U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

52–891 PDF 2009

FULL COMMITTEE HEARING ON 

INCREASING ACCESS TO CAPITAL 

FOR SMALL BUSINESSES 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

OCTOBER 14, 2009 

Small Business Committee Document Number 111-051 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

PARKER GRIFFITH, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

STANDING SUBCOMMITTEES 

Subcommittee on Contracting and Technology 

GLENN NYE, Virginia, Chairman 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

KURT SCHRADER, Oregon 

DEBORAH HALVORSON, Illinois 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

PARKER GRIFFITH, Alabama 

AARON SCHOCK, Illinois, Ranking 

ROSCOE BARTLETT, Maryland 

W. TODD AKIN, Missouri 

MARY FALLIN, Oklahoma 

GLENN THOMPSON, Pennsylvania 

Subcommittee on Finance and Tax 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

W. TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

PARKER GRIFFITH, Alabama 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

Subcommittee on Regulations and Healthcare 

KATHY DAHLKEMPER, Pennsylvania, Chairwoman 

DAN LIPINSKI, Illinois 

PARKER GRIFFITH, Alabama 

MELISSA BEAN, Illinois 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

LYNN WESTMORELAND, Georgia, Ranking 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

Subcommittee on Rural Development, Entrepreneurship and Trade 

HEATH SHULER, North Carolina, Chairman 

MICHAEL MICHAUD, Maine 

BOBBY BRIGHT, Alabama 

KATHY DAHLKEMPER, Pennsylvania 

ANN KIRKPATRICK, Arizona 

YVETTE CLARKE, New York 

BLAINE LUETKEMEYER, Missouri, Ranking 

STEVE KING, Iowa 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

(IV) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1 

Graves, Hon. Sam .................................................................................................... 2 

WITNESSES 

Sarbarsky, Mr. Martin, CFO & COO, HR BioPetroleum, Inc., San Diego, 

CA, on behalf of Biotechnology Industry Organization ..................................... 4 

Zimmerman, Dr. Thomas G., Director, Osteopathic Medical Education, Program Director, Osteopathic Family Medicine Residency, South Nassau Communities Hospital, on behalf of the American Osteopathic Association .......... 6 

Fochler, Mr. Ryan P., President/Owner, Dog Paws ’n Cat Claws Pet Care, 

Inc., on behalf of Comp oration for Enterprise Development ........................... 8 

Shay, Mr. Matthew, CEO, International Franchise Association ......................... 10 

Finch, Ms. Zola, Director of Finance, RMI CDC, Jefferson City MO, on behalf 

of National Association of Development Companies ......................................... 12 

Sekula, Mr. Mark, Senior Vice President, Business Services, Randolph-Brooks 

Federal Credit Union, on behalf of National Association of Federal Credit 

Unions ................................................................................................................... 29 

Galiette, Ms. Carolyn C., Senior Managing Director, Ironwood Capital, on 

behalf of National Association for Small Business Investment Companies .... 31 

Dutch, Ms. Suzette, Managing Partner, Triathlon Medical Venture Partners, 

LLC, on behalf of National Venture Capital Association ................................. 33 

Menzies Sr., Mr. R. Michael S. , President and CEO, Easton Bank & Trust, 

on behalf of Independent Community Bankers of America .............................. 35 

Johnson, Mr. Cass, CEO, National Council of Textile Organizations ................. 36 

(V) 

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 46 

Graves, Hon. Sam .................................................................................................... 48 

Sarbarsky, Mr. Martin, CFO & COO, HR BioPetroleum, Inc., San Diego, 

CA, on behalf of Biotechnology Industry Organization ..................................... 50 

Zimmerman, Dr. Thomas G., Director, Osteopathic Medical Education, Program Director, Osteopathic Family Medicine Residency, South Nassau Communities Hospital, on behalf of the American Osteopathic Association .......... 55 

Fochler, Mr. Ryan P., President/Owner, Dog Paws ’n Cat Claws Pet Care, 

Inc., on behalf of Comp oration for Enterprise Development ........................... 59 

Shay, Mr. Matthew, CEO, International Franchise Association ......................... 63 

Finch, Ms. Zola, Director of Finance, RMI CDC, Jefferson City MO, on behalf 

of National Association of Development Companies ......................................... 70 

Sekula, Mr. Mark, Senior Vice President, Business Services, Randolph-Brooks 

Federal Credit Union, on behalf of National Association of Federal Credit 

Unions ................................................................................................................... 77 

Galiette, Ms. Carolyn C., Senior Managing Director, Ironwood Capital, on 

behalf of National Association for Small Business Investment Companies .... 86 

Dutch, Ms. Suzette, Managing Partner, Triathlon Medical Venture Partners, 

LLC, on behalf of National Venture Capital Association ................................. 92 

Menzies Sr., Mr. R. Michael S. , President and CEO, Easton Bank & Trust, 

on behalf of Independent Community Bankers of America .............................. 100 

Johnson, Mr. Cass, CEO, National Council of Textile Organizations ................. 106 

Statements for the Record: 

Clarke, Hon. Yvette D. ............................................................................................ 113 

Corporation for Enterprise Development ............................................................... 114 

(VI) 

(1) 

FULL COMMITTEE HEARING ON 

INCREASING ACCESS TO 

CAPITAL FOR SMALL BUSINESSES 

Wednesday, February 11, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 11:30 a.m., in Room 

2360 Rayburn House Office Building, Hon. Nydia Vela ́zquez [chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Dahlkemper, Schrader, 

Michaud, Altmire, Clarke, Ellsworth, Halvorson, Graves, Fallin, 

and Luetkemeyer. 

Also Present: Representative Moran. 

Chairwoman VELA ́ ZQUEZ. Good morning. This hearing is now 

called to order. Whether we are talking about equity investment or 

traditional bank loans, access to capital has always been a major 

obstacle for small firms. Today that challenge is compounded. 

According to a July survey by the Federal Reserve, 35 percent of 

domestic banks have tightened small business lending. Even loans 

through the SBA are down. For small firms, these declines are 

more than a simple setback. In fact, a lack of financing has forced 

many entrepreneurs to delay projects and put off investments. In 

some cases, it is limiting small firms’ ability to create much needed 

jobs. 

For small firms, access to capital is access to opportunity, and it 

is clear that small firms are in need of both. That is why the bill 

we are examining this afternoon delivers critical small business 

funding. 

I would like to thank Representative Schrader, Chairman of the 

Subcommittee on Finance and Tax, for his leadership in moving 

this legislation forward. It is a bipartisan product, one that could 

not have come together without the work of eight different committee members, including two from the minority. Their efforts 

were instrumental in drafting a blueprint that accounts for every 

stage of the small business life cycle, from start-up to IPO. 

The small business start-up stage is especially critical to our 

economy. That is because new firms generate jobs and revenue 

where there once were none. But of course, entrepreneurs cannot 

create new positions and paychecks out of thin air. Start-ups require significant capital to get off the ground. 

Unfortunately, however, funding to these firms is declining. In 

the last quarter of 2008, it plunged $5.4 million. The legislation we 

2 

are discussing today will stem from those drop-offs by providing 

critical, early-stage capital. It not only greases the wheels for equity investment, but also expands SBA’s microloan program. 

In doing so, it provides an additional $110 million for our smallest, most promising start-ups. Because small firms comprise 99.7 

percent of all employer companies, that revision is more than an 

investment in small businesses. It is an investment in American 

job growth. 

Small firms’ funding needs begin in the start-up stage. But, as 

any small business owner will tell you, they certainly do not end 

there. Even established firms require periodic capital infusions, 

particularly when it comes to enhancing their ventures. 

Today’s legislation helps firms secure financing for new purchases. It also raises SBA loan guarantees, reducing risk for lenders. That is critical, because some banks are saying they will not 

loosen lending standards until the middle of 2010, and that is at 

the earliest. 

For small firms that rely on loans, an eight-month waiting period 

could mean the end of their venture before it gets off the ground. 

That is why it is so important that we move forward with this legislation now. It will help small firms to purchase new equipment 

and inventory, and it would allow every business, regardless of industry, to hire new workers. 

At a time when our economy is struggling, it only makes sense 

to stabilize the small business community. After all, it was small 

firms that sparked a recovery during the downturn of the mid 

1990s. For this reason, we want to be sure that entrepreneurs have 

the resources to weather more than just an economic storm. 

With important improvements to SBA’s disaster loan program, 

we can protect the foundation of our economy, even in the event 

of catastrophe. Following a natural disaster, capital is nothing 

short of a necessity. But for many small firms, it is the only issue 

that matters at all, catastrophe or no catastrophe. In a hearing this 

Committee held last week, that fact became abundantly clear. 

This past Wednesday, our Committee met to discuss the state of 

small firms in the housing sector. We expected the conversation to 

focus on items like Section 179 expensing and the First Time Home 

Buyer’s Credit. As it turns out, our witnesses had another, more 

pressing issue in mind: access to capital. 

One witness, despite owning a profitable venture, simply could 

not find a bank to finance his operations. As a result, his firm was 

forced to delay $1 million in contracts and ultimately lay off 10 

workers. 

I wish I could say his story was so unique. But the truth is this 

sort of thing is happening every day, and we cannot afford to continue down this road. That is why this legislation is so vital. It will 

ensure small firms have access to the capital they need to keep operations running and the opportunity they need to grow our economy. 

With that, I would like to take this opportunity to thank all of 

the witnesses that are here today in advance for their testimony 

and will now yield to Ranking Member Mr. Graves for his opening 

statement. 

3 

Mr. GRAVES. Thank you, Madam Chair, for holding this important hearing to consider legislative changes to the SBA’s capital access programs. 

As I have mentioned before, access to credit and capital is critical 

to small businesses and to our American economy. During the past 

few years, we have seen the capital and credit markets fluctuate 

widely. Those changes are evident in the SBA Zone lending statistics. 

In fiscal year, approximately 90,000 loans, worth over $14 billion, 

through the 7(a) lending program; in fiscal year 2009, those figures 

are 44,009 billion. Some might say that credit was too available in 

2006 and 2007. Today the pendulum has swung completely in the 

opposite direction of credit and capital to unavailable. 

Clearly the economy must find an appropriate middle ground. In 

an effort to navigate an appropriate middle course, the SBA capital 

access programs can play a vital role. Those programs can fill gaps 

where conventional commercial credit and capital markets are not 

supplying funds to small businesses. 

Of course, those programs do no good if there are significant barriers to their utilization by lenders, investors, and small business 

owners. Bills being discussed today are designed to reduce impediments to their use by lenders, venture capitalists, and small businesses. This is a good start, and I hope to hear from our witnesses 

what additional changes are needed to unfreeze the capital and 

credit markets for small business owners. 

I am generally supportive of the bills before us today. I still have 

some concerns about some of the legislative proposals. I recognize 

that additional expenditures may be necessary to fix programs that 

are currently not functioning, but given the current budgetary constraints, the cost of some of the initiatives remain troubling. 

Furthermore, there may be some difficulties with implementation 

of some of the programs. I look forward to working with the Chairwoman and the rest of the Committee to resolve these issues in a 

bipartisan manner. 

It is important to recognize that the legislative actions we take 

in this Committee are only a component of a broader strategy needed to revitalize the small business economy. 

With over 25 million small businesses in this country, improving 

the capital access program of the SBA will not cure the credit and 

access ills through which the economy is suffering. It must recognize that overly restrictive regulatory policies must be corrected in 

order to swing the pendulum back to an appropriate middle ground 

for the country’s capital and credit markets. 

Congress must also not adopt policies that zap confidence in 

small business owners to invest in the growth of their enterprises. 

In position of additional costs, whether it is through cap and trade 

legislation or increased taxes to reformed health care, will reduce 

confidence in small businesses to take the economic risks needed 

to grow their enterprises. 

If Congress takes an approach and approves access to capital and 

SBA programs, on one hand, and then turns around through increasing operating costs of small businesses, on the other hand, 

and Congress will have not accomplished a whole lot. 

4 

Again I want to thank the Chairwoman for holding this hearing 

and our witnesses for being here today. I know you have taken 

time out of your busy schedules and in some cases traveled a long 

way. We appreciate that very much. 

Chairwoman VELA ́ ZQUEZ. Does any member wish to be recognized for the purpose of making an opening statement? 

[No response.] 

Chairwoman VELA ́ ZQUEZ. Okay. So it is my pleasure to introduce 

Mr. Martin Sabarsky. He is the Chief Financial Officer and Chief 

Operating Officer of HR BioPetroleum, a renewable energy technology company located in San Diego, California. 

Mr. Sabarsky is testifying today on behalf of Biotechnology Industry Organization. BIO is the world’s largest biotechnology organization, with more than 1,200 members. 

Welcome. 

STATEMENT OF MARTIN SABARSKY 

Mr. SABARSKY. Good morning, Good morning Chairwoman 

Vela ́zquez, Ranking Member Graves, members of the Committee, 

Committee staff, ladies and gentlemen. My name is Martin 

Sabarsky, and I am the Chief Financial and Operating Officer of 

HR BioPetroleum, a Hawaii-based biotechnology company focused 

on developing algae-based products such as next generation 

biofuels. 

I am privileged to be here on behalf of the Biotechnology Industry Organization, representing more than 1,200 member companies 

and nonprofit institutions in all 50 states that are involved in 

health care as well as agricultural, environmental, and industrial 

biotechnology. 

I am here to convey our strong support of the Small Business 

Early-Stage Investment Act of 2009. As indicated in my testimony 

submitted for the record, this bill addresses a longstanding problem 

in the biotechnology industry in which venture capital firms have 

become increasingly reluctant to fund promising early-stage research beyond the basic research stage and before the revenue generation stage. 

In the biotech industry, we refer to this phase as the Valley of 

Death, which sounds perhaps melodramatic but is a real dynamic 

that has been exacerbated greatly since the onset of the financial 

crisis last year. 

At the same time, advancing science through the Valley of Death 

has never been more important as we strive to create a TwentyFirst Century economy, create new jobs, become more energy-independent, and develop promising biotech therapies, all of which are 

critical priorities. 

Part of the challenge in developing innovative new biotech technologies and products is that it is extremely time and capital-intensive. The substantial costs and time lines involved in drug development are well-known. Perhaps less well-known, however, is that 

the pre-commercial development of advanced biofuel technologies is 

also a capital and time-intensive process and is estimated to cost 

anywhere from $100 to $300 million and take 5 to 10 years. My 

company, HR BioPetroleum, is but one small business in the 

5 

emerging biofuels industry that has the potential to benefit from 

this important legislation. 

