Full text of "Entrepreneurship in America : focus on capital formation : field hearing before the Committee on Small Business, United States Senate, One Hundred Fourth Congress, first session, Aapril 12, 1995"

See other formats

I \j ' S. Hrg. 104-148

^ ENTREPRENEURSHIP IN AMERICA:

FOCUS ON CAPITAL FORMATION

Y4.SM 1/2: S. HRG. 104-148

Entrepreneurship in Anerica: Focus...

FIELD HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION

APRIL 12, 1995

Printed for the use of the Committee on Small Business

NOV 2 I 1995

U.S. GOVERNMENT PRINTING OFFICE
92-575 WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-047609-7

^ S. Hrg. 104-148

ENTREPRENEURSHIP IN AMERICA:
FOCUS ON CAPITAL FORMATION

Y4.SM 1/2: S. HRG. 104-148

Entrepreneurship in Anerlca: Focus...

FIELD HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
UNITED STATES SENATE

ONE HUNDRED FOURTH CONGRESS

FIRST SESSION

APRIL 12, 1995

Printed for the use of the Committee on Small Business

NOV 2 I 1995

U.S. GOVERNMENT PRINTING OFFICE
92-575 WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents. Congressional Sales Office, Washington, DC 20402
ISBN 0-16-047609-7

COMMITTEE ON SMALL BUSINESS

CHRISTOPHER S. BOND, Missouri, Chairman

LARRY PRESSLER, South Dakota
CONRAD BURNS, Montana
PAUL COVERDELL, Georgia
DIRK KEMPTHORNE, Idaho
ROBERT F. BENNETT, Utah
KAY BAILEY HUTCHISON, Texas
JOHN WARNER, Virginia
WILLLAM H. FRIST, Tennessee
OLYMPLA. J. SNOWE, Maine

Louis Taylor, Staff
John W. Ball III,

DALE BUMPERS, Arkansas

SAM NUNN, Georgia

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOHN F. KERRY, Massachusetts

JOSEPH I. LIEBERMAN, Connecticut

PAUL D. WELLSTONE, Minnesota

HOWELL HEFLIN, Alabama

FRANK R. LAUTENBERG, New Jersey

Director and Chief Counsel
Democratic Staff Director

(II)

CONTENTS

OPENING STATEMENT

Page

Bond, The Honorable Christopher S., Chairman, Committee on Small Busi-
ness, and a United States Senator from Missouri 1

WITNESS TESTIMONY

O'Donnell, James F., chairman, Capital for Business, Inc 3

Zielonko, William M. senior vice president, The Boatmen's National Bank

of St. Louis 15

Coleman, Dennis G., executive director, Economic Council of St. Louis

County 17

Greenspan, Tessa, president, Sappington Farmer's Market 22

Gallardo, Ramon A., founder, Casa Gallardo Restaurants 24

Kirkpatrick, C. Virginia, owner, CVK Personnel Management and Training

Specialists 25

Cimasi, Robert James, CBI, CBC, president and founder. Health Capital

Consultants, Inc 31

Weidenbaum, Murray, director, Center for the Study of American Business

at Washington University in St. Louis 33

Brockhaus, Robert H., Ph.D., Coleman Foundation Chairholder in Entrepre-
neurship, and director, Jefferson Smurfit Center for Entrepreneurial Stud-
ies at St. Louis University 38

ALPHABETICAL LISTING

Bond, The Honorable Christopher S.

Opening statement 1

Brockhaus, Robert H.

Testimony 38

Cimasi, Robert James

Testimony 31

Coleman, Dennis G.

Testimony 17

Gallardo, Ramon A.

Testimony 24

Greenspan, Tessa

Testimony 22

Prepared statement 23

Kirkpatrick, C. Virginia

Testimony 25

Prepared statement 27

O'Donnell, James F.

