

Mr. PEGG. Our employees have just become aware, and they 

think we are going out of business. 

Mr. PILCHER. Our rank and file employees are not aware of the 

refinancing activities we are trying to do. We have a very small office staff, and I am sure just about everybody in the office knows 

what is going on. 

Three-fourths of the people in the office are related, family related, so they are all aware of it. As I mentioned earlier, in addition to the owner there are four sons who work in the business, 

and we are all on the same management team. They are all aware 

of it. 

I spent the better part of my first year with the company trying 

to arrange conventional refinancing. We just could not get the 

35

terms we needed. In some cases they would not even talk to us at 

all. 

You know, this really was going to be a life saver program for 

us. The monthly payment is about two-thirds of what our current 

payment is. As I mentioned in the testimony, we are going to have 

to refinance it anyway in a few years. 

We could possibly struggle along for another four years, but this 

really would have helped us grow the business and get out of some 

of the problems that we are in. 

Mr. SPRAGUE. In our case, most of the employees have not been 

hired yet. It is not just our employees. All the businesses downtown 

and the building owners are all expecting our project to be the catalyst for the city. 

It is not just whether or not how our employees feel. It is that 

this was the catalyst for the whole downtown of the city. If we cannot generate the catalyst, what is the impact to the city, to all the 

residents of the city? It has major impacts at the end of the day. 

Mr. PEGG. I would like to add one thing for the record. We approached several lending institutions over the last seven years and 

discussed with them other more traditional options. 

The 7(a) program, as I put down in our testimony, has been critical to our company because our company is built on knowledgeable 

capital. We do not have smokestacks. We do not have plants. We 

do not have lots of capitalized equipment. We have lots of very 

smart, hard working people that get together and design and put 

together these projects and deliver them in an interactive, multimedia format to the people of Saudi Arabia. 

That said, these projects in their nature, in their very nature, 

take anywhere between 18 and 24 months to complete. The sheer 

amount of expense that it takes to ramp up, getting everybody together, traveling over there, collecting the data, shooting the video, 

creating the graphics, creating the animation. We become this organization of highly motivated, hard working people, but again we 

are in a very plain building, and we wait for these large milestone 

payments at the end. 

Every traditional lender that we have ever talked to says go to 

the SBA. You have a contract. Go to the SBA. The SBA will guarantee it. Then we will lend you the money. We cannot possibly survive if we do not have that guarantee. 

If we do not have that loan, this next payment that we get, you 

know, we will not be able to draw it back down because our renewal has not been funded. We will go out of business, and we will 

default on this project. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

I want to thank all of you for coming here and sharing your experience and your pain. I am sorry that the federal government is 

failing you. It really saddens me that the Administrator could come 

here before this Committee, and he is so committed to small businesses that he did not stay to listen to your stories. He did not stay 

so that you could tell him that he knew darned well last year they 

would be running out of money. 

Mr. Chairman, I think that you understand that this is a real 

crisis for small businesses in this country, and I hope that pretty 

36

soon you conduct a hearing on your proposal that has been submitted by the Administration and co-sponsored by you. 

Chairman MANZULLO. Thank you, Mrs. Velμzquez. 

Ms. VELAZQUEZ. Are you going to have a hearing? 

Chairman MANZULLO. Give me a chance to think about it. Obviously if we have legislation, we will have a hearing. 

Ms. VELAZQUEZ. We will? Thank you. 

Chairman MANZULLO. Anthony, with regard to piggybacking 

loans, walk us through that. 

Mr. WILKINSON. How it works? 

Chairman MANZULLO. Yes. 

Mr. WILKINSON. A piggyback is where a lender makes some piece 

of the financing transaction in a first lien position and then the 

SBA 7(a) loan comes behind in a second lien position. It is really 

basically the 504 type of loan structure where there is a private 

sector lender in the first and then SBA in the second. That is what 

a piggyback structure is. 

Chairman MANZULLO. So the reason that the SBA eliminated the 

piggyback is that the budget authority has to show the first position as part of the budget authority? 

Mr. WILKINSON. I believe the reason that they gave for eliminating piggybacks was a simple effort to lower loan demand. 

Chairman MANZULLO. SBA still allows SBA taking a first position and anybody coming in afterwards. Is that correct? That is 

still allowed? 

Mr. WILKINSON. That does not happen. A lender would not put 

itself in a second lien position. 