Studies have shown that successful development in America of 

biofuels, such as biodiesel from algae, could result in the equivalent 

of 7.9 million barrels of oil being produced per day by 2050, virtually eliminating our need for gasoline. 

The widespread use of biofuels could also reduce greenhouse gas 

emissions by 1.7 billion tons per year, equal to more than 80 percent of transportation-related emissions in 2002. 

The benefits are clear. The early-stage research is promising. 

But, as we sit here today, the private equity capital to make new 

investments to drive these programs forward aggressively is largely 

sitting on the sidelines. 

In fact, in a recent press release, the National Venture Capital 

Association reported that venture funds raised in the third quarter 

of 2009 are at a 15-year low. Investments in clean technology companies, such as my own, were down 48 percent in the first quarter 

of 2009 alone. 

My presently unsuccessful attempts to raise private equity financing for HR BioPetroleum over the past 12 months, despite a 

promising technology and significant corporate achievements, are 

instructive. 

By 2005, despite having no venture capital funding, my company 

had successful demonstrated a proprietary process to grow algae at 

an industrial scale in Hawaii. Based on these positive results in 

2007, we were able to successfully enter into an industry-leading 

joint venture with Royal Dutch Shell called Cellana, the initial 

focus of which is to build and operate a new facility in Hawaii to 

demonstrate the economics of integrated algae production and algal 

oil production. 

In 2008, in large part on the strength of this joint venture, we 

signed memoranda of understanding with Hawaiian Electric, Maui 

Electric, and Alexander and Baldwin to develop a commercial algae 

facility on Maui. Despite these accomplishments, however, we were 

unable to complete a private equity financing that fell through a 

year ago this month as a direct result of the current financial crisis. 

Our subsequent attempts to attract additional venture capital investment have not yet borne fruit, due, I believe, to venture funds 

becoming even more hesitant to take technology risks within my 

industry at the same time that many of their traditional funding 

sources have backed off or backed out of venture investing. 

R&D programs through our Cellana joint venture continue, however, but most of our industry peers are not so fortunate. Many 

have less than 12 months of cash. And some have had to discontinue operations entirely. Hence, this pending legislation is even 

more critical to addressing the structurally inadequate funding environment that exists today and has for some time. 

Other complementary programs, such as the loan guaranty and 

grant programs through the Department of Energy and Department of Agriculture, are important adjuncts to this pending legislation, but these programs are simply not available to small businesses that don’t already have the sufficient equity capital to satisfy the mandated cost-share or minimum equity requirements. 

6 

This is a real Gordian Knot that can only be cut by providing additional equity capital to address this problem. as the pending bill 

would provide. 

In closing, to ensure that the U.S. remains the world leader in 

biotechnology research and development, investment in early-stage 

biotechnology companies needs to be fostered. BIO believes that 

providing incentives for additional investment in small biotechnology companies is the most effective approach for SBA to 

support these high-risk, high-reward companies. 

Thank you all for the opportunity to talk to you today about HR 

BioPetroleum and the promise of biofuels as well as how the Small 

Business Early-Stage Investment Act of 2009 could provide critical 

investment dollars required to develop biotech products that will 

benefit the public. I look forward to addressing any questions you 

may have. 

[The prepared statement of Mr. Sabarsky is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Right on target by 12 seconds. 

[Laughter.] 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Our next witness is Dr. Thomas Zimmerman. He is the Director 

of Osteopathic Medical Education and the Program Director of Osteopathic Family Medicine Residency, South Nassau Communities 

Hospital. Dr. Zimmerman is testifying today on behalf of the American Osteopathic Association, which represents more than 67,000 

osteopathic physicians. 

Welcome. 

STATEMENT OF THOMAS ZIMMERMAN 

Mr. ZIMMERMAN. Thank you. 

Chairwoman Vela ́zquez, Ranking Member Graves, and members 

of the Committee, thank you for the opportunity to testify before 

you today. As an osteopathic physician Board-certified in family 

medicine, a health information technologies consultant, and a 

member of the American Osteopathic Association, I have witnessed 

firsthand the challenges facing our nation’s physicians as pressure 

mounts for these practices to implement HIT systems in the coming years. 

Clearly, the incentives offered through the HITECH Act beginning in 2011 and the subsequent threat of penalties beginning in 

2015 are expected to encourage many physicians to adopt electronic 

medical record systems. 

However, from my experience and that of most research, I find 

that the biggest stumbling block to EMR implementation for many 

physician practices is financing. For this reason, we wish to express 

our strong support for H.R. 3014, the Health Information Financing Act of 2009. 

The AOA represents 67,000 osteopathic physicians across the 

country. Our profession is unique in its focus on primary care, with 

approximately 60 percent of osteopathic physicians entering this 

field, the vast majority of whom practice in community-based settings. 

7 

However, inequities in our current Medicare payment system 

have resulted in onerous financial burdens for these physicians, 

whose practices generally operate with one to six employees. While 

our members are eager to adopt more streamlined administrative 

and clinical systems, narrow profit margins and high overhead 

hinder investments in new innovations, such as health information 

technology. 

Many of these systems require a considerable amount of capital to purchase. The average cost to install an EMR system is $32,000 

per physician according to an MGMA study. Other studies have 

placed this cost much higher. 

The funds provided in the American Recovery and Reinvestment 

Act earlier this year offer financial incentives that will facilitate 

the implementation of these systems. Because these incentives 

come on the back end, however, smaller practices are at a significant disadvantage. 

Under current law, we believe that the bulk of stimulus funds 

are likely to flow toward hospitals and larger specialized practices, 

ultimately making the rich richer while small practices work to 

build up the funds and infrastructure necessary to qualify. 

With the time line established through ARRA, it is our belief 

that only a small minority of small physician practices will qualify 

for the 2011 bonus. Additional government support, including the 

loan program in your legislation, would level the playing field, enabling and encouraging many more small practices to implement 

EMR systems. 

As you well know, the economic crisis in this country has hit 

small businesses particularly hard. Solo and small practices in the 

past often turned to home equity loans to fund business investments. With the current credit crunch, access to these loans is also 

severely limited. 

H.R. 3014 would grant physicians access to private lenders 

through guarantees issued by the SBA. We support the targeted 

nature of your proposal, which directs funds toward the specific 

equipment, training, and maintenance services necessary for our 

practices to meet the guidelines set forth by the Department of 

Health and Human Services. 

The AOA recognizes the promise of increased productivity, prevention of medical errors, reduction in health care costs, increased 

administrative efficiencies, decreased paperwork, and expanded access to affordable care offered by HIT. However, these benefits cannot be achieved until physician practices have clear guidelines from 

CMS as to the standards to ensure interoperability across systems. 

We expect these guidelines and the definition of meaningful use 

to be published by the year’s end. But with just 12 months to purchase and implement a qualifying system, we believe that this time 

line is overly aggressive and inadvertently favors large institutions. 

The administrative costs associated with the adoption of HIT systems also present an obstacle for small practices. The initial transition period involves considerable time for both the physician and 

support staff, who may require outside training and consultants. 

During this time physicians often decrease patient load by up to 

25 percent for several months. These increased training expenses 

combined with decreased revenue creates a formidable cash flow 

8 

problem that many small practices may not be able to accommodate. The loan program in this legislation accounts for these factors 

by allowing the funds to be applied towards extra administrative 

costs. 

Ms. Chairwoman, your legislation paves the way for small practices to join larger institutions in implementing HIT systems that 

will improve the delivery of care across the spectrum of health 

care. 

We commend you on your recognition of the challenges facing our 

members and the sound policy you set forth in H.R. 3014. On behalf of the AOA and my colleagues, thank you for your efforts. And 

we look forward to working with you and your colleagues throughout this promising period of transition. 

[The prepared statement of Mr. Zimmerman is included in the 

appendix.] 

Chairwoman VELA ́ ZQUEZ. Very good. On time. Thank you, Dr. 

Zimmerman. 

Our next witness is Mr. Ryan Fochler. He is the President and 

owner of Dog Paws n’ Cat Claws Pet Care, a small business located 

in Arlington, Virginia. Mr. Fochler is testifying today on behalf of 

Corporation for Enterprise Development. CFED is a leading public 

policy advocate that helps federal, state, and private sector leaders 

move the nation towards a more equitable and inclusive economy. 

Welcome. 

STATEMENT OF RYAN FOCHLER 

Mr. FOCHLER. Thank you very much, Chairwoman Vela ́zquez, 

Ranking Member Graves, and the entire Committee for inviting me 

here today to provide this important testimony about the SBA 

microloan program and H.R. 3737. 

My name is Ryan Fochler. And in 2004, I became the owner of 

Dog Paws ’n Cat Claws Pet Care in Arlington, Virginia. As you all 

know, small businesses are the backbone to our economy. 

Dog Paws ’n Cat Claws employs 30 employees in the D.C. metro 

area. And we provide services for more than 1,800 clients and their 

pets, including home visits when they are out of town or away at 

work. We also house a 7,000 square foot doggie day care facility located in Arlington. 

The pet industry accounts for more than $43 billion a year in 

economic activity and experienced a growth rate of more than 5.5 

percent, despite the recession. And it continues to show no signs 

of slowing down. In fact, it continues to expand across multiple industries. 

For example: car companies now offer a full line of dealer-installed pet accessories, new airline companies have taken off with 

the sole purpose of transporting animals in pressure and temperature-controlled cabins, and many chain hotels have adopted petfriendly policies, which is why you may be asking yourself, if the 

pet industry is so fantastic, why is Ryan here? To answer that 

question, because despite a credit score of more than 720 and an 

average growth in sales of 168 percent over the first 3 years of my 

stewardship, Dog Paws would not be here where it is today without 

the SBA microloan program. 

9 

In recognition of that fact, I am also here to thank this Committee for their work on improving the microloan program and to 

make suggestions for future changes to the program so that that 

it can continue to help entrepreneurs like myself. 

I am very excited about some of the changes proposed in H.R. 

3737, including improving borrower education; opening the door to 

more flexible, responsible microloan products; expanding eligibility 

requirements to increase the presence of microloan intermediaries 

across the country; and increasing the amount of money that an 

intermediary can borrow from SBA in order to reach more small 

businesses. 

I know that there are many more entrepreneurs like myself that 

were told no by banks every single day. All of these factors will 

contribute to making another entrepreneur’s microloan experience 

even more positive than mine, which came at a crucial time for my 

business. 

In 2007, because of our constant growth, I felt it was time to pursue my larger dream of the company to expand beyond dog walking 

and create a holistic training, day care, boarding, grooming and retail facility for people and their pets in my community. 

In December of 2007, I was pre-approved for an SBA express 

loan from Provident Bank, which gave me the green light to finalize our space and move forward with opening our store. Within two 

months, our retail store was experiencing both commercial and 

media success. We have been nationally recognized as a green retail establishment. 

Unfortunately, shortly thereafter, the credit crisis hit in full 

force. To be specific, despite having never made a delinquent payment, our available credit was slashed from over $56,000 to approximately $1,000 without warning. I felt sick to my stomach. We 

had grown from at that point 7 employees to over 20 at that point. 

This severe and in my opinion unwarranted reduction in my 

credit made it nearly impossible for us to order new product for our 

retail store. It also created a horrible domino effect. The drastic 

lowering of my credit lines resulted in a much higher debt to available credit ratio. Now, instead of using about 50 percent of our 

available credit, we were at 90 percent of our available credit, 

which made us look like much riskier to banks. 

My credit has since taken a nosedive, not because bills weren’t 

paid but because I was told, ‘‘You have been a good customer up 

until this point, but there is no guarantee that you will be in the 

future.’’ 

I spent the next three weeks visiting what I felt was every single 

bank in the D.C. metro area. I was turned down time and time 

again by large and small banks alike. Many of the loan officers 

that I met with sympathized with my situation and told me that 

I had easily qualified before the financial crisis. But with the decline in my credit score, I could not get a loan from banks themselves that probably received bailout funding. 

This is when I learned about the SBA microloan program and 

the Latino Economic Development Corporation. They took a look at 

our books, our history, year-over-year sales, and employment 

growth, our 100 percent positive credit card payments, and lent us 

$20,000 in working capital. 

10 

I also got something else from LEDC: quality, in-depth technical 

assistance for my business. Banks give loans and send payment invoices. Micro lenders like LEDC do much more. 

LEDC, with all of their technical support, set Dog Paws up for 

success. They have ongoing one-on-one support, group events and 

training. They think of us when they meet new business owners 

and potential clients. 

Because of the over 100 hours of technical assistance I have received from the microloan program at LEDC, I am a better businessman, and my company is continuing to grow at a sustainable 

rate. 

Despite the tremendous help that we received from LEDC, Dog 

Paws continues to seek capital we need to reopen our retail center. 

We have approximately 1,000 square feet of empty space that current employees, like my manager, who was laid off from Fannie 

Mae, and potential employees, who were laid off from Bank of 

America, could go to work right away. 

But without the availability of the SBA microloan program and 

SBA lending programs, Dog Paws ’n Cat Claws would not exist as 

it does today. We would most likely have not been able to create 

23 new jobs over the past year and a half. We would not be trying 

to figure out a way to get our retail center reopened to create more 

full and part-time jobs. We would not be able to outsource new 

trainers, groomers, consignment stores, et cetera. 

Before I finish, I want to suggest a few more changes to the 

microloan program that I know will help entrepreneurs down the 

road. By increasing the microloan program to $50,000 to run a successful small business, especially a retail business, larger amounts 

of capital are essential for ordering product. Do whatever you can 

to continue expanding this program. Believe me, the need is out 

there. 

Microloan Intermediaries like LEDC do not have the marketing 

and advertising muscle that banks and even credit unions have. If 

they did, I certainly would have knocked on their doors earlier. 

Small businesses are currently acting as a backstop for the economy and the bailout. Despite the limited available credit, many of 

us are still finding ways to grow. We are somehow managing to 

create jobs while companies that are subsidized by the government 

or even received bailout funds continue to lay off employees. 

Thank you for this opportunity to testify here today. I look forward to answering any questions that you may have. 

[The prepared statement of Mr. Fochler is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Fochler. 

Our next witness is Mr. Matthew Shay. He is the CEO of the 

International Franchise Association, one of our nation’s largest 

business associations, with more than 10,000 members. 

IFA represents members in every aspect of the franchise community and across the nation. 

STATEMENT OF MATTHEW SHAY 

Mr. SHAY. Chairwoman Vela ́zquez, thank you very much for the 

introduction and Ranking Member Graves, members of the ComVerDate Aug 31 2005 14:20 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52891.TXT DARIEN
11 

mittee. It is a pleasure to be here today to applaud your efforts to 

restore the access of credit for small businesses and, in particular, 

to urge our strong support for the Small Business Credit Expansion 

and Loan Market Stabilization Act. 