Testimony 3

Prepared statement 7

Weidenbaum, Murray

Testimony 33

Prepared statement 35

Zielonko, William M.

Testimony 15

(III)

ENTREPRENEURSHIP IN AMERICA:
FOCUS ON CAPITAL FORMATION

WEDNESDAY, APRIL 12, 1995

United States Senate,
Committee on Small Business,

Washington, D.C.

The committee met, pursuant to notice, at 1:30 at Washington
University Women's Center, 1 Brookings Drive, St. Louis, Missouri,
the Honorable Christopher S. Bond (chairman of the committee)
presiding.

Present: Senator Bond.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.
BOND, CHAIRMAN, COMMITTEE ON SMALL BUSINESS, AND A
UNITED STATES SENATOR FROM MISSOURI

Chairman BOND. The hearing of the United States Senate Com-
mittee on Small Business will come to order. Good afternoon. We
thank you very much for joining us today. It is a pleasure to be
back in St. Louis and also to be at Washington University. I am
very pleased to see Chancellor Danforth; and he expressed his re-
grets that he would not be able to stay, but we certainly appreciate
the hospitality of the University, and we are delighted to see so
many friends.

I might tell you that with me today is my staff director of the
Small Business Committee in Washington, Louis Taylor. He and
others of my staff here in St. Louis are joining us today and look
forward — all of us look forward to having a chance to talk with
many of you.

This is the first day of the series of hearings that we are holding
around the country called Entrepreneurship in America. And we
are focusing on a number of key issues facing small and growing
businesses in our country. Witnesses this afternoon are small busi-
ness owners, lenders, and investors who have come to share with
us their ideas on the topic of great concern to all business, and that
is access to capital.

When I talk to small business owners here in Missouri and
across the country, one of the topics year-in and year-out is the un-
certainty they face in obtaining financing to operate or expand
their businesses. And as Chairman of the Committee on Small
Business, I want to make sure that we respond to the needs of
small businesses.

I am sure that many of you here well know that small businesses
are the backbone of America and our economy. They employ 54 per-
cent of the American work force. They generate some 50 percent of

(1)

the gross domestic product. Over the past decade, for every person
laid off by large corporations in this country, five new jobs will be
created by small business. These new and growing small busi-
nesses need ready sources of capital to grow, to hire new employ-
ees, to continue to fuel our economic growth.

I firmly believe we cannot turn our back on this dynamic seg-
ment of our economy, and our government has an obligation to pro-
mote entrepreneurship. The Small Business Administration is the
principal federal agency with a mission to make debt and equity
capital available to all small business owners.

The 7(a) Business Loan Program guarantees small business
loans that would not otherwise have been made. As many of you
know, without the 7(a) guarantee, many banks would be reluctant
to make longer term loans which are key if our nation's small busi-
nesses are going to grow and help revitalize our economy.

The SBIC, Small Business Investment Company, Program en-
courages private sector SBICs to provide equity and long-term debt
financing to small businesses. Some of the best-known companies
in America got help from an SBIC. You probably have heard of
companies like Intel, Federal Express, Callaway Golf — the maker
of the Big Bertha golf clubs.

A few weeks ago, the President and the SBA Administrator an-
nounced a proposed reorganization of SBA that would have signifi-
cant implications for the 7(a) loan program. I would like to be able
to ensure that our nation's small businesses have access to the es-
sential programs and services of the Small Business Administra-
tion into the 21st century. I think we need to be ready to accept
some budget cuts in the Small Business Administration in order to
balance the budget. I sit on the Budget Committee as well, and I
volunteered to that Committee a proposal to save hundreds of mil-
lions of dollars from the SBA budget over the next five years.

There are others who want to eliminate the SBA entirely; but I
think there is an important mission to fulfill, and I will not support
any budget cutting efforts that have the potential to cripple the
ability of our small businesses to obtain the financing they need.