Chairman MANZULLO. Let us talk about the responsibility of 

some banks around here. Mrs. Velμzquez and I sit on the Banking 

Committee, and I am really tired of these giant lending institutions 

only making ‘‘safe’’ loans and not making character loans and you 

guys having to go to the federal government time after time after 

time again being subject to the appropriations process. 

Here you have people, Mr. Pegg. We have two manufacturers out 

of four people that are suffering. I spent about 85 percent of my 

time on manufacturing. In fact, I just gave an interview to CNN 

calling for the resignation of the chairman of the President’s Council on Economic Advisors who is thrilled with the offshoring of the 

high value white collar jobs and does not think that any job in this 

country has been lost to China. 

When I see people like you, Mr. Pegg, who are fighting back and 

you, Mr. Moses, in manufacturing, where are the banks? You have 

track records. Why do they not get involved in this thing? 

Mr. MOSES. Would you like me to answer that? 

Chairman MANZULLO. Yes, sir. 

Mr. MOSES. My bank that I am working with—in fact, I was 

working with several of them. They were all willing to take their 

share of the risks with the program. They are right ahead of me 

in the risk amount. 

I am taking the greatest risk. The bank was actually taking the 

next greatest risk, and then came the government taking the third 

greatest risk. 

Mr. PEGG. I would just say in our situation that there was no incentive for the bank to take the risk. We have cleared up———. 

37

Chairman MANZULLO. What is the incentive? Meaning what? 

Mr. PEGG. Well, why should they take more risk? We have been 

operating through this SBA program for seven years. 

Chairman MANZULLO. Through that same bank? 

Mr. PEGG. Through the same banks, yes. 

Chairman MANZULLO. Which bank is that? A local bank? 

Mr. PEGG. M&T. It was All First. Before that it was Penn Business. 

Chairman MANZULLO. Different names? 

Mr. PEGG. Penn National. All the same people we have been 

working with. 

Chairman MANZULLO. Okay. 

Mr. PEGG. There is no need to fix it because it is not broken. It 

has been working fantastic. 

Chairman MANZULLO. Maybe they should understand that it is 

broken, and they have an obligation as the local lender to come in 

there and help save some jobs. 

Mr. PEGG. If anything, they have actually communicated to us 

that there have been rumblings that they were going to do less 

SBA type loan activity, but there was absolutely no verbiage, no 

conversation whatsoever that indicated that they would do any 

kind of traditional lending with us. 

Chairman MANZULLO. Have you asked them to factor your bill of 

lading or your payments? 

Mr. PEGG. We presented them with contracts, Mr. Chairman. 

Chairman MANZULLO. That is not enough? 

Mr. PEGG. No. They look at us, and they will say how big is your 

home? What does your private asset portfolio look like? 

Chairman MANZULLO. That is the problem in America today. No 

one lends on the basis of somebody’s integrity, even years and 

years and years of track record. 

There is a problem with the SBA. We talked a year ago about 

the fact that there would not be enough money. It is very distressing, extremely distressing. This hearing did not have to take 

place with this. 

Let me say this. There are people here from the SBA that have 

stayed the entire program. Karen Haas, Deputy Assistant Administrator, Office of Congressional Legislative Affairs. 

Karen, why do you not raise your hand back there? Could you 

introduce some of the other folks from SBA that have sat through 

the hearing to make sure they listen to the testimony? 

Ms. HAAS. John Whitmore. 

Chairman MANZULLO. John Whitmore. Okay. 

Ms. HAAS. Brian Worth. 

Chairman MANZULLO. Brian. Okay. 

Ms. HAAS. Emily Murphy, Will Meade. 

Chairman MANZULLO. Karen, thank you. 

Mr. Sprague, have you looked to the Department of Agriculture? 

There are certain types of loans that are available in low economic 

areas. 

Mr. SPRAGUE. To be honest, no, sir. You know, this whole thing 

came down pretty recently, as you know. We got the phone call. I 

forget when my partner called me and said do you want today’s 

bad news. 

38

Chairman MANZULLO. Okay. 

Mr. SPRAGUE. No, sir. First, we really believed that at the end 

of the day that the Members of both sides of the aisle would say 

at least the 7(a) needs to be taken back. 

Chairman MANZULLO. It would take a special supplemental ap- propriation of $30 million in order to restore it. 