I am Matt Shay, President and CEO of the IFA, headquartered 

here in Washington, and very privileged to represent our 1,200 

member companies who create small businesses across this country. 

And you have got my written remarks. And so, rather than go 

into detail on those, what I would like to do is just try to make 

three points with you and emphasize those: first, that, no matter 

what you have heard, the credit crisis affecting small business and 

franchise businesses, in particular, is severe and becoming acute 

and more so every day; secondly, that the extraordinary nature of 

this crisis in our view requires the Congress, the administration, 

and the SBA to take extraordinary measures. 

And, third, and I think maybe most importantly, we feel very 

strongly that a renewed emphasis on access to credit for small 

business and the facilitation of loans for small business can help 

lead our nation back into a period of sustainable economic recovery 

and, to put a fine point on that, to create jobs. And I think that 

that is what we all are most concerned about today, is the creation 

of jobs. And we really believe that a renewed emphasis on access 

to loans for small business will help us achieve that. 

We think franchising is a particularly apt prism through which 

to look at the impact of the credit crisis on the small business community. There are franchise businesses operating in virtually every 

sector of small business. And because of the nature of the way in 

which small business franchises are regulated, the way they register at the federal and state level, the way information is reported 

to the franchisors, it is much easier to monitor and analyze the impact of this credit crisis on franchise businesses generally than it 

is on independent businesses in particular. 

Our research and the experience that we have with the 

PricewaterhouseCoopers, who have conducted a number of research 

projects for us demonstrate that there are more than 900,000 franchise businesses operating in the United States today. Those businesses create jobs for 21 million Americans and generate more 

than $2.5 trillion of total economic output. And to put that in perspective, that is 15 percent of the private sector workforce and 12 

percent of total GDP, or total economic output. So it is a significant 

and growing component of the nation’s economy. 

Further, we have been able to demonstrate through this research 

that over the last five or six years, franchise businesses have outperformed non-franchise businesses operating in similar industries. 

So franchise business is a more efficient way to create jobs to invest capital and ultimately to drive growth in our economy. 

Over the last several years, franchise businesses grew by 40 percent, when non-franchise businesses in the same sector grew at approximately 25 percent. So we know that investing in a franchise 

business, providing capital and access to credit for those businesses, has a huge positive impact on job creation. 

The experience that our members have is that lending has essentially ceased. All the companies that were lending to franchise 

12 

businesses, CIT, Wells Fargo, GE Capital, are basically out of this 

market now. And it’s also our experience that there are thousands 

of deals literally sitting on the sidelines: entrepreneurs that have 

signed contracts that have paid franchise fees who are unable to 

access capital they need to start those businesses. 

We would make four basic suggestions to the Committee about 

things you could do that would be very beneficial to our members 

and we think the small businesses generally. First, increasing the guaranteed loan amount from $2 million to $5 million would have an immediate impact on the ability of 

franchisees to grow and create jobs. 

Secondly, adopting a market-based approach to the loan pricing 

for SBA loans we think would help supply and demand, find a 

proper equilibrium, which we don’t think exists today. There is 

over-demand and under-supply, and we think that is because there 

is disincentive created by the policy decision to set rates at a certain level. 

Third, we believe there are some things that can be done in 

terms of regulations we could adopt that would put emphasis back 

on making loans available to small business start-ups through the 

7(a) program, as opposed to other ways in which this program has 

been utilized over the past year. We think, in particular, refinancing of real estate has artificially indicated that there is a 

heavy usage here when the money is not really going where it 

needs to go, which we think, really, are the small business startups. 

And then, fourth and finally, we think the audit standards are 

creating a level of uncertainty for lenders that are creating some 

disincentives for them in terms of their ability to rely on the guarantee that an SBA loan will, in fact, be backed up should things 

not work out the way we all hope they do. 

So we applaud the Committee’s efforts. We appreciate the things 

you are doing. And we stand ready to work with you to adopt these 

changes. Thank you very much. 

[The prepared statement of Mr. Shay is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Shay. 

Our next witness is Ms. Zola Finch. She is the Director of Finance of RMI CDC, a small business-certified development corporation based in Jefferson City, Missouri. 

Ms. Finch is testifying today on behalf of the National Association of Development Companies, the leading trade association of 

certified development companies, which administer the SBA 504 

CDC program. 

Welcome. 

STATEMENT OF ZOLA FINCH 

Ms. FINCH. Thank you. 

My name is Zola Finch. And I am past Chair of NADCO. I am 

pleased to provide a statement today about the Committee’s proposal to improve access to capital by small businesses. 

I would like to thank Chairwoman Vela ́zquez, Ranking Member 

Graves, and the entire Committee for their continued support of 

13 

the CDC industry and the 504 program. The Committee has 

worked closely with SBA and our industry to ensure the availability of this program to small businesses for many years. 

First, I would like to discuss the need to reduce the cost of the 

504 program. SBA has informed us that its 2010 budget increases 

the cost of the 504 program by 38.9 basis points. This is due to at 

least two factors in the SBA’s econometric subsidy model. The first 

factor is the national unemployment rate, and the second factor is 

the forecast of the 504 default rate. 

With both of these factors being impacted by the current recession but their real effect is expected to be short-lived, we ask the 

Committee’s support of an appropriation sufficient to offset this fee 

increase for the next two years. 

Small businesses are finally returning to a growth mode, which 

means improved cash flow, but why use that to pay increased program fees? We request this to be taken up as soon as possible in 

order to eliminate the impact of the subsidy fee increase on our 

borrowers for F.Y. 2010. It does not seem right in this economy to 

provide small businesses feverly from the stimulus bill in February 

of 2009 and turn around and increase their cost of borrowing in October of that same year. 

The Committee has worked hard to enhance the 504 program to 

put more fixed asset financing and working capital in the hands of 

small businesses hard pressed by this recession. With that, it is 

clear that many small businesses either need access to larger guaranteed loan amounts or have already used up their allocated maximum for 504 under the current law. 

The current restrictions can be addressed first in three ways. 

First, increase the maximum 504 loan amount beyond its current 

limit of $1.5 million; second, allow a borrower to maximize their 

use of both 504 and 7(a) loan limits; and, third, eliminate the regulation that restricts business owners with higher net worths from 

participating in 504 projects. 

The Committee has recognized the need to reduce loan losses 

with more effort devoted to loan liquidations and recoveries. At 

Congress’ direction several years ago, SBA created a new regulation that enabled taking advantage of the recovery expertise within 

the CDC industry. Many CDCs already perform such tasks for the 

loan programs they administer. They have simply not been given 

the ability and freedom by the SBA to do this on a broad scale for 

504. NADCO believes that losses can be reduced if CDCs are allowed to perform recoveries in these settlements of loan guarantees 

of 504 projects. 

The Committee has created other program changes to reduce 

losses. Under the proposed field, you will make the program more 

flexible by allowing higher owner equity injections, which will reduce the high cost of first mortgages. 

Second, use of the PCLP program may be expanded by making 

the pilot amortization program permanent for calculations of the 

PCLP reserves. 

And, third, the Committee will improve servicing of defaulted 

504 loans by directing the administration to continue loan accounting for default through its own highly automated central servicing 

agent. This will result in much improved loan servicing by proVerDate Aug 31 2005 14:20 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52891.TXT DARIEN
14 

viding better information to the CDC’s handling those loan defaults. 

Finally, the Committee is addressing the need to make the SBA 

programs more relevant and productive. Loan volume for both 504 

and 7(a) programs has improved slightly since passage of the Stimulus Act, but many of those benefits have not yet been implemented by SBA. Both programs are down over 40 percent from levels two years ago. 

The 504 program is over 20 years old with an environment of restrictive and overbearing regulations, which has evolved within the 

federal bureaucracy. With this new administration and the fresh 

thinking under senior policy-makers, NADCO sees an opportunity 

to break out of the old program structure and establishment. We 

see the chance to work with this new leadership team and with the 

new Congress to expand the 504 program benefits to more borrowers. 

NADCO believes that the first step in this process of expanding 

and enhancing the 504 program is to clarify the structure of CDCs 

that deliver the program and ensure an enhanced level of service 

by the CDCs. The Committee has developed several program 

changes that will increase the focus of the CDC industry on community development through our nonprofit organizations in the future. 

Working together, we must be more creative and flexible in servicing the needs of not only existing small businesses but also in 

providing financing to new industries. We must tear down the 

walls of arcane, irrelevant, and restrictive regulations that create 

unnecessary barriers to reaching the industries of the Twenty-First 

Century economy. 

SBA has become one of the largest economic development agencies in the federal government. By leveraging its guarantee authority using lending partners, SBA has directly assisted the creation 

of over 5 million jobs through more than $200 billion in 504 first 

mortgages, 504 debentures, and 7(a) bank loans. Very few agencies 

can claim this kind of record and accomplishment and impact on 

our economy. 

But, like any maturing organization, SBA has to reevaluate its 

products to serve the changing needs of small businesses. NADCO 

urges Congress to collaborate with the new SBA management with 

farsighted market-driven lenders to eliminate those overly restrictive regulations and create the financing and economic development program so vital to America’s future in a competitive world. 

Small businesses that are agile and forward-thinking will lead us 

out of this recession. Let’s help them to do it now. And by working 

together, we can put America back to work. Thank you. 

[The prepared statement of Ms. Finch is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Finch. 

Mr. Sabarsky, the proposed small business early-stage investment program has a specific focus on delivering capital to small 

businesses in some of the most capital-intensive industries, like 

biotech, clean energy, and life science. Can you discuss some of the 

policy justification for the program focused on these industries? 

15 

Mr. SABARSKY. Yes. Thank you, Madam Chairwoman. 

So I think this is a sort of two-part question. The first answer 

to the question gets to the policy justifications for the targeted industries, as specified in the pending legislation. Particularly when 

it comes to biotechnology, clean technology, I think you see possibly 

the greatest combination of need for capital, especially in the current crisis that we are facing, as well as the potential for subsequent investment and job creation coming in from the combination 

of the public sector and private sector funding, which I am assuming and hoping will be available once sufficient risk is taken out 

of the biofuels development and biotech development processes. 

I think, in particular, talking about the biotech industry, this 

program would leverage America’s existing strengths in technology 

generally and biotech, in particular, as we move to an increasingly 

knowledge-based economy here in the Twenty-First Century. 

It also in the case of biofuels would have the impact of bringing 

manufacturing and energy production into the U.S. and away from 

other parts of the world, whether it is OPEC countries or others, 

that may not be so friendly. So from an energy security standpoint, 

I think that has value as well. 

Now, there is also a question about why target small businesses, 

early-stage companies. I think Congress and the administration 

and prior Congresses have indicated through things like the stimulus bill, through preexisting grants and loan guaranty programs, 

renewable fuel standards, and other regulations and tax policy a 

strong national priority for developing biofuels, alternative energy 

of renewable technologies, energy technologies generally. And so 

there is already a serious policy commitment at the national level 

to support the advanced biofuel industries that I am working on. 

Once that is done, though, one has to ask the question, are small 

businesses able to compete on a level playing field for some of the 

larger dollars that are really necessary to field a large demonstration facility to prove the economics of biofuels production as one example? 

And right now what we are seeing through DOE and DOA programs, be they the grant programs or the loan guaranty programs, 

is small companies simply can’t play in that environment because 

you can’t even get an application together that satisfies DOE’s or 

DOA’s requirements based on out-of-pocket expenditures that are 

required, which are substantial, sometimes mid to high six figures. 

But the most important impediment is that you can’t show the 

20 to 50 percent cost share required on the grant side or the minimum equity required on the guaranty side to actually field your 

plant should you get the award. 

Chairwoman VELA ́ ZQUEZ. Mr. Sabarsky, can you tell us what is 

the average return on equity for early-stage— 

Mr. SABARSKY. Early-stage investment? 

Chairwoman VELA ́ ZQUEZ. Yes. 

Mr. SABARSKY. Well, and maybe the panel coming next would be 

more appropriate. I am not a venture capitalist. I do not play one 

on TV. But as I talk with them, they talk about a 25 to 40 percent 

year over year that they target. And this is obviously a very high 

return to indicate that there is a high risk. And, as the venture 

capitalists will tell you, out of every 10 investments, maybe 1 or 

16 

2 will actually produce a 10x return to their investment, which 

helps to take care of the ones that don’t return anything or you basically get back your money and that is it. 

Chairwoman VELA ́ ZQUEZ. Okay. Thanks. 

Mr. Shay, in your testimony, you emphasized the continued need 

for credit, especially among start-up businesses. Do you believe 

that lenders overemphasize more profitable loans, like loans to establish businesses with larger, greater needs, credit needs? Do 

these larger loans contribute to the credit shortage for start-ups 

that we are seeing at this point? 

Mr. SHAY. Well, I certainly think in a competitive marketplace, 

capital hopefully, being agnostic, is going to go where it can, where 

it believes it is going to get the greatest return. So as the sources 

for loans to small businesses have dried up, the existing capital is 

either sitting on the sidelines or it is going to other places, larger 

loans. 

There is a segment of our membership, about 400 member companies, that have investment levels, start-up investment levels, of 

between three-quarters of a million dollars and $2 million. Given 

the current loan limits on an SBA guaranteed loan of $2 million, 

those franchise investors essentially hit the limit with their first 

store. 

So for the people that are trying to expand to multi-unit status 

two or three stores, which is really what they need in order to be 

profitable in many cases, the challenge that those people face—and 

that is really the sweet spot, those 400 that have those size businesses—they have exhausted the possibility of financing and capital with the first store. 

So yes, we see a big challenge. And, you know, I can’t point fingers at what is creating the real bottleneck. Is the capital going 

somewhere else, bigger loans or not? But we would not consider a 

loan of $750,000 to $2 million to be an extremely large loan. That 

is a very competitive loan for a small business. And it is tough to 

find. 

Chairwoman VELA ́ ZQUEZ. It is less risky for a bank to lend to 

other, more established businesses than going and lending to startups. 

Mr. SHAY. Right. And certainly our view is that a franchise fits 

that category of an established business because you have got a 

track record and a history. And, again, not wanting to distinguish 

between franchise businesses and a typical independent start-up 

because we think all independent businesses are great. We just 

happen to favor the franchise model. 

But yes. There is no question, though, that lenders, bankers, 

nonbank lenders look at a franchise. And when they see a business 

plan developed by a franchise system, that gives some comfort that 

there is going to be sort of some full faith and credit there, as opposed to someone that walks in off the street and doesn’t have that 

experience or doesn’t have those kinds of resources at their disposal. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Dr. Zimmerman, the proposed health IT loan program, would you 

say that the proposed health IT loan program be duplicative of the 

17 

SBA’s existing loan programs or are there factors that distinguish 

this program? 