We are going to be holding hearings later this month on the 7(a)
program, looking at options of restructuring financing to increase
and ensure the availability of funds. The Committee will also be
analyzing the SBIC program. We reviewed options that might en-
hance the public/private partnership so it can continue to grow
without increasing demands on the federal budget.

I think we can be excited about the opportunity to improve the
quality of life, the profitability of small and growing businesses and
to give encouragement to the entrepreneurs of tomorrow. But we
are here to learn from you who are actually doing the work and
who are in the field. Your testimony is vitally important. The best
ideas, we always find, come from the people who are actually doing
the work, who are here in the field and not necessarily those who
are in Washington talking to us all the time. I applaud and appre-
ciate your being here and your participation in this hearing. I look
forward to hearing your views and comments, so we can find ways
to work together to promote the spirit of Entrepreneurship in
America.

We have three panels today, and I would like to invite the first
panel to come forward. James F. O'Donnell, Chairman of Capital
for Business, Inc.; William M. Zielonko, Senior Vice President of
Retail Banking of the Boatmen's National Bank of St. Louis; and
Dennis G. Coleman, Executive Director of the St. Louis County
Economic Development Council.

Gentlemen, your entire statements will be included as a part of
the record. The ones that I have received, I have had an oppor-
tunity to review thoroughly. We will take all of these written
records back to Washington for Committees and staffs to review;
Because we do have a lot of people today, we are going to ask that
you keep your oral testimony to five minutes and if you would sum-
marize the major findings.

Normally we have a very sophisticated timing system. It has a
green light when you get started; and with one minute to go, a yel-
low light comes on; when the five minutes are up, we have a red
light. However, we have not been able to keep up with technology,
and the machine is down. So Mr. Goldfarb will hold up a high-tech
sign over here which says one minute to go, and if you could keep
your testimony within that time frame; I would very much appre-
ciate it. Let's start with Mr. O'Donnell.

STATEMENT OF JAMES F. O'DONNELL, CHAIRMAN, CAPITAL
FOR BUSINESS, INC., ST. LOUIS, MISSOURI

Mr. O'Donnell. Mr. Chairman, I appreciate the opportunity to
testify today. I am pleased to be able to share my perspective on
capital formation and specifically the role of the Small Business In-
vestment Company program and its impact on small business in
our state. I am testifying today in my capacity as Chairman of Cap-
ital For Business, Inc., and as a member of the Executive Commit-
tee of the Board of Governors of the National Association of Small
Business Investment Companies which is the professional trade as-
sociation which represents the SBIC industry.

Capital For Business is a venture capital investor and fund man-
ager of two SBICs specializing in management buyouts, acquisi-
tions and mergers, and expansions of privately held companies.
Headquartered here in St. Louis, Capital For Business manages
CFB Venture Fund I, Inc., a $17 million corporate SBIC and CFB
Venture Fund II, a $30 million SBIC limited partnership.

In general, CFB investments are structured as preferred stock or
subordinated debt with common stock warrants for an equity par-
ticipation. Our investments rely upon current return in the form of
a cash dividend or interest payment, an important portion of our
total return. We focus our investments primarily in Missouri and
the nearby Midwestern states.

I joined Capital For Business in 1987 as president and became
chairman in 1990. I have over 20 years of experience as a business
manager working with middle market companies and have been af-
filiated with Commerce Bancshares, CFB's parent and largest in-
vestor, for more than 12 years.

Today, I would like to address several key issues regarding the
SBIC program and its impact on capital formation efforts of small
businesses. First, it is important to understand why Congress ere-

ated our unique public/private partnership, the Small Business In-
vestment Company.

The SBIC program found its beginning in a Federal Reserve
study conducted in the mid-'50s. The study concluded that sources
of long-term loans and equity financing for small businesses were
inadequate. The Congress responded to the Federal Reserve
Board's observations by creating the Small Business Investment
Act of 1958. The provisions of this Act created the Small Business
Investment Company program.