Mr. SPRAGUE. $30 million in the realm of the——

Chairman MANZULLO. I understand. 

Mr. SPRAGUE[CONTINUING]Federal budget is pretty small. 

Chairman MANZULLO. We said that last year. 

Karen, if I could be so bold? Could Mr. Sprague meet with you 

afterwards and any of the other folks that are here? 

Go ahead, Karen. Perhaps you could help them because maybe 

there is money available through Agriculture on it. 

Mr. WILKINSON. Could we set up times for the other 250 applicants that are in the same boat? 

Chairman MANZULLO. Anthony, if you did not ask that question 

I would have been disappointed. Listen, you guys have been great. 

Do you have any more questions over there, Frank? 

Mr. BALLANCE. I did have one that I think I will ask Mr. Pegg. 

Do you do international business? 

Mr. PEGG. Yes, sir. 

Mr. BALLANCE. What would happen to your business, and I guess 

others who are in small business can consider this question, if you 

did not get the loan and you had to say go under? I am hoping that 

will not happen to you, but you are fulfilling a demand obviously. 

What is going to happen to that demand? 

Mr. PEGG. We typically compete with not only other U.S. prime 

contractors that have offices in the Kingdom of Saudi Arabia, but 

also a whole host of other international competition primarily coming out of the U.K., coming out of France and Germany. 

I would guess that on any given contract we probably have anywhere between six and a dozen competitors that are ready to jump 

in and take care of that work. 

Mr. BALLANCE. Are any of those American businesses, or are 

most of them foreign? 

Mr. PEGG. Most of them are foreign. 

Mr. BALLANCE. How many of your jobs are on this side? 

Mr. PEGG. Fifteen people. 

Mr. BALLANCE. I represent a rural area, Mr. Chairman. SBA has 

always been looked upon as an agency that would help businesses 

who were either struggling or who were trying to get started or 

who maybe did not have a track record. 

The banks, as you point out, are there. They do not promise to 

create jobs, at least the ones I have talked to. I am just wondering 

if any of you are from rural areas what the impact might be in 

terms of just that fact alone. 

Mr. SPRAGUE. Pahokee is definitely rural. It is 6,000 people. It 

is stuck out kind of by itself on the other side of Palm Beach County. 

Let me take one example of that. We have been putting in rental 

boats, and part of that is we want to do guide service and eco tours. 

We have had a maintenance man, a young, black guy, a really neat 

guy. As a matter of fact, I am going to hate to lose him on mainteVerDate 0ct 09 2002 12:04 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\HEARINGS\93891.TXT MIKEA
39

nance, but he really took an interest in the boats so Jim decided 

let us bring a captain teachers course out to Pahokee, and let us 

see if we can get enough people in Pahokee who would actually 

study and become captains. 

This young man studied very, very hard. We gave a bunch of it 

on our time. Anyway, he has passed, and he has his captain’s license. He will be the first black captain, as far as I know, in all 

of the Glades to ever receive his captain’s license. 

He is so happy that he would like I think us to take his diploma 

and blow it up and put it on a billboard, but that is what we are 

trying to do. We are trying to give people a different alternative 

than going out in the fields and picking agriculture or sugar or 

whatever it is and raise the standard of living through bringing 

recreation to Pahokee, Florida. 

You know, we are going to have all kinds of jobs that we are going to create. It is going to raise the standard from $10,000 to 

what we believe is going to be the median of about $26,000 within 

the city when we do this project. 

I hope that answers your question. 

Mr. BALLANCE. I just think there is a tremendous need for this 

program. We just have to put the hammer down and see if we can 

find the money. 

Chairman MANZULLO. Congresswoman Majette, do you have any 

questions? Congresswoman Velμzquez has a question. 

Ms. MAJETTE. Okay. 

Chairman MANZULLO. Let me go with her, and then we can 

bounce to you if you have a question. 

Ms. VELAZQUEZ. Thank you. Thank you. Tony, it seems that 

there is a sense here of some people, some Members, that this situation is for the banks to be blamed. Can you comment on that? 

Mr. WILKINSON. Well, that is interesting. First of all, there have 

been shutdowns in the past. One of the shutdowns, the first one 

I remember, prompted the legislation that now requires a 15-day 

notice because the SBA at this particular time just closed the program and did not accept applications. 