Mr. ZIMMERMAN. No. I don’t believe that the proposed legislation 

does duplicate existing resources through the SBA. With the proposed legislation, the fact that there is up to a three-year 

deferment on the payment of interest before the payback begins decreases the cost of this loan greatly and makes it a lot more attractive for small practices to consider implementing the HIT technology. 

A lot of these cost savings sided with electronic medical record 

systems, even in the federal Stimulus Act, come from savings and 

not actual revenue. So it is very important to see reductions in cost 

at the front end and not saying, ‘‘Well, ten years from now, this is 

how much money you will save.’’ The physician is a business. And 

they need to see what the difference in the overhead, my cost right 

now, out of pocket is going to be. So no, I don’t believe it is duplicative. 

Chairwoman VELA ́ ZQUEZ. We hear that the cost for implementing IT will be like $100,000 per practice. Do you know what will be the 

cost savings once the IT has been implemented? 

Mr. ZIMMERMAN. A lot of times it depends on how well the practice is actually running with the EMR system. And a lot of it has 

to do with how well the practice has been run before the system 

is implemented. If they have a good paper system, if it is an efficient office, they will see a lot more savings and increased revenue 

with the EMR system. I believe some studies cite anywhere between $10,000 to $20,000 

per physician in cost savings. And if you look at the average cost 

of an implementation, a lot of times that comes out to about a six 

to eight-year period before you have a return on investment depending on the size and cost of the system. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Fochler, in the proposed legislation or the draft legislation 

that we have before us, we are allowing for the SBA to use the surplus to reduce the cost of loans for borrowers in the microloan program. The microloan program has been criticized for the interest 

rate, the high interest rate the borrowers pay. 

Would this put more money into the hands of small businesses, 

like yours? 

Mr. FOCHLER. Yes. I think anything to improve the microloan 

program, especially, you know, it is much higher interest rates, but 

at the same time, it is more competitive than credit cards. And at 

least it is accessible, even though it is limited. 

So I think it definitely could improve and ultimately get more 

money into the hands of small business owners that are struggling 

to grow. Even though we seem to find ways to do it, it is just very 

stunted growth. Anything could definitely be a huge improvement 

to helping the microloan program. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I have more questions. And I will come back at the second round. 

So now we will recognize Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chair. 

Mr. Shay kind of answered my question to an extent. But I am 

on the Ag Committee. And the USDA has a guaranteed loan proVerDate Aug 31 2005 14:20 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52891.TXT DARIEN
18 

gram with limits up to $25 million. My question is, you know, 

should the capital access programs in the SBA be modified to higher limits? 

And, as I stated, you already kind of answered that, but I would 

like to get an answer from all of you on that. Obviously the limits 

are much different under the SBA. And I would be very curious 

how much that would help. 

Mr. SABARSKY. Thank you, Congressman. 

So the limits are important for folks in the early-stage biotechnology industry. Though I think the structure of the loan guarantees or grants through the Department of Energy or Department 

of Agriculture are the bigger issue, that would be helpful to increase the limits. 

I think the main benefit that I would like to see as a separate 

proposal perhaps that we could talk about later would be the ability to bootstrap a grant or award such that you wouldn’t have to 

demonstrate your ability to come in with a minimum equity or the 

cost share components until after you have been awarded the dollars for the innovation for the ability to deploy technology that is 

considered to be important and then go out and raise the private 

dollars required to do that. 

Right now it is a catch-22. And it literally is keeping companies 

like mine out of the prices altogether versus other larger companies 

that may be dabbling in the science that we are doing or much 

smaller companies that are earlier-stage even than we may have 

gotten lucky with the funding shortly before the crisis that we are 

in right now. 

And I am not sure that that is the way the Congress intended 

the selection process for these programs to work. I think they assumed a well-functioning capital market, which capital markets are 

anything but well-functioning at the moment. That is my perspective. 

Mr. GRAVES. Mr. Zimmerman? 

Mr. ZIMMERMAN. Thank you. 

For the sake of physician practices, I believe that the current 

limits are adequate. If you take into consideration for anywhere 

from a 3 to 6-physician practice, the average cost of an implementation might run between $120,000 to $250,000, I think the limits 

are adequate to help incentivize action. 

If you look at hospitals, on the other hand, their costs will obviously be much, much higher. But that is out of the realm of 3014. 

Mr. GRAVES. Mr. Fochler? 

Mr. FOCHLER. Yes. I think Mr. Shay made a great point. We are 

a small business looking to expand and grow. We have a lot of communities that have asked us to open up our store in some of the 

new developments that are out there. But I have personally hit my 

cap. I can’t go back to get any more loans because the microloan 

has lent me all the money they can at this point. So Mr. Shay 

made a great point. 

Yes, we do need to work with our business model to grow, sustain, to increase more jobs. You know, we are stuck exactly where 

Mr. Shay said. So the increase will be tremendous. 

Mr. GRAVES. Go ahead, Ms. Finch. 

19 

Ms. FINCH. Under the 504 loan program, yes, an increase in the 

guaranteed amount would be tremendous because within the CDC 

industry, we have multiple borrowers. And they come to us. And 

they have done a 504 with us. And they want to do another location and do a real estate deal in another location. And they have 

maxed out. 

So we would be able to do multiple deals under 504 or, as Mr. 

Shay stated, if you are a franchise and you have got a big storefront, you have maxed out on 504, you cannot do another storefront 

under 504 under the limitations. 

And, even with a manufacturing company at $4 million, you know, another location, they are maxed out at $4 million. And we 

are unable to help them with 504. So the increase in the guaranteed loan amount would be very, very helpful under 504. 

Mr. SHAY. Mr. Graves, could I just elaborate? 

Mr. GRAVES. Yes, absolutely. 

Mr. SHAY. Just one further thought on that. I mentioned earlier 

the study that we did with PricewaterhouseCoopers that analyzed 

the economic impact of franchise businesses in this country and 

those 400 that have the investment levels of $750,000 to $2 million. 

We did some more analysis of the kind of growth rates that those 

companies experienced in the last decade. And it was six, seven, 

eight percent growth per year. And if we could get 5 percent 

growth going even for the companies of this size, our estimates are 

that over the next 12 to 18 months, we would create more than 

600,000 new jobs just by making that capital available to the people that hit the cap at $2 million. 

So when I said in my earlier remarks that from our perspective, 

the most important aspect of increasing the loan guarantee amount 

is the job creation aspect, that is really our view, that if we can 

get access flowing to these companies and we grow 16,000 or 

18,000 new businesses and they employ 15 to 20 people apiece, all 

of which are pretty conservative estimates based on past experience, that is well over half a million new jobs created out of this 

sector of the economy just from increasing the amount from 2 million to 5 million. 

Chairwoman VELA ́ ZQUEZ. Ms. Dahlkemper? 

Ms. DAHLKEMPER. Thank you, Madam Chair. Thank you to the 

experts here on the panel for coming today and joining us and giving us your guidance and expertise. 

Dr. Zimmerman, yes, I have a question for you regarding the 

HIT loans. If you could expand a little bit more on the three-year 

deferment period and how you think that will be important for 

smaller practices going forward? 

And if you have any thoughts or evidence on what you think will 

be the financial return when you implement that and how you can 

use that, then, of course, to repay the loan? I mean, do you think 

there will be that savings that is necessary with this three-year 

deferment to be able to then repay the loan? 

Mr. ZIMMERMAN. I think so because if you look at most implementations, it takes about 6 to 12 months before the practice starts 

to get back up to the original level of productivity. So if you figure 

in a year of that decreased productivity getting back to baseline 

and then beyond that starting to generate more revenue, whether 

20 

it be through cost savings and decreased cost of transcription, ability to see more patients per day, increase efficiencies in the office, 

decrease staff costs, by that point, by the second and third year, 

you are starting to generate more income, which would be able to 

start to pay off the cost of the loan. 

So for that three-year period to have a free, you know, a no-cost 

source of capital where you are not paying interest, I think that 

would be very beneficial for the practice. 

Ms. DAHLKEMPER. So the three-year time period you think is 

adequate— 

Mr. ZIMMERMAN. I think so. 

Ms. DAHLKEMPER. —in terms of being able to get the returns 

that you need? 

Mr. ZIMMERMAN. Yes. 

Ms. DAHLKEMPER. Okay. Thank you. 

Mr. Sabarsky, yes, I wanted to ask you if you could elaborate 

maybe on why you believe the conventional markets are not meeting the needs currently for early-stage and high-growth business as 

yours. What do you see is the biggest hurdle at this point? 

Mr. SABARSKY. Well, the biggest hurdle right now beyond just 

the lack of—it’s a question of, why are the dollars not there, even 

though the dollars are there for later-stage investment? 

This is a phenomenon that we of the biotechnology industry have 

seen for the better part of 20 years. We have also seen it, frankly, 

with the pharmaceutical companies, who would prefer to pay more 

for later-stage products that have less risk. 

So on the curve of risk and return, at least the pharma companies had decided to pay more for less risk. I think the challenge 

right now as I interface with venture capitals—and there is a panel 

coming up next—is the venture capitalists that I have talked to 

seem to want to have the same type of return, but they are less 

willing to take the risk. 

And the challenge that I face is that folks on the angel investing 

side, the sort of high net worth individuals, friends and family, 

have a very limited ability to invest maybe single-digit millions, $2 

to $4 million, really, at most. And traditionally venture capitalists 

picked up the slack until more mature private equity has then 

come in. And so there is a sort of stair step. 

It is interesting as part of the financial crisis, this dynamic has 

been exacerbated. And I don’t have great rationale to explain why 

venture capitalists have changed their models. I have a couple of 

venture capitalists actually telling me that they are shifting their 

model to actually invest in public securities, so not even private securities. So that may be something that other panelists could speak 

to. 

It is a mystery to me why this is the case, but it is a continuation 

of a dynamic that we have observed for some time now, Congresswoman. 

Ms. DAHLKEMPER. Thank you. Thank you. I appreciate that. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. Ms. Fallin? 

Ms. FALLIN. Thank you, Madam Chairman. I appreciate all of 

you coming today and giving testimony. We certainly want to do all 

21 

that we can to help your businesses grow and create access to capital. I have a couple of questions. 

We keep hearing about banks and the money that is available to 

be lent to the small businesses. And even this week, there were numerous reports of a lack of available credit and capital. 

Can you tell us why you think there is a disconnect between the 

assertations that credit is available while still small businesses 

claim they cannot get the credit and the available credit is being 

slashed? Can you tell us what some of those barriers are and if you 

are seeing that in your individual industries? 

Mr. SABARSKY. Congresswoman, I will sort of defer to the rest of 

the panelists here. In the biotech industry, especially at the small 

business level, generally it is not available. So it is all equity financing. But the other businesses here clearly could be benefited 

by the financing. So I will yield to them. 

Mr. ZIMMERMAN. Thank you. 

From my experience from informal research with banking personnel and physicians, they find it increasingly hard to qualify for 

any funding in the past, where having a credit score of 720 or 

above meant you got a very good rate, now it means the difference 

between getting a loan at all or not. 

I have heard of several physicians who have had accounts with 

banks where they have had $2 or $3 million in savings with that 

bank or different funds. And in the past, where the bank would say 

when the physician would ask for a line of credit or a letter of credit, it would be a matter of just the procedure of printing out the 

letter, at this point now they are saying, ‘‘No. I don’t think we can 

do that at this time.’’ And there is no rhyme or reason. I am not 

an economist, but on the street, this is what people are experiencing. 

Ms. FALLIN. Okay. Thank you. 

Go ahead. 

Mr. FOCHLER. Thank you. 

Yes. I actually firsthand dealt with some of this in my testimony, 

as I mentioned, going into multiple banks in the D.C. metro area, 

you know, with a credit score of above 720. 

A lot of them have gone. They aren’t even looking at our growth 

rate. They aren’t considering that. It is mainly based on I have to 

come up with the amount of equity to match the loan that I need. 

If I was in that position, I probably wouldn’t be at that bank in the 

first place if I had that kind of available equity. 

So that is the really challenging part for us is even the—what 

is really frustrating is when I work with some of these branches, 

the branch manager is actually very surprised I get turned down. 

At an average growth of over 168 percent since I have been the 

owner per year, to not have that in consideration is very frustrating. And this year we are even showing a higher growth than 

that at this point. And still I could be growing, creating much more 

jobs. So it is frustrating to hear that there is available credit. But 

I am not seeing it firsthand. 

Thank you. 

Mr. SHAY. In the franchise context, I think the experience has 

been that, whereas, the loan officers over the recent history kind 

of held the decision-making authority over which loans got made 

22 

and didn’t get made, the pendulum has swung in the direction of 

the underwriters. And so the underwriting and the loan restrictions that go along with these loans I think from our perspective 

are driving the decision. 

And, you know, you can’t blame the banks. And certainly we 

don’t for the position they are in between shareholders and regulators saying, ‘‘Don’t make bad loans’’ and the business community 

saying, ‘‘We need access to credit.’’ But, for example, the loans that 

were available to franchises several years ago, 18 months ago, for 

a relatively more modest equity up front, 20 percent equity maybe 

or in some cases plus or minus, now those loans are available at 

50 percent equity. So the restrictions are very significant. And they 

are just not available. 

I mentioned to Ranking Member Graves, the other Ranking 

Member Graves, earlier— 

(Laughter.) 

Mr. SHAY. —that we had a visit with the CEO of one of our member companies here doing the rounds in the last several months. 

And his situation is he has got 2,000 franchise licenses sold, contracts signed, franchise fees paid. And those 2,000 franchisees are 

unable to obtain the financing necessary to open those stores. And 

this is a well-known franchise system. 

So, even for the well-known, well-established systems, if it is a 

problem when Wells Fargo and CIT and GE Capital and the others 

are just completely out of the franchise space, then we are really 

in a difficult position. 

Ms. FALLIN. Okay. Thank you. 

Anything you want to say? 

Ms. FINCH. Sure. Within the 504 industry, last year our total 

loan volume was down, you know, 30 or 40 percent. And even 

though the bank only has to do 50 percent of a project with the 504 

behind it, they did not even want to pursue that. So the credit was 

that type. 

Within the last two to three months, we are seeing where banks 

are starting to at least entertain doing 504s and doing 50 percent 

mortgages along with us to where during the month, just a few 

weeks of October, we have seen an uptake of about 10 percent from 

where we were up from last year. So the banks are starting to get 

a little more comfortable at least doing a 504 with a 50 percent 

mortgage. So there is a slight uptake. 