Over the 36-year history of the program, SBICs have invested
close to $12 billion in 100,000 small businesses around the country
including, of course, Missouri. Mr. Chairman, in 1994 alone, small
businesses received approximately $1 billion in SBIC financing
which was about a quarter of the total equity financing done in the
country.

Current trends in the capital markets, however, have nearly shut
out the ability of small businesses to raise long-term patient cap-
ital. This funding gap for small companies remains particularly
acute because these kinds of businesses are not high-technology-
based companies or they are not located in the strongholds of eq-
uity investments such as Boston, New York, Chicago, or California.

For 36 years, SBICs have worked to fill that gap. Close to 78 per-
cent of the small businesses funded by SBICs are nontechnology-
based businesses. You quoted already the SBIC participation in
well-known national companies that have grown and created jobs
and paid federal income taxes. But there are also stories of hun-
dreds of thousands of "Main Street, USA" businesses financed by
SBICs that are not as prominent. It is this story that truly illus-
trates the impact SBIC investments can have.

Local SBIC investments include technology-based companies like
CITATION Computer Systems in St. Louis and also basic metal
cutting companies like Steel Manufacturing & Warehouse Com-
pany in Kansas City. CFB I, our original SBIC, invested approxi-
mately $900,000 in CITATION mostly between 1983 to 1988. The
amount of each investment round making up the $900,000 ranged
from as little as $100,000 up to $250,000, amounts which would try
the patience of larger, non-SBIC type equity investors.

In 1992, CITATION successfully completed an initial public offer-
ing raising over $6 million. From $3 million in revenues back in
'83 and only 36 jobs, CITATION today has $23 million in revenues
and employs 212 people. I think CITATION is truly a SBIC success
story in Missouri. Steel Manufacturing & Warehouse Company is
a metal cutting and slicing business which was unable to grow be-
cause of a lack of capital. In 1993, Steel had revenues of $9 million.
CFB II, our new venture partnership, invested $1 million in Steel,
and within two years the company projects $15 million in revenues.
Steel employs about 41 people in Kansas City.

Most of these kinds of companies do not get the attention of the
investment banking community because commissions would be too
small for firms like this. Borrowing from local banks is also dif-
ficult because of collateral concerns or under-capitalization on the
balance sheets. These companies require smaller amounts and usu-
ally longer repayments to be bankable. They need, in other words,
the kind of investments that only SBICs would be willing to make.

In 1989, the SBIC industry recognized the fact that in spite of
the tremendous benefits of the program, there were some short-
comings in its operations. And working closely with the SBA and
members of Congress, our industry group helped overhaul the pro-
gram. The new, revamped SBIC program was signed into law in
September of 1992, and the regulations implementing the laws be-
came effective in April 1994.

The fundamental problems of the program, I think, have been
addressed and are being corrected. Included in the overhaul were
many changes made to both the costs and the risk of the program
to the federal government. Also included in the legislation was cre-
ation of the new funding mechanism for small business investing
which we have called the Participating Security.

Since the new program officially began 11 months ago, 43 new
SBICs have been licensed including two new Missouri SBICs.
These 43 SBICs have raised $700 million in private capital rep-
resenting more private capital entering the program in that one
year than in the last 10 years combined. I am also pleased to re-
port that on February 22nd of this year, the first funding using the
new Participating Securities allowed nine SBICs to obtain $73 mil-
lion from the capital market for investments in small businesses.
This funding, coupled with private capital from the participating
SBICs, made available over $100 million immediately for small
business investment.

More clearly, the Participating Security enables SBICs to invest
in riskier, smaller businesses by deferring a portion of the interest
to the back end of the deal. In exchange for its deferral, the Gov-
ernment receives participation in the profits.