Well, as all these applicants will tell you, you do not just put 

that application together overnight. It takes a while to put the application together. You spend lots of time and money getting to 

that point. To have the rug jerked out from underneath you just 

was not fair, so we suggested to Congress that we put in a notification requirement giving folks an opportunity to finish their application and hence the 15-day requirement was passed. 

Since then there have been a couple more shutdowns. Every time 

the SBA announces that a loan cap is coming they have a spike in 

demand. That demand comes from the applicants who are in the 

middle of their application process. They hurry and get it finished 

and get it submitted before the deadline. 

It is not surprising. It has happened in the past. SBA knew that 

there would be a spike in demand when the cap was announced. 

It is just the way it works. 

Ms. VELAZQUEZ. So if they wanted to, they could have held the 

applications and waited until the money was available? 

Mr. WILKINSON. Absolutely. That is what they have done in the 

past. These applications should have been retained and put in a 

40

queue and funded as money became available rather than returning the applications, and in some cases where the applications are 

like Express and PLP faxed applications, those applications were 

physically destroyed, run through a shredder. 

Ms. VELAZQUEZ. Mr. Pegg, in your testimony you mentioned that 

you have a disaster loan, right? 

Mr. PEGG. Yes. 

Ms. VELAZQUEZ. Could you please tell us what will happen to 

this disaster loan if you cannot renew your capital line? 

Mr. PEGG. We will probably default on the disaster loan because 

we will be out of business. 

Ms. VELAZQUEZ. Has the SBA offered to defer the payments until 

this problem is worked out? 

Mr. PEGG. No. 

Ms. VELAZQUEZ. Maybe you can meet with SBA today and discuss that. 

Mr. PEGG. That would be great. Thank you. 

Chairman MANZULLO. Congresswoman Majette, did you have a 

question? 

Ms. MAJETTE. Yes. 

Chairman MANZULLO. Okay. Go ahead, please. You have to turn 

on your microphone. 

Ms. MAJETTE. Thank you, Mr. Chairman, and thank you, gentlemen, for being here. 

My question is for Mr. Sprague. I understand that you have had 

some challenges. Can you tell me? Is there a reason why your company would not be able to refinance through other non-SBA 

sources? 

Mr. SPRAGUE. Yes, ma’am. We have a multifaceted project. It is 

infrastructure, sewer, water. It is buildings, swimming pools, fixtures, cabins, boats, rehabbing bathrooms. I mean, it is multifaceted. 

We looked at everything we needed to complete and do this 

project, some of it immediately. We have finished the plans. The 

engineering is done. We have gone through the very intricate process with the Army Corps because we are on their dike so it is not 

the normal permitting process. We have to go through all kinds of 

additional hoops. 

We got the package for it, and we went through to conventional 

financings with what we needed with the explanation that they 

went through the package, thought we looked real good. They went 

through our balance sheets, our business plan, profit and loss, everything, where we have been since we have been there. 

Then they learned that we are sitting on state lands, and you 

cannot encumber state lands. Therefore, we do not fit in their financing box. They suggested we have the perfect program for you. 

It is SBA 7(a). 

We started working on our SBA 7(a) documents, and we got that 

completed. We submitted it. I want to say we submitted it on the 

6th, not even knowing that there was already happened in December. We were not even aware of that. 

We turned it in because my partner is pretty good about a complete package. I believe that we had everything in our package 

41

when it was completed and given to them. Then we received a telephone call. He gave me the news a few days later about the SBA. 

I do not believe at this point—the Chair said that we may be 

able to. There may be some Agricultural money. I do not know. I 

mean, the government has helped us a lot because it is a public/

private partnership that we are doing with the city. We are an area 

of economic critical concern, and we have all these designations. 

We are willing to do whatever we can, but we believe, and as has 

been shown to us by the banks, that this 7(a) program is perfectly 

designed for our type of facility. Unfortunately, we need a fair 

amount of money because it is not a little project. 

Ms. MAJETTE. Has this change in circumstance cost you personally or cost the company? How has it affected you? 

Mr. SPRAGUE. Well, every day. My partner and I have gone two 

and a half years without drawing a paycheck because we want to 

make sure everything we do goes back in. Somewhere my wife 

says, you know, there should be a paycheck coming our way one 

of these days. 

What it does, though, is it slows the whole project down. I do not 

know how we are going to do this now. Some of it is grants. We 

have to look at those kind of dates. We are going to have to see 

how this thing goes together. 