Ms. FALLIN. That is some good news. 

Ms. FINCH. Some. 

Ms. FALLIN. Well, thank you very much. Thank you, Madam 

Chair. 

Chairwoman VELA ́ ZQUEZ. Mr. Michaud? 

Mr. MICHAUD. Thank you very much, Madam Chair, Mr. Ranking Member, for having this hearing on increased access to capital 

for small businesses. 

I have talked to a lot of small businesses back in my home State 

of Maine. They, too, have a problem with accessing capital with the 

credit crunch. I know the financial stimulus package is supposed 

to help with the credit, allowing businesses to be able to get the 

financing they need. 

23 

I have also talked to actually many credit unions, who actually 

have capital money or money that they would actually like to lend 

small businesses. But, unfortunately, there is an arbitrary limit set 

on credit unions of what they can lend for businesses. 

My question to each of you is, would you be supportive if Congress actually increased that or removed that arbitrary limit so 

credit unions actually can allow access to capital for small businesses? 

Mr. SABARSKY. Congressman, I will start over here. And I guess 

I will answer more as a member of the San Diego County Credit 

Union. I would be supportive, even though it would put our capital 

at risk, mainly because we understand that without access to capital, local, regional, national development just is stunted and, 

therefore, everything that flows from that, lack of job creation, as 

we see here, the local business, and all of the dollars that don’t go 

to employees, don’t go to everybody that those employees then 

would hire. 

And so I think we are strongly supportive of that, even though 

as a business, it would be unavailable to me. I still think that as 

members of the broader community, we are very supportive of that. 

Mr. ZIMMERMAN. I think any measure to increase availability of 

lower-cost loans would be of great advantage to physicians, especially graduating residents from residency programs as they might 

go out to start up their own private practices. Most times the credit 

unions do provide more economical sources of capital. So I would 

support that. 

Mr. FOCHLER. Also as a member of a credit union, I would support it as well. I feel like also with the credit unions, sometimes 

I have been able to get a little bit more support, a little bit more 

technical assistance. I feel like they are there to really go above 

and beyond that I haven’t seen from some of the major banks. So 

I think that would be phenomenal to do something like that. 

Mr. SHAY. Without weighing in on the position that might be 

taken by the credit unions and their members, notwithstanding 

those that are here today, I think our folks certainly would be supportive of anything that we could do that would give access to more 

credit. So this is one of those things that can be achieved. I don’t 

think any of our people would argue with it. 

Ms. FINCH. If it is going to help the small business industry. 

Mr. MICHAUD. Well, thank you very much for answering that 

question. And also thank you for your testimony today because this 

a very important issue when small businesses are the backbone of 

our economy. And I think we have got to do everything that we 

have to do to make sure that they survive and thrive and grow. 

And that’s why I thought it was amazing that artificial limit is set 

in statute. And we ought to definitely look at that. So thank you 

for your response. 

I yield back, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Luetkemeyer? 

Mr. LUETKEMEYER. Thank you, Madam Chair. 

Yes, I often think of our Ranking Member as the phantom. That 

is our nickname for him. Now you see him. Now you don’t. Now 

we see him. But thank all of you for being here today. 

24 

I am rather curious. I know that we are talking about access to 

capital here. And one of the things that I think is important as we 

evaluate some of the SBA programs here is our access to those as 

well. 

What percentage of your members or do you have an idea of the 

participation that you have by your membership in SBA programs 

and how successful it has been? We can start with Mr. Sabarsky. 

Mr. SABARSKY. Sure. Thank you, Congressman. 

I think, in particular, the SBIR program the Committee must be 

well-aware of is probably the most used in the biotechnology and 

pharmaceutical industry. I think that has been a very successful 

program. 

I think the only issue, if you will, that we might have with it is 

that the dollar limits obviously tap out fairly early in the process 

for anything that is considered capital-intensive. But it is an excellent method to develop initial proof of concept and get you at least 

to the beginning phases of what we call the Valley of Death. 

Mr. LUETKEMEYER. Can you give me an idea, do you have an 

idea of the percentage of your members’ participation? And if so, 

is it going up as a result of the lack of access to capital? Are you 

seeing more participation as a result of the constriction by the 

standard credit markets? 

Mr. SABARSKY. And we could follow up with BIO staff later. I 

suspect it is a very high percentage. Probably when you consider 

the small business segment of the larger biotechnology industry, it 

is probably north of 50 percent. They tend to be fully funded. Sometimes you even get overhead as well. So they both get the research 

done and help keep the lights on. 

So I think they are very important programs and would strongly 

support their continuation and even expansion beyond the current 

limits under current law. 

Mr. LUETKEMEYER. Very good. Thank you. 

Dr. Zimmerman? 

Mr. ZIMMERMAN. Thank you. 

I am actually not aware of the AOA’s membership’s actual involvement in the SBA program, but my understanding with this 

proposed legislation, it would greatly increase the access to those 

guaranteed loan programs. 

Mr. LUETKEMEYER. Okay. Perfect. 

Mr. Fochler? 

Mr. FOCHLER. My experience with some of the business-to-business groups that I am with, I don’t know the exact percentage, but 

I also don’t know of any other small business that doesn’t have a 

loan somehow tied to the Small Business Administration. So I 

would say I don’t know the percentage, but it is extremely high. 

Every loan that we do have is somehow tied to a Small Business 

Administration loan. 

Mr. LUETKEMEYER. Okay. Have you seen an increase in the request or utilization of SBA loans as a result of the restriction that 

we are having right now? 

Mr. FOCHLER. It is hard to tell. I mean, I can’t even request any 

more because I have used what I can. So it is not even an option 

for me to go back and even request anything else. So I am just at 

that point where I can’t request anything. 

25 

Mr. LUETKEMEYER. Okay. Very fine. 

Mr. Shay? 

Mr. SHAY. I can’t give you specifics on how much it has increased, but clearly among our membership, the usage of SBA 

loans has increased dramatically because the other sources are essentially all gone now. So as these private lenders have disappeared or pulled back from the market, there really isn’t anywhere else to go for many of these companies. 

I know the SBA can track what portion of the loan portfolio is 

related to a franchise business. And I suspect that we could also 

extract through our research partner information related to the 

number of franchise companies that use SBA loans and what that 

incident is. 

But there is no question, just even anecdotally, that that number 

has increased dramatically over the course of the last year, just because those other sources are no longer there. 

Mr. LUETKEMEYER. Very good. 

Ms. Finch? 

Ms. FINCH. Well, since I am here representing NADCO of 200 

members plus and we administer the 504 and deliver the 504 loan 

program, we are all very successful at that. 

[Laughter.] 

Mr. LUETKEMEYER. A fairly good answer from you. 

Ms. FINCH. However, as you will know, our loan volume is down 

due to decrease by our lending partners working with us and the 

access to capital for small businesses, but we are all very successful. 

Mr. LUETKEMEYER. Thank you. 

I will yield back my time. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Halvorson? 

Ms. HALVORSON. Thank you, Madam Chairman. And thank you 

all so much for being here. 

I just think that this is very important because everywhere I go, 

the first thing I hear from every business person I talk to, no matter where I go, is access to credit and access to capital from whatever business person I am talking to. My husband and I own two 

businesses. And everybody I know owns something. And they can’t 

get credit. 

You know, Mr. Shay, you talk about the fact that you say that 

the 7(a) loan program should go from 2 million to 5 million. Is that 

what you say? I don’t disagree. I know I am sponsor of the bill to 

increase it from 2 to 3 million. It is a start. 

However, the people who are opponents of that say that the SBA 

would have to take on too much risk and then now we are giving, 

you know, maybe big business too much opportunity to get into 

having a small business. Then we are taking away from what this 

truly is for. 

What do you say to that? 

Mr. SHAY. Well, our perspective is that when you are talking 

about a loan amount of 750 to 2 million—and I reference that a 

couple of times—we have got 400 members that fit in that category. And those people are out creating jobs. 

26 

And, to the Chairwoman’s point, there are businesses that operate with a business plan and a recognized trademark and a brand 

name. So the risk is relatively less when compared to a pure startup business. 

Our focus is on creating jobs for the economy. And we think that 

if this is a demonstrable way in which we can do that, that it 

would be—‘‘irresponsible’’ is maybe too strong a term, but if there 

is an opportunity here for job creation, that we should do it. 

And if there are outrageous numbers of failures for some reason, 

then we can revisit the issue. But in the short term, these businesses really have nowhere else to go. And the SBA is a lender of 

last resort. And so we want to get people back to work and get the 

economy moving. And we think this is a responsible way to try to 

do that. 

Ms. HALVORSON. Thank you. 

Because it is something that we are all still talking about. So I 

encourage the input. And I am still getting plenty because I don’t 

disagree with you. 

Ms. Finch, could you help me clarify? You were saying that together we can fix some of this bureaucracy within the clarification 

of some of the paperwork. I know you used the words that we need 

to be ‘‘creative and flexible’’ and that it is too ‘‘arcane and restrictive.’’ But I didn’t hear what we need to do. 

So if you could help me just answer some of the things of what 

we need to do with being creative and flexible and not so arcane 

and restrictive. 

Ms. FINCH. Well, the paperwork under a 504 loan has increased 

from this size to this size over the last 20 years. One of the things 

that is restrictive is that we look at net worth and profit after tax. 

And those figures could be increased to allow more—and they are 

still small—would still allow more small businesses into our program. That could be increased definitely. 

Personal resources test is something that I think can be viewed. 

That is a new regulation that had come into play about three or 

four years ago. And people that have large net worths or have accumulated money over the years are penalized from using our program basically because they have larger liquid assets. So that could 

be either done away with or some sort of limitation possibly, but 

that could easily be done away with. 

It is the little things that have crept into our program that have 

made it much more difficult for small businesses to become eligible. 

Ms. HALVORSON. Okay. And just so you know, this administration has a great technology department. And because of so many 

of us who want to decrease bureaucracy, we have now created—and 

if any of you out there have done FASFA forms for student aid, I 

used to do three a year. And they are very awful. 

Now they will be done almost with the click of one click. So we 

are hoping that with a lot of your input, we will be able to do the 

same thing with this. We have the technology we need to use these 

experts that we have in this administration to do that. 

So I look forward to working with all of you on that. 

Ms. FINCH. Great. Thank you. 

Ms. HALVORSON. Thank you. 

27 

I yield back, Madam Chairman, unless, sir, you have something 

to add? Please? Go ahead. 

Mr. FOCHLER. I just wanted to say, too, from my experience with 

some of these requests of raising some of the limits, doing some research and development on the microloan programs, I mean, it is 

really phenomenal the way they give extra technical support to 

make it a lot less risky. They teach us. 

As Mr. Shay was saying, a lot of the franchises out there, they 

are still small business owners. They are taking a lot less risk, but 

at the same time we could all use some extra technical assistance. 

And these microloan programs are I think a great system to kind 

of take a look at for increasing some of these other programs as 

well. 

Ms. HALVORSON. I absolutely agree. And we need to find that 

happy medium. So thank you all so much for everything. 

I yield back, Madam Chairman. 

Chairwoman VELA ́ ZQUEZ. Mr. Schrader? 

Mr. SCHRADER. Thank you all for your generally positive comments on the new Investment and Financing Act of 2009. Hopefully 

this is a beginning. And certainly while we would like to do more, 

we are constrained, like many businesses, in terms of how much 

money we can actually spend at any given point in time. So a lot 

of your suggestions I think fall on very receptive ears. And hopefully going forward and as, Lord willing, our economy recovers, we 

will be able to make some additional investments. 

I was interested a little bit in, Mr. Shay, your comments about 

the real estate portion of what SBA is doing and how that we may 

be overemphasizing that, on one hand, and maybe the market interest rates might be more. Can you elaborate on that a little? 

And then I would like Ms. Finch’s response to that if that is 

okay. 

Mr. SHAY. Sure. And I don’t want to pick any fights with anybody, but one of the things that we think would make sense to put 

the emphasis where it ought to be in terms of the 7(a) program 

would be to look at the amortization periods and say, for example, 

a loan that is going to amortize over a period of 15 years or longer, 

that there ought to be borrower fees associated with that and for 

a loan that is going to amortize over a period of 15 years or less— 

I guess it can’t be 15 years or more but split the difference. For 

the shorter-term amortizing loans, we ought to reduce lender fees 

for those. 

I mean, the goal ought to be to create incentives for the money 

to go to the places that are really going to help start-up businesses, 

as opposed to a longer-term amortization. And a small business is 

not a 30-year amortization or an 18-year amortization. A small 

business is a start-up if they need an injection of capital for 18 

months or 12 months or 2 years or something like that. 

So whatever we can do to sort of reset some of things that would 

emphasize or create incentives for the capital to flow to the startup side, from our perspective, that makes sense. 

Now, obviously other people will have other perspectives for totally legitimate reasons, but that is our view of one way in which 

you might do that. 

28 

In terms of the market rate on the interest charges—and I am 

not sure if you were alluding to that as well. I mentioned that. It 

is in our written submission. In that area, clearly from what everyone here has said, I think, the demand for access to capital exceeds 

the current supply or if not the supply—and I think maybe it 

doesn’t exceed the supply because we know the balance sheets look 

pretty healthy in a lot of places, but it exceeds willingness to lend. 

And so the question is not so much how we create more supply. 

The question is how we create incentives to lend. And incentives 

to lend, back to the observation that capital is agnostic, I mean, 

capital will go where it is going to achieve the greatest return on 

investment. 

And so if there are lenders out there that look at opportunities 

to make loans and say, ‘‘If it is an SBA loan, I can earn six and 

a quarter. And if it is a loan somewhere else, I can earn eight or 

nine percent,’’ then they are not going to do an SBA loan. And we 

can’t blame them for that. 

So our view would be if there is an opportunity to strike more 

of a balance there between the interests of lenders and borrowers, 

recognizing this is a government agency and— 

Mr. SCHRADER. You have got some borrowers that are actually 

lending at eight percent? I don’t have many in my area, but I appreciate. 

Mr. SHAY. Yes. I think that in some places, it happens. And Ryan 

talked about that. It is still better than a credit card. So, I mean, 

if you are really desperate for capital and you have got a great 

idea, you will pay whatever you have to pay. And I think a lot of 

lenders don’t want to do deals at six percent if they can do a better 

deal somewhere else. 

Mr. SCHRADER. Ms. Finch, comment? 

Ms. FINCH. When the American Recovery Act was passed and the 

money was available to pay fees under our program, it did increase 

our loan activity. It was a real incentive for businesses who maybe 

stepped back and were thinking twice about expansion, saw this as 

an incentive of, well, maybe this is a good time to expand because 

I can have the savings on the up-front fees. So they would go ahead 

and do their expansion. I feel that is money well spent. 