Mr. Chairman, our industry recognizes and appreciates the envi-
ronment in which you and your colleagues of Congress are working.
The calls to reduce the deficit, decrease the size of government, and
balance the budget are loud, and we hear them in the industry.
But the overwhelming expansion of the program and the demand
for leverage by SBICs has placed enormous pressure on current ap-
propriation levels, and the funding levels required to meet the de-
mand of licensees dramatically exceeds the current appropriations.

I will close by saying, Mr. Chairman, the provisions of the rescis-
sion bill passed in the Senate which would pare the SBIC appro-
priation by $15 million will certainly cripple the ability of SBICs
in the short run to invest in small companies. We urge you to con-
sider the impact of this amendment and how it will help stall the
growth of small businesses in Missouri, in the Midwest, and
around the country.

We ask for your help, but we offer our help also. In this environ-
ment of fiscal restraint, we believe it is critical that we continue
to explore all possible means of reducing the role of the federal gov-
ernment and budgetary costs to the federal government of the
SBIC program without undermining the tremendous contribution
the program makes to the U.S. economy. We, as an industry, and
me personally as an SBIC manager, are committed to studying
every possible means of reducing the costs of the program to the
American taxpayer.

We believe it is possible to design a program that will reduce or
eliminate the need for direct, annual appropriations while provid-

ing a consistent source of funding to enable SBICs to continue pro-
viding long-term patient capital.

We will be pleased to present our research on this privatization
plan to you and members of the committee when completed. In the
meantime, we urge your support of current funding levels for the
program.

[The prepared statement of Mr. O'Donnell follows:]

Statement

James F. O'Donnell

Chairman,

Capital For Business, Inc.

St. Louis, Missouri

I appreciate the opportunity to testify today. I'm pleased to be able to share my
perspective on capital formation, and specifically, the role of the Small Business
Investment Company Program and its impact on small business in our state.

I am testifying today in my capacity as Chairman of Capital For Business, Inc.,
and as a member of the Executive Committee of the Board of Governors of the
National Association of Small Business Investment Companies, the professional
trade association representing the SBIC industry.

Capital For Business, Inc. is a venture capital investor and fund manager of two
SBIC's specializing in management buyouts, acquisitions and mergers, and
expansion of privately held mid-size companies. Headquartered here in St. Louis,
Capital For Business manages CFB Venture Fund I, Inc., a $17 million corporate
SBIC, and CFB Venture Fund II, Inc., a $30 million SBIC limited partnership.

In general, CFB investments are structured as preferred stock or subordinated
debt with common stock warrants for an equity participation. Our investments
rely upon current return in the form of cash dividend or interest as an important
portion of total return. We focus our investments primarily in Missouri and the
nearby Midwestern states.

I joined Capital For Business in 1987 as president and became chairman in 1990.
I have over twenty years experience as a business manager working with middle
market companies and have been affiliated with Commerce Bancshares, Inc.,
CFB's parent and largest investor, for more than twelve years.

Today, I'd like to address several key issues regarding the SBIC program and its
impact on the capital formation efforts of small business.

First, it is important to understand why Congress created our unique
public/private partnership, the Small Business Investment Company.

The SBIC program found its beginning in a Federal Reserve study conducted in
the mid-1950's. The study concluded that sources of long-term loans and equity
financing for small businesses were sorely inadequate. The Congress responded
to the Federal Reserve Board's observations with the Small Business Investment
Act of 1958. Provisions of this Act created the Small Business Investment
Company program.

Over the 36-year history of the program, SBICs have invested close to $12
billion in 100,000 small businesses around the country, including Missouri. Mr.
Chairman, in 1994 alone, small businesses received appro.ximately $1 billion in
SBIC financing.

Current trends in the capital marlcets have nearly shut out the ability of small
businesses to raise long-term, patient capital. This funding gap for small growth
companies remains acute--particularly for businesses that are not
high-technology-based or located in the venture capital strongholds of Boston,
New York, Chicago, and California.