It is not just us. It is the whole downtown redevelopment because 

we are that catalyst for bringing people. This one will open that little shop, and this one will have a breakfast and lunch. This one 

will do this, and that one will do that. All these closed businesses 

will hopefully start reopening. 

It is not just waiting to see how we are going to put our project 

back together and figure out how this is going to work and how 

many years it is going to slow us down in trying to achieve where 

we have to go and what is going to happen at the end of the day. 

It is a whole bunch of other people that are sitting and waiting 

because they had high expectations that all of a sudden everything 

was coming together. It was all coming together. I mean, this thing 

came out of nowhere. 

Ms. MAJETTE. So your project really is the linchpin——

Mr. SPRAGUE. Yes, ma’am. 

Ms. MAJETTE[CONTINUING]In terms of development in that entire 

area? 

Mr. SPRAGUE. Yes, ma’am. 

Ms. MAJETTE. Sort of dropping the pebble in the pond, and the 

ripples would continue to go around. 

Mr. SPRAGUE. That is it. The city council has been good. I mean, 

they have now looked. All right. The center of town down from the 

project. What do we need? We need parking. They have just gone 

out and committed that they are going to buy this property around 

here and commit parking for all the businesses down there. 

We have people coming. Now, the businesses do not have parking. There will be public parking. You know, everybody is planning 

all going on here, and now all of a sudden somebody pulled the rug 

out from under everything. 

Ms. MAJETTE. Is there any way that you can break up the financing to be able to———. 

42

Mr. SPRAGUE. The problem is, I do not know. I am not saying 

that there are not a few pieces that we can do. In other words, like 

if we go like I just needed a front endloader. Yes, we went out and 

did conventional financing on it. Not a problem. You know, if we 

do not pay the payments, they have something they can grab. 

A lot of what we are doing is not grabbable as far as the banks 

are concerned, or it is multifaceted. You know, it is a little bit here 

and a little bit there, and it is hard to go out and get that kind 

of stuff. 

At this point we do not know how it is going to work. My partner 

is back, and that is his main penance I call it is to work on this 

kind of stuff. That is his half. He is trying to figure out where we 

are going to go. When I get back, I guess we will try to figure out 

where we proceed from now. 

Ms. MAJETTE. I guess the Everglades adventure has become a 

misadventure. 

Mr. SPRAGUE. It is still an adventure. I am not sure it is a misadventure yet, but it definitely got a little more adventuresome 

than it was. 

Ms. MAJETTE. More adventurous than you intended it to be? 

Mr. SPRAGUE. Yes. 

Chairman MANZULLO. They need some venture capital. 

Mr. SPRAGUE. Yes. 

Ms. MAJETTE. Thank you. Thank you for your testimony. 

Mr. SPRAGUE. Yes, ma’am. 

Chairman MANZULLO. I want to thank all of you for coming. 

Mr. Sprague and Mayor, I would suggest the EPA has all kinds 

of grants for wastewater treatment facilities, for drinking water. 

There is a tremendous amount of resources that are out there. If 

you pay taxes, I guess you are eligible to apply for these grants and 

loans if they are there. 

Karen, you could help them and guide them into other programs 

that are available with the staff that is available? Thank you very 

much. We want to thank the SBA and their staff for being here. 

We want to thank the witnesses, especially those of you who 

have come from long distances to be here. 

Is this your first time to testify before Congress, David? 

Mr. PILCHER. Yes, it is. I will be here all day tomorrow, so I can 

meet with you as long as you would like. 

Mr. MOSES. Likewise for me also. 

Mr. PEGG. Us too. 

Chairman MANZULLO. Listen, I understand. You need to talk to 

the guys at the SBA. I would also suggest that you talk to your 

Senators and your U.S. Representative. 

In our district we have a person that does full-time economic development. We are savaged with double digit unemployment in my 

district. It is getting worse because we have a heavy manufacturing 

base, and, Mr. Sprague, we have a good portion of the Mississippi 

River in our district. We are in the process of trying to develop 

things similar to what you are doing, so that is why I have a particular interest in what you are doing. 

To all of you, thank you for coming here. It is a real privilege 

to be Members of Congress and to have people who are impacted 

by these government programs to come and testify before us. 

43

The hearing is adjourned. 

[Whereupon, at 5:15 p.m. the Committee was adjourned.]

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