As I stated in my testimony, though, beginning October 1, our 

subsidy rate went from zero to 389. I think that increase in fees 

is going to eat away at small business’ cash flow that if they were 

to apply for a 504 loan, if that fee were to be paid for and that 

would be a savings to them, that that would be also another incentive for them to use the SBA 504 program. 

So I think there are ways to use money smartly and more effectively, more cost-effectively, to help give an incentive to small businesses to use our types of programs. 

One thing I will also mention is under 504, if you are a small 

business start-up, you are required to put in 15 percent. Otherwise, 

under 504, you could get in for 10 percent if you are an existing 

business. 

That is a requirement, and I believe that is statutory. So if that 

barrier were taken away and it was more of a credit decision as 

to who should put in 10 percent and who should put in 15 percent, 

29 

that barrier being taken away could help be a stimulus to small 

business expansions and start-ups. 

Mr. SCHRADER. Thank you both very much. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Ms. Finch, correct me if I am wrong, but I think you mentioned 

that since October, your lending partners have increased lending 

activities by ten percent? 

Ms. FINCH. In my particular— 

Chairwoman VELA ́ ZQUEZ. Yes. 

Ms. FINCH. In my state, yes. 

Chairwoman VELA ́ ZQUEZ. I am glad to hear that. However, many 

analysts have voiced concern that a collapse in commercial real estate is yet to come. And the focus of CDC’s 504 is basically financing on real estate projects. 

So does the proposed legislation contain the necessary tools to 

control rise in costs and address the potential for increased losses 

in the program? 

Ms. FINCH. I believe it does in that it also, then, gives CDCs the 

ability to try and recover on their 504 loans. We have the authority, but we don’t have policies, procedures in place for us to be able 

to do that on our own. 

And CDCs have been doing this in many other programs that 

they administer. So by giving us the ability to try and recover, liquidate and recover, on our own loans, I think that is a very important aspect. 

Living in Missouri, I know what my market is. I know how to 

liquidate a property and try and maximize my recoveries. And 

right now we are partnering with the SBA in doing that. But I 

think if we were given the ability to have more freedom to do that, 

I think that is going to be very helpful. 

Chairwoman VELA ́ ZQUEZ. Okay. Thank you. 

Mr. Graves? You don’t. So let me take this opportunity again to 

thank you all. And you are all excused. Thank you. 

Ms. FINCH. Thank you. 

Chairwoman VELA ́ ZQUEZ. I will ask the members of the second 

panel to please come forward 

Mr. SCHRADER. [presiding] I would like to welcome the second 

panel to the Committee here today, look forward to your testimony. 

And we will start with Mr. Sekula. 

Mark Sekula is the Senior Vice President of Business Services of 

the Randolph-Brooks Federal Credit Union, one of our nation’s 

leading credit unions, serving more than 300,000 members, many 

of whom have served in our armed forces, I understand. 

Mr. Sekula is testifying on behalf of the National Association of 

Federal Credit Unions, the leading trade group for our nation’s federal credit unions. 

Welcome. 

STATEMENT OF MARK SEKULA 

Mr. SEKULA. Thank you. 

Good afternoon, Chairman Ranking Member Graves, and members of the Committee. My name is Mark Sekula, and I am testifying today on behalf of the National Association of Federal Credit 

30 

Unions, NAFCU. I serve as the Senior Vice President for Business 

Services for Randolph-Brooks Federal Credit Union, headquartered 

in San Antonio, Texas. 

This June Randolph-Brooks Federal Credit Union was recognized 

by SBA Administrator Karen Mills as the SBA 2009 credit union 

lender of the year. We were also ranked as the fifth largest SBA 

patriot express lender in the United States with year-to-date volume for 2009 with 133 loans for approximately $8 million. Randolph-Brooks is also ranked as the number one SBA lender in the 

55 counties in our SBA district for 2009. 

Randolph-Brooks started its business program only five years 

ago. And today we have over 16,000 business accounts. We only 

started SBA lending a little over two and a half years ago, at the 

request of our members. And we currently have 414 loans for about 

$20 million. We grew 13 million of that from 2008 to 2009 as businesses turn to us for credit after losing other sources. 

Through fiscal year 2009, which for the SBA runs from October 

to September, we generated 153 loans, for 8.9 million, and helped 

create 396 jobs and retain 799 employees. 

It is also widely recognized that credit unions did not cause the 

current economic downturn. However, we believe we can be an important part of the solution. Credit unions have fared well in the 

current environment and, as a result, may have capital available. 

Surveys of NAFCU member credit unions have shown that many 

are seeing increased demand for mortgage and auto loans as other 

lenders leave the market. A number of small businesses who have 

lost important lines of credit from other lenders are turning to 

credit unions for capital that they need. 

Many small business owners are members of credit unions 

around the country and rely on our services to help make their 

small businesses successful. Our nation’s credit unions stand ready 

to help in this time of crisis and, unlike other institutions, have the 

assets to do so. Unfortunately, an antiquated and arbitrary member business lending cap prevents credit unions from doing more 

for America’s small business community. 

The current economic crisis has demonstrated the need to have 

capital available to help our nation’s small businesses, especially in 

troubling times. Many credit unions have the capital other lenders 

cannot provide but are hamstrung by this arbitrary limitation. It 

is with this in mind that NAFCU strongly supports the passage of 

H.R. 3380, the Promoting Lending to America’s Small Business Act 

of 2009. 

Introduced by Representatives Kanjorski and Royce, this important piece of legislation would raise the member business lending 

cap to 25 percent while also allowing credit unions to supply much 

needed capital to under-served areas, which have been among the 

hardest hit during the economic downturn. 

NAFCU strongly supports the reintroduction of the Credit Union 

Small Business Lending Act, which was first introduced by Chair 

Vela ́zquez in the 110th Congress. We also support the legislation 

currently before the Committee, H.R. 3723, the Small Business 

Credit Expansion and Loan Market Stabilization Act of 2009. We 

believe that this legislation takes important steps toward improvVerDate Aug 31 2005 14:20 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52891.TXT DARIEN
31 

ing the SBA and its 7(a) loan programs and will help credit unions 

do more with the SBA. 

When I cover this bill in more detail in my written testimony, an 

important aspect of this legislation is a continuation of the program 

started under the American Recovery and Reinvestment Act of 

2009, including a continuation of the 90 percent guarantee on SBA 

loans and the lower fee structure. The continued guarantee is particularly helpful for credit unions as the guaranteed portion of the 

SBA loans does not count against the arbitrary member business 

lending cap. 

We also applaud the provisions that would assist small lenders 

that do not participate in the preferred lender program and that 

would have the SBA provide training to smaller lenders. 

Finally, we believe the capital backstop program established in 

this bill could be an important tool in allowing credit unions to get 

capital to small businesses in a time of need as the SBA would 

handle much of the administrative work in such a circumstance. 

In conclusion, the current economic crisis is having an impact on 

America’s credit unions, but we continue to provide excellent service to our members. Credit unions stand ready to help our nation 

and our nation’s small businesses recover from the current economic downturn. Legislation, such as H.R. 3723 and the Promoting 

Lending to America’s Small Businesses Act, H.R. 3380, would aid 

credit unions in their efforts to help our nation’s small businesses. 

I thank you for the opportunity to appear before you today on behalf of NAFCU and would welcome any questions that you may 

have. 

[The prepared statement of Mr. Sekula is included in the appendix.] 

Mr. SCHRADER. Thank you very much. 

Let’s go to Ms. Carolyn Galiette, Senior Managing Director of 

Ironwood Capital located in Avon, Connecticut. Ms. Galiette is testifying today on behalf of the National Association for Small Business Investment Companies, one of the oldest organizations of venture capitalists in the world and leading trade organization for 

small business investment companies. 

STATEMENT OF CAROLYN GALIETTE 

Ms. GALIETTE. Thank you, Representative Schrader, Representative Graves, and members of the Committee. Thank you for the opportunity to appear before you today. Your dedication to the small 

business community is appreciated by all of the small business investment companies that I represent and by all of the small businesses that we support. 

My name is Carolyn Galiette. I am a senior managing director 

and co-founder of Ironwood Capital, an investment management 

firm located in Avon, Connecticut. Over the past eight years, 

Ironwood Capital has become a staunch supporter of the SBIC program. We manage three SBICs, the first of which was licensed on 

September 7th, 2001 and the third of which was licensed in June 

of 2007. 

We, like many other SBICs, have managed through turbulent 

times but have remained steadfastly focused on the objectives of 

32 

the SBIC program to provide patient capital, operating advice, and 

market experience to eligible small businesses to generate a return 

for our limited partners through the success of these small businesses and be thoughtful stewards of the taxpayers’ money, which 

lends capital to our funds. 

We fill a capital need that is unmet by other financial institutions, including banks which provide SBA-guaranteed loans. To 

date we have invested in 53 small businesses in places ranging 

from Moline, Illinois to Winterville, North Carolina and to Brooklyn, New York. We also travel to invest in smaller cities, such as 

Hockley, Texas; Fitzgerald, Georgia; and Middleburg, Pennsylvania, places that are often overlooked by other capital providers. 

Our partnership with the SBA has enabled our portfolio companies to create approximately 4,500 jobs and to increase revenues in 

these companies by over 50 percent on average. Moreover, we have 

accomplished all of this while making 50 percent of our investments in companies owned and managed by women and minorities 

and businesses located in and employing residents of low and moderate-income communities. We have provided capital where larger, 

more established financing sources would not, some of which are 

the very lenders and investors who recently received TARP financing. 

The SBIC Debenture program is an incredible resource for small 

businesses and the taxpayer. This program is truly market-driven 

and operates at a zero subsidy rate, requiring no appropriations. 

Unfortunately, despite the efficiency of the SBIC credit facility, the 

program is dramatically under-used, due in large measure to the 

cumbersome and time-consuming process of obtaining a license and 

operating within the guidelines of the program. Fiscal year 2009 

used only about 20 percent of the program’s $3 billion in capacity, 

denying domestic small businesses over $2 billion in growth capital. 

The SBIC Modernization and Improvement Act creates a streamlined licensing process that enables well-performing SBICs to establish follow-on funds in a timely manner, thereby avoiding a 

waiting period of one year or more that currently plagues the process. In fact, it took us 11 months to get our second fund license, 

9 months to get our third fund license, and another 7 months on 

top of that to complete the FBI checks. 

At the same time, the proposed legislation retains the rigorous 

underwriting process currently in place for new managers. Moreover, by increasing the borrowing ceiling on families of funds in 

good standing, the bill creates the ability to keep successful SBIC 

operators in the program. 

Without these changes, these growth constraints will, unfortunately, preclude our next fund from being an SBIC, a prospect that 

disappoints me and an outcome which will likely affect many of our 

similarly successful peers. It would be a terrible waste to push 

aside fund managers, who have proven to be experts at empowering and in growing small business. 

The bill needs a few technical adjustments, but otherwise it is a 

very solid piece of legislation whose passage we consider to be timecritical. Because it enhances a successful existing program, it could 

33 

be implemented expeditiously and actually be utilized to deploy 

needed capital to small businesses early in 2010. 

I strongly encourage all of you to move this bill forward as quickly as possible. Similarly, the Small Business Early-Stage Investment Act addresses a critical need for small business equity capital. 

We believe several technical changes should be included in order 

to ensure the long-term success of this new program. These improvements include the licensing by SBA of early-stage program 

participants and the broadening of the program, to include industries, such as manufacturing and industrial technology, industries 

which lie beyond the Silicon Valley companies that will likely constitute the current focus of the bill. 

In addition, there are a number of other provisions that have 

served the SBA well, which we advocate should be added to this 

program. We seek legislation that benefits not only our members 

but, equally importantly, policies that benefit the U.S. taxpayer 

and the small businesses we serve because without all of these constituents, we cannot succeed. 

The SBIC program marries individual entrepreneurship with 

government assistance in a way that is productive for all and 

which is absolutely crucial to our nation’s economic growth. 

Thank you for the opportunity to speak to you today and your 

support of small business. 

[The prepared statement of Ms. Galiette is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Galiette. 

Our next witness is Mr. Michael Menzies. He is the—oh, I am 

sorry. I am sorry. Suzette Dutch—I am sorry—is the Managing 

Partner with Triathlon Medical Venture Partners in Cincinnati, 

Ohio. This is a venture-based venture capital firm that invests exclusively in the life sciences. 

Ms. Dutch is testifying today on behalf of National Venture Capital Association, which represents the U.S. venture capital industry, with more than 450 member firms. 

STATEMENT OF SUZETTE DUTCH 

Ms. DUTCH. Thank you, Chairman Vela ́zquez, Ranking Member 

Graves, and members of the Committee. My name is Suzette 

Dutch, and I am co-founder and Managing Partner with Triathlon 

Medical Ventures, an SBIC based in the Midwest that invests exclusively in life science funds. 

By virtue of our regional presence and $105 million in capital 

funding, we are one of the leading sources of early-stage life science 

investment in the Midwest. 

In addition to having been a venture investor since 1987, I am 

also a member of the National Venture Capital Association. And it 

is my privilege to be here today on behalf of the venture capital industry to support the Small Business Early-Stage Investment Act 

of 2009. 

We believe this bill presents a tremendous opportunity to fund 

more of the most promising small businesses in our country. The 

venture industry has consistently supported the notion that signifiVerDate Aug 31 2005 14:20 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52891.TXT DARIEN
34 

cant value can be created when government and the private sector 

work together. The intent of this program appears to do that and 

to be beneficial to regions of the country that today are underserved in terms of access to capital. 

There have traditionally been limited funding sources for ventures which carry significant entrepreneurial and technological 

risk. The current economic climate makes even traditional institutional investors slow their commitments to this asset class and 

makes the need for public collaboration more critical to these engines of future economic prosperity. 

Given the risk of failure and the lack of collateral in their early 

years, these start-up companies are not able to qualify for traditional commercial loans, nor are they appropriate for the SBA’s Debenture Program as the long time until profitability prevents them 

being able to support a current interest payment portion. 

Appropriately, the expertise to select and nurture these investments keeps other alternative providers, such as buyout shops and 

hedge funds, away and leaves it to venture capitalists to fund these 

companies. The program would bolster the country’s ability to offer 

promising companies a better chance to grow and thrive at a time 

when we need more jobs and stronger economic growth. 

Implementing this program through established venture firms 

recognizes that intelligent investing and measured risk taking requires more than money, requires expertise and guidance from professionals who understand the industry’s competition and strategic 

landscape into which these start-ups are operating and who have 

the networks of relationships to assist the companies as they grow. 

While venture capital is a national industry with venture-backed 

companies in every state, there is a concentration on the coasts. 

This program, as structured, will benefit other parts of the country 

where this is needed. 

For example, in Ohio, where my firm is headquartered, venture capitalists invested $39 million in 17 companies in the first half of 

’09 compared to $3.4 billion invested in 476 California companies 

during the same time period. 

Ohio, as well as other states in our Midwest geographic footprint, 

has the entrepreneurs, university labs, and leading medical institutions that drive venture investment. It is capital we lack. And the 

opportunity to be part of this program and support local companies 

would be welcomed by firms like mine that have access to a great 

many more ideas than we can fund on our own. 

The bill is currently proposed as an excellent start by offering 

the right incentives to the right stakeholders, by requiring privately managed companies to have capital commitments from nonfederal sources. 

There is an intrinsic vetting that occurs, assuring the SBA a 

level of comfort that the applicant already has the support of accredited investors. Limiting the grant to 100 million for a single 

fund supports the appropriate diversification, protecting the government’s interest as well as facilitating syndication. 

The focus on early-stage investing in a diversity of industries 

channels government funding where it has historically been the 

most successful and where the gap is greatest between academic 

grant funding and expansion funding. 

35 

As we move through the legislative process, there are a few considerations we think will maximize the success of the program. 

First, venture capital funds have a ten-year life. And, therefore, we 

recommend the language be amended to permit drawdowns of capital over the life of the fund for follow-on investment and payment 

of expenses. This would make the language more consistent with 

industry norms and could be tempered with a restriction on new 

investments or a maximum percentage that could be drawn down 

after the first five years. 

Another area of potential concern is the requirement that distributions be made to all investors in the form of cash without the 

option of distributing freely tradeable public stock. Recognizing 

IPOs are often a form of financing, rather than a liquidity event, 

this prevents other investors from achieving potential up-side and 

post-IPO stock appreciation and may make them reluctant to commit to funds. 

With these changes, we strongly support this program. And I 

look forward to answering any questions. 

[The prepared statement of Ms. Dutch is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Ms. Dutch. 

Our next witness, Mr. Michael Menzies, is the President and 

CEO of Easton Bank and Trust Company in Easton, Maryland. 

Easton Bank is a state-chartered community bank with $150 million in assets. Mr. Menzies is also Chairman of the Independent 

Community Bankers of America. ICBA has nearly 5,000 members 

representing more than 20,000 locations nationwide. 

Welcome. 

STATEMENT OF MICHAEL MENZIES 

Mr. MENZIES. Thank you, Chairwoman Vela ́zquez and Ranking 

Member Graves, members of the Committee. It is my honor to represent the 5,000 community bank members of the Independent 

Community Bankers of America. 

With many of the largest firms stumbling and the unemployment 

rate reaching ten percent, the viability of the small business sector 

is more important than ever. The SBA loan programs were created 

to assist our nation’s entrepreneurs. ICBA appreciates the Committee’s support of robust SBA loan programs and proposals to make 

them even better. 

Community banks like mine specialize in small business relationship lending. For their size, community banks are enormous small 

business lenders. While community banks represent about 12 percent of all banking assets, they make 31 percent of the dollar 

amount of all small business loans of less than a million dollars. 

Notably, half of all small business loans under $100,000 are made 

by community banks. 

The headlines have been full of reports of the giant mega lenders 

that took on huge risks and stumbled. Community banks represent 

the other side of this financial story. Despite the dominance in the 

media about a credit crunch, community banks are alive and well 

and lending. In fact, small banks of a billion dollars in asset size 

36 

or less were the only segment to show an increase in their net 

loans and leases in the last FDIC quarterly data. 

The ICBA was pleased with the ARRA stimulus enacted in February, which contained several ICBA-backed tax relief and SBA reform measures. Specifically, the major SBA loan program enhancements enacted are all helping many small businesses ride out this 

deep recession. And we support the extension of the key incentives 

for the SBA 7(a) and 504 lending programs. 

At my bank I have made use of both the first-time home buyer 

tax credit and the SBA ARC loan program. ICBA applauds the 

Small Business Committee’s legislation to extend the beneficial 

SBA enhancements included in the stimulus package, such as extending the SBA fee reductions and higher guarantee levels, expanding the ARC loans programs to apply to existing SBA loans, 

increasing the maximum loan amount to $50,000, and streamlining 

loan paperwork, making permanent the SBA secondary market facility authority. 

ICBA believes the key to best meeting small business capital 

needs is to have diversity in SBA lending options. The SBA should 

be there to meet the needs of both large and small SBA loan program users. 

Before this financial crisis hit, nearly 60 percent of all SBA loans 

were concentrated in just 10 banks. This is unacceptable because 

there are more than 8,000 community banks nationwide that can 

support a large number of SBA loans in total if community banks 

are able to access SBA loans more easily. In other words, we don’t 

want an SBA with a one size fits all cookie cutter approach that 

only the biggest volume SBA lenders can use. 

To help encourage more lenders to extend SBA loans to small 

businesses, we support making the community express program 

permanent, supporting a small lender outreach program, establishing a permanent rural lender program, and creating a national 

lender training program. 

ICBA appreciates the Small Business Committee’s support for 

the SBA programs and especially for proposing a robust authorization level. Specifically, we support $17.5 billion in 7(a) program authority, increasing the SBA 7(a) loan limit from $2 million to $3 

million—that is enough—allowing alternative loan size standards 

for determining eligible small business borrowers. 

We support the Committee’s work. Thank you for all of your efforts in getting the credit needs of small businesses satisfied 

throughout America. I would be thrilled to answer any questions 

you may have. 

[The prepared statement of Mr. Menzies is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Menzies. 

Our next witness is Mr. Cass Johnson. He is the CEO of the National Council of Textile Organizations. The National Council of 

Textile Organizations represents the entire spectrum of the textile 

industry. 

Welcome. 

37 

STATEMENT OF CASS JOHNSON 

Mr. JOHNSON. Thank you. 

Good afternoon, Chairman Vela ́zquez, Ranking Member Graves, 

and members of the Committee. My name is Cass Johnson. I am 

the President of the National Council of Textile Organizations. 

I think this is the third time I have had the opportunity to testify before your Committee. May I just say that you always tackle 

important subjects. We really appreciate it. You shine a light 

where many committees, for some reason, dare not go. I just want 

to thank you for that. 

The U.S. textile industry is the third largest exporter of textile products in the world. We export over $16 billion in goods to other 

nations. In that export context, I would like to touch briefly on a 

new topic, the availability of export financing for small businesses. 

As the last 12 months have shown, we truly live and compete in 

a global economy. Credit is an essential ingredient in that economy. And access to credit, particularly credit for export, has become 

a new and major competitive issue for our industry and for other 

sectors. 

During the financial crisis, Asian governments and banks reacted 

swiftly to ensure that export credit was not only available and 

plentiful. In April, China announced a textile revitalization plan 

that extended increased textile export subsidies and new credit 

lines and guarantees to its small and medium-sized textile companies. 

In August, Pakistan announced it was eliminating taxes on all 

textile exports and would be granting comprehensive insurance for 

all textile exporters. And yesterday, India announced that all textile exporters would now get a two percent rebate on their credit 

costs from the Indian government. 

Unfortunately, in regards to export credit availability here, the 

opposite has been the case. Our industry’s access to export credit 

has been significantly reduced. As U.S. government institutions, 

U.S. banks, regional banks, and private insurers have deemed the 

$25 billion textile and apparel trade between the United States and 

the NAFTA, CAFTA Andean region to now be risky and, as a result, have hiked fees, reduced credit, and withdrawing guarantees 

and insurance. 

To illustrate the problem, imports of finished apparel from Asia 

have dropped by ten percent this year. That is about the drop in 

U.S. consumption. However, within the CAFTA, NAFTA Andean 

region, imports are down by 22 percent. Accordingly, U.S. textile 

exporters have seen their exports decline by 24 percent. It will 

come as no surprise to hear, then, that our sector has been forced 

to lay off more than 50,000 workers since December of last year. 

When we surveyed our members as to why U.S. exports were in 

decline to the region, they universally responded that credit has 

been significantly curtailed to their customers in the region. 

We also learned that our mills are increasingly being asked to 

extend credit to apparel customers overseas who used to have their 

own credit and that they are being asked to do so sometimes without normal private insurance or government guarantees that used 

to be in place. And while this has been occurring, U.S. mills have 

been squeezed by their own banks. 

38 

We have instituted new fees, requirements, and standards for extending credit to them. To make matters worse, Ex-Im Bank has 

sharply reduced its activity for textile and apparel trade in the 

Western Hemisphere and, according to our members and importers, guarantees almost no trade, none of that $25 billion trade, in 

the region. As you can see, the entire credit chain for textile and 

apparel accomplished in the Western Hemisphere is under strain. 

NCTO, the National Cotton Council and our members, have been 

examining programs in the SBA and the Ex-Im Bank in order to 

determine how best to restore credit availability. 

We have determined that with a few updates, the SBA’s export 

working capital program could provide an essential assist during 

these difficult times. These modifications concern the size of the 

loans being guaranteed and the limit on the size of the companies 

that can access guarantees. These two components need to be updated so that textile companies and other manufacturing exporters 

can take advantage of the programs. 

Regarding the size of the companies, we are asking that the size 

limitations for companies in NAICS code 313, which covers all 

manufacturers, be standardized at 1,250 employees. A number of 

NAICS numbers have limits as high as 1,500, but our companies, 

for instance, have limits at 500. This will automatically open new 

export opportunities for small and medium-sized enterprises in the 

United States and provide access to almost all textile exporters. 

Regarding the loan amount, we recommend a new export capital 

program be created outside of the 7(a) program. We suggest that 

the SBA set loan amounts at 5 million, 10 million, and 15 million 

that tie risk to the amount borrowed. The terms of the loan would 

be from 12 to 18 months and use standard SBA terms and interest 

rates. The guarantee level would be dependent on loan size. 

In closing, our industry has solid export opportunities in the 

CAFTA and NAFTA regions and has helped create a platform that 

today accounts for $25 billion in exports and employs over 1 million 

workers region-wide. 

However, faced by the reduction in export financing and wellcapitalized competitors in Asia, we desperately need more financing and access to more financing options. We believe the SBA ca 

play an important role. And we urge the Committee to consider 

these two important modifications. 

Thank you very much. 

[The prepared statement of Mr. Johnson is included in the appendix.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Johnson. 

Mr. Sekula and Mr. Menzies, can you tell me what is the average 

loan size of 7(a) loan programs that you have made in the last two, 

three years? 

Mr. SEKULA. Yes, Madam Chairman. 

We have only been in the SBA lending arena for two and a half 

years. So we are relatively new into this. But since our inception, 

our average SBA loan size for 7(a) is $48,000. 

Chairwoman VELA ́ ZQUEZ. Forty-eight? 

Mr. SEKULA. Yes, ma’am. 

Chairwoman VELA ́ ZQUEZ. Mr. Menzies? 

39 

Mr. MENZIES. Chairwoman, I don’t have an average, if you will, 

but the range of loans that we have made has been from about 

$25,000 up to about $700,000. So I can think of a loan that is 

235,000, but that would be the range of loans. 

Chairwoman VELA ́ ZQUEZ. Okay. Some in the previous panel that 

we had and some advocates are asking for an increasing of the 

maximum size on the 7(a) loans by as much as 2 and a half of the 

current size to 5 million, from 2.5. 

Have you seen any real demand for loans this large from small 

businesses or if this is something that is more likely to benefit 

large banks that took TARP money? 

Mr. MENZIES. We have not seen loan demand and I have no 

knowledge of member banks that have seen loan demand at that 

$5 million level. Our belief would be that $3 million should be more 

than adequate. 

Mr. SEKULA. Yes, ma’am. Our position is pretty much the same. 

We have not seen an increase in loan demand for those sizes of 

loans. So we feel that the amount at this point would be adequate 

at this point in time, but we are relatively, again, new into this. 

Chairwoman VELA ́ ZQUEZ. Okay. Ms. Galiette, by most accounts, 

the need for investment has grown steadily over the past decade 

and is currently higher than at any time in the past. However, for 

years, the investing capacity in the SBIC program has gone unused. 

Will the changes in the proposed legislation enable the SBIC program to grow and meet the need for capital? 

Ms. GALIETTE. I think so. I feel that one of the challenges for the 

SBIC program, it’s the front end and the back end. The front end, 

the licensing process is so time-consuming and cumbersome that 

good managers are turned away. And at the back end, once you 

have raised a fund, we have raised our first, our second, and now 

our third fund, we are going to be forced out of the program because once you have achieved success, you become too big for the 

cap. 

It is not that any individual fund is larger nor is it that we are 

funding larger businesses than we have historically, but the average life of a fund is ten years. And so most successful fund managers are going to be managing three funds. You are going to have 

your newest fund; your fund that has basically hit the fourth year, 

which is almost the conclusion of the five-year investment period; 

and then your oldest fund, which is in its seventh or eighth year, 

which is almost fully harvested but isn’t quite harvested. And in 

order to survive and keep capital moving out to communities and 

small businesses, you need to raise that next fund. 

And so what happens is the funds are forced out of the program. 

They raise their next fund, a much larger fund because of the 

economies of raising funds, raising capital is also very difficult. So 

when you are forced to raise all of your capital from private investors, you are going to tend to raise a larger fund and invest in larger businesses because it is a lot of work to invest in small businesses. 

Making a $2 million loan is in many cases more work than making a $20 million loan because those companies, they need the technical assistance, they need our expertise, they don’t know how to 

40 

work with the banks, they don’t know how to increase lines of credit. And we spend a lot of time on that, which the larger mezzanine 

lenders don’t have to do. 

Chairwoman VELA ́ ZQUEZ. All right. Would you say that the proposed language on the expediting relicensing program is crafted in 

a way that protects SBA? 

Ms. GALIETTE. I believe it is. I think that clearly you need to be 

a proven manager. You need to have had a couple of exits. I think 

it is three exits in the proposal. You need to have a business plan 

that is substantially similar to your prize business plans and the 

same core group of investment managers so you can’t have changed 

your focus or your team. And there is always a provision for the 

administrator, for whatever reason, to reject that licensee if there 

are extenuating circumstances. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Sekula, could the proposed capital backstop program containing this legislation have helped credit unions deliver more financing to small firms? 

Mr. SEKULA. Yes, Madam Chairwoman. I think that the backstop 

would help us more small—at least from the credit union perspective, it would allow more smaller credit unions to be able to get in 

and start offering funds easier. And then, of course, with the continuation of the SBA doing a lot of the administrative work, then 

there is not the burden of trying to hire and get, obtain staff, and 

retain staff because from a credit union perspective, we have to 

have two years required member business lending training before 

you can become a business loan officer. So this will allow those who 

don’t have that current staff on hand to be able to do that and capitalize on what the SBA backstop program would offer. 

Chairwoman VELA ́ ZQUEZ. Ms. Dutch, the proposed small business 

early-stage investment program will permit participating investment companies to repay the SBA funds at the same time as other 

investors when the company exits its investment. What are the advantages of this repayment structure? 

Ms. DUTCH. Madam Chairwoman, I think that that is critical. As 

I mentioned, we were a participating securities SBIC. And, in fact, 

as we looked at that program, I think the difficulty with that was 

that it did not participate in the up side. 

And what private investors and institutional investors have 

learned in the venture capital is that when we look across venture 

capital performance, the top tier way compensates. And the multiples that they earn compensate. And by capping the up side and 

not participating the same way that the private investors do, both 

in terms of timing and in participating in the full up side, their economics were sort of doomed to failure. 

And so I think by aligning, the venture capital industry has 

shown over time that it is an attractive asset class. And that 

makes sense. 

Chairwoman VELA ́ ZQUEZ. Thanks. 

Mr. Menzies, a frequent criticism of the ARC loan program was 

that these loans were burdensome for lenders to make. What are 

some ways that the paperwork burden for ARC loans could be reduced while keeping the loan safe for banks like yours? 

41 

Mr. MENZIES. Chairwoman Vela ́zquez, community banks make 

relationship decisions. They are not in the production business. We 

don’t use computers to credit score and simulate the repayment of 

a loan and run it through a big production model. 

So one vehicle would be to allow community banks to use their 

standard C’s of credit, character, capacity, capital, collateral, coverage, and conditions, and make those judgments the way they 

make judgments and feed them into the SBA program without the 

level of paperwork that is currently required in the ARC program. 

Another clear benefit of this program would be to expand some 

of the definition of the use of the program. If I understand it correctly, it can be used to fund payments, if you will, but there are 

situations where individuals in small businesses have used their 

working capital to make payments. They have depleted their working capital to make those payments. 

And that working capital needs to be restored at the favorable 

terms that are available in the ARC program. That would be extremely beneficiary if that was incorporated in this legislation. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Graves? 

Mr. GRAVES. Thank you, Madam Chair. 

I just have one question for Mr. Johnson. I think you kind of already answered it, but I wanted to reiterate. Should we have a 

greater emphasis on expanding capital and credit to manufacturers 

and, for that matter, any business that is going to improve the 

trade deficit? 

Mr. JOHNSON. Absolutely. And what we are seeing is because of 

access to credit being reduced, the exports we should be making, 

we are not able to make. And, therefore, the deficit is increasing. 

And the proposals, the modifications we have proposed I think 

would help a lot. Our information is that manufacturers because 

the program size and the size of the companies simply are not 

availing themselves of these opportunities. 

Our industry is certainly looking for a way to restore credit and 

would employ this program vigorously. 

Mr. GRAVES. Thank you. 

Chairwoman VELA ́ ZQUEZ. Mr. Schrader? 

Mr. SCHRADER. Thank you, Madam Chair. 

Mr. Sekula, there has been a lot of discussion. You guys beat the 

drum pretty good on increasing the small business loan amounts 

for the credit unions. And considering that a lot of the banking 

community, at least large banks, aren’t loaning at all has a lot of 

cache, at least with me. 

I am interested in symmetrics. I mean, what assurances do we 

have that if we give this authority, that there will be an increase 

in small business lending beyond what you are already doing? And 

how would we gauge that? I mean, given the change, what increase 

in small business lending, what percentage increase in your portfolio or the credit unions across the country would we expect to 

see? 

Mr. SEKULA. Well, unfortunately, I can’t speak on behalf of all 

the credit unions of what their growth will be across the country. 

I can talk about some of what we have experienced over the near 

term. 

42 

For instance, when TARP went into place within 6 months after 

that, credit union member business lending increased 18 percent 

while lending with other financial institutions had dropped on the 

business side. 

From Randolph-Brooks’ perspective, we have been doing SBA 

lending for two and a half years. And our SBA lending from August 

of ’08 to August ’09 increased 107 percent. So the demands are 

there, but there are also barriers to entry. 

And some of the things that you have addressed in this are by 

removing the preferred lender status so that more SBA loans can 

be granted is going to be a plus, the backstop deal with opportunities for preferred lenders to buy those loans. 

But we also have to get past the issues that credit unions have 

with the arbitrary cap that was placed back from the Credit Union 

Membership Access Act, back from 1998. Prior to 1998, credit 

unions did not have a cap in place. During the Credit Union Membership Access Act, they asked Treasury to do a study on that and 

found that credit unions had no—there were no economic or safety 

and soundness reasons to necessarily support that. 

They also found in that study that the credit union delinquency 

and charge-off as compared in the member business lending arena 

were much lower than those of other financial institutions. And 

those numbers still hold true today in regards to performance for 

member business lending portfolio. 

I feel from my perspective that by removing some of these barriers, these entry to barriers for credit unions to get in and play 

who do have the capital to be able to lend, that credit unions will 

help. 

I’m not leading to create an illusion that credit unions are going 

to save small businesses and take care of all of their lending needs. 

It has to be a cumulative effort of all financial services getting in 

place to be able to provide those services. But I think credit unions 

can’t. 

Mr. SCHRADER. And you would be willing to work with the Committee on metrics, like most small businesses would? 

Mr. SEKULA. Yes, sir. 

Mr. SCHRADER. Mr. Menzies? Excuse me if I got that— 

Mr. MENZIES. Menzies. 

Mr. SCHRADER. Menzies. I apologize. 

A little off topic, I think related here, I have been a little concerned with the FDIC director’s recent announcements trying to recapitalize their money. They are talking about making banks pay 

three years in advance what their normal dues would be. 

Could you comment—I guess I would be interested in the credit 

unions’ response on that, too—comment on what that is going to 

do to the ability or inclination of banks to lend money in these very 

difficult times? 

Mr. MENZIES. Absolutely, Representative. I would like to make 

two comments, if I may, which is that I think it would be healthy 

for the nation to give credit unions unrestricted access to commercial lending and remove their 12 and a quarter percent cap, provide 

them an opportunity to be taxed and to pay towards the trilliondollar federal deficit, provide them an opportunity to be part of the 

community reinvestment program, and offer them the opportunity 

43 

to be regulated safety and soundness-wise the same way that community banks are. It would be a great opportunity for the nation. 

Taxing, CRA seems— 

Mr. SCHRADER. If you could my question because I am running 

out of time? 

Mr. MENZIES. Okay. And the answer to your question about recapitalizing the fund, it’s a long, frankly, issue. We know that there 

are $42 billion in the fund right now. Thirty-two billion have been 

dedicated for reserves. Ten billion is left in capital. 

The prepayment strategy is a strategy that is somewhat helpful 

to banks because we are allowed to put that prepaid premium on 

the balance sheet of the bank and amortize it over a three-year period of time. 

The inequity of that solution is that all of us know that the $6 

trillion of liabilities of the largest banks of the land are de facto 

guaranteed under too big to fail. And the previous special assessment was created by defining it as assets minus capital, which appropriately assessed those de factor insured liabilities. And that is 

the negative, if you will, of the prepayment of the deposit insurance 

premium. 

Mr. SCHRADER. Just real quick because, again, I am running out 

of time—I apologize. 

Mr. MENZIES. No problem. 

Mr. SCHRADER. With the prepayment, are most banks going to be 

lending more or lending less given the changes in their balance 

sheet? 

Mr. MENZIES. It absolutely will restrict the ability of banks to lend. In the case of my bank, $750,000 would be our prepaid insurance premium. That will come out of liquidity. 

Mr. SCHRADER. Yes. 

Mr. MENZIES. And that will be not available for lending. Yes, sir. 

That is your point. And that is an accurate point. 

Mr. SCHRADER. I would like the Committee to look at that sometime perhaps. Thank you very much. I yield back. 

Chairwoman VELA ́ ZQUEZ. Ms. Halvorson? 

Ms. HALVORSON. Thank you, Madam Chair. And thank you, panelists, for being here. Thank you, Mr. Johnson, for acknowledging 

the fact that we take on the hard issues because it is something 

that we have no choice to do. This is something that, no matter 

where we go, this is the first question we get from our businesses: 

how do we get access to capital and how do we get these things 

done. 

I introduced the House Resolution 3723, which does take the 7(a) 

loan from 2 million to 3 million and increases the ARC loan from 

35 to 50 because I believe that we take a good program. We want 

to increase it. 

I am glad that the Chairman asked about the average 7(a) loan 

because, even though we wanted to make it better, we do acknowledge that, even though people want to make it even bigger, the average loans aren’t anywhere near what people say that they should 

be. 

What we are trying to accomplish with this legislation is an increase in lenders to participate in this 7(a). And I often hear small 

business owners in my district say that they can’t find bankers 

44 

that are going to offer these 7(a) loans, especially in my rural part 

of my district. 

So, even in this legislation that I have, we are seeking to address 

this program or these problems by creating a real lender outreach 

program. And I know that the small bank outreach program is 

going to seek to increase the 7(a) participation among credit unions 

and community banks. 

So I guess my question is—and before I ask my question, I also 

want to say that I have banks in my district that don’t want to 

offer the ARC loans because they are saying that they’re afraid 

that if a person defaults on the ARC loan that the SBA is not reimbursing them or it’s very difficult to get the reimbursement, even 

though they’re guaranteed at 100 percent. 

So I would like anybody on the panel that would like to answer 

that if you are having trouble getting reimbursed from the SBA if 

there are any defaults. But, actually, I want anybody and Mr. Menzies or Mr. Sekula to discuss how you think what we could specifically do to increase the participation of people in banks and credit 

unions using this 7(a) program. 

So if we could start with Mr. Sekula? 

Mr. SEKULA. Well, as I mentioned earlier, I think for entry into 

the 7(a) program from the credit union perspective, only less than 

3 percent of credit unions out of close to 8,000 credit unions are 

participating and offering SBA loans. 

It is a very small percentage, but the average credit union size is only $92 million, as compared to the bank average size, it is 

probably close to $1.6-1.7 billion. So, as a result, their resources are 

very limited into that. 

And so some of the stipulations that are put in place in H.R. 

3723 will remove some of those by deferred lending steps or hoops 

that you have to jump through in order to become a preferred lender in order to offer it in 7(a) loans. 

In addition to that, as I mentioned earlier, removing the cap of 

the 12.25 percent will provide some opportunity for that to take 

place as well as increasing the cap limit for member business loan 

qualification of 50,000 to 150,000. 

And I really think that without them having to add additional 

staff that is going to be a drain on resources as they can work 

through the SBA program, that we will find more credit unions 

participate in the 7(a) programs. 

Ms. HALVORSON. And, Mr. Menzies? I just want you to know everywhere I travel in my district, I say the community bankers did 

not get us into this mess. We love our community bankers. And, 

please, if you would like to add to how we increase participation? 

Mr. MENZIES. God bless you, Representative. 

Ms. HALVORSON. I do, everywhere I go. 

Mr. MENZIES. As I mentioned in my testimony, supporting a 

small lender outreach program is very important. Education is important. I get an e-mail every week from our local SBA office. Mr. 

Knox sends me an e-mail and educates us on what is going on. I 

think education really is the key. 

I have also heard, have not experienced or witnessed or personally seen examples of the SBA not paying on guarantees, but I 

have heard the same thing of a technical default in the loan docuVerDate Aug 31 2005 14:20 Dec 14, 2009 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\52891.TXT DARIEN
45 

ments existing and having trouble getting paid but personally 

haven’t experienced that. 

I think training is the issue and training loan officers. Loan officers like to do deals. They like to get things done. And when you 

bring in this infrastructure of new documents and new process and 

new procedure, lenders are inclined to say, you know, ‘‘I would 

rather it go this path and this path.’’ 

Ms. HALVORSON. So are you saying education— 

Mr. MENZIES. Education. 

Ms. HALVORSON. —is a primary barrier from banks and credit 

unions? 

Mr. MENZIES. I think it is the primary opportunity. I think good 

lenders allow the SBA to be one tool in their bag of tricks. And 

they always consider the SBA solution as a piece of the whole solution. Rarely is it the total solution anyhow. Training banks and 

lenders on how to access and use the SBA in my opinion is a great 

opportunity. 

Ms. HALVORSON. Great. Thank you. Thank you. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves, any other questions? 

[No response.] 

Chairwoman VELA ́ ZQUEZ. Well, let me take this opportunity to 

thank all of you. I think this Committee, we are listening. And we 

read the papers. We watch the news on TV. We hear the stories 

going on about the jobless economy and the fact that one of the obstacles that you are facing right now is the lack of access to capital. 

And so through this proposed legislation, we are trying to address 

some of the impediments that exist. And I want to take this opportunity to really thank all of you for being here today. 

I ask unanimous consent that members will have five days to 

submit a statement and supporting materials for the record. Without objection, so ordered. 

This hearing is now adjourned. Thank you. 

[Whereupon, at 2:00 p.m., the foregoing matter was concluded.] 

46 


52891.001
47 


52891.002
48 


52891.003
49 


52891.004
50 


52891.005
51 


52891.006
52 


52891.007
53 


52891.008
54 


52891.009
55 


52891.010
56 


52891.011
57 


52891.012
58 


52891.013
59 


52891.014
60 


52891.015
61 


52891.016
62 


52891.017
63 


52891.018
64 


52891.019
65 


52891.020
66 


52891.021
67 


52891.022
68 


52891.023
69 


52891.024
70 


52891.025
71 


52891.026
72 


52891.027
73 


52891.028
74 


52891.029
75 


52891.030
76 


52891.031
77 


52891.032
78 


52891.033
79 


52891.034
80 


52891.035
81 


52891.036
82 


52891.037
83 


52891.038
84 


52891.039
85 


52891.040
86 


52891.041
87 


52891.042
88 


52891.043
89 


52891.044
90 


52891.045
91 


52891.046
92 


52891.047
93 


52891.048
94 


52891.049
95 


52891.050
96 


52891.051
97 


52891.052
98 


52891.053
99 


52891.054
100 


52891.055
101 


52891.056
102 


52891.057
103 


52891.058
104 


52891.059
105 


52891.060
106 


52891.061
107 


52891.062
108 


52891.063
109 


52891.064
110 


52891.065
111 


52891.066
112 


52891.067
113 


52891.068
114 


52891.069
115 


52891.070
116 


52891.071
117 


52891.072
118 

Æ