For thirty-six years, SBICs have worked to fill that gap. Close to 78% of small
businesses funded by SBICs are non-technology-based businesses. The story of
SBIC participation in the start-up of Federal Express, Apple, and Intel are
familiar to many. The story of the hundreds of thousands of "Main Street, USA"
businesses fmanced by SBICs is not. And it is this story that truly illustrates the
impact of SBIC investments.

SBIC investments include technology based companies like CITATION
Computer Systems in St. Louis and basic metal cutters like Steel Manufacturing
& Warehouse Company in Kansas City. CFB I, our original SBIC, invested a
total of over $900,000 in CITATION from 1983 through 1988. The amount of
each investment round making up the $900,000 ranged from $100,000 to
$250,000, an amount which would try the patience of larger, non-SBIC venture
firms. In 1992, CITATION successfully completed an initial public offering,
raising over $6,000,000. From $3,000,000 in revenues and 36 jobs in 1983 to
$23,000,000 in revenues and 212 jobs in 1995, CITATION clearly is a Missouri
SBIC success story. Steel Manufacturing & Warehouse Company was a metal

cutting business unable to grow due to a lack of capital. In 1993, Steel had
revenues of $9,000,000. CFB II, our newest SBIC, invested $1,000,000 in Steel
and two years later, the company projects revenues of $15,000,000 and employs
41 people.

Most of these companies cannot get the attention of the investment banking
community because commissions for the firms would be far too small.
Borrowing by their local banks is either insufficient or impossible to find because
small companies often lack hard assets for collateral and because their capital
needs are relatively small and require a longer-term repayment. They need the
investments that only an SBIC would be willing to make.

In 1989, the SBIC industry recognized the fact that in spite of the tremendous
benefits the program had already generated for the U.S. economy, there were
shortcomings in the operations of the program. Working closely with the U.S.
Small Business Administration and members of Congress, we helped overhaul the
SBIC program.

The new, revamped SBIC program was signed into law in September of 1992
and the regulations implementing the law became effective in April of 1994. The
fiandamental problems of the program were addressed and corrected. Included
in the overhaul were many changes made to both the cost and the risk of the
program to the Federal government. Also included in the legislation was the

creation of a new funding mecfianism for small business investing which we call
the Participating Security.

Since the new program officially began eleven months ago, 43 new SBICs have
been licensed, including two with Missouri roots. These 43 SBICs have raised
$700 million in private capital, representing more private capital entering the
SBIC program in one year than in the last ten years combined. I'm also pleased
to report that on February 22, 1995, the first funding using the new Participating
Securities allowed nine SBICs to obtain $73 million from the capital markets for
investment in small businesses. This funding, coupled with private capital from
the participating SBICs made available over $100 million for investing into small
businesses immediately.

A colleague of mine in a Kansas-based SBIC is already investing his proceeds
from this landmark funding in seven early-stage companies here in the midwest.
I stress early-stage because it is the Participating Security that permits him to
provide the long-temi patient capital those seven companies will need to grow
strong, create jobs, create wealth within their communities, and general tax
revenues.

More clearly, the Participating Security enables SBICs to invest in riskier, smaller
businesses by deferring a portion of the interest which SBICs pay to the Federal
government in the earlier years of the SBICs life. In exchange for the deferral.

the go\crnment receives a participation in the profits of the SBIC, thus creating
the strong possibiht\- that the SBIC program may cost much less in the near
future and ma_\- actually cost the Federal government nothing. We believe the
new SBIC program will generate a profit for the government in the future— in
addition to creating jobs, technologies, services, and tax dollars to strengthen the
U.S. economy.

Mr. Chairman, our industry recognizes and appreciates the environment in which
you and your colleagues in the Congress are working. The calls to reduce the
deficit, decrease the size of government, and balance the budget are loud. We
hear them too.

The overwhelming expansion of the SBIC program and of the demand for
leverage by SBICs from the Federal government has placed enormous pressure
on current appropriation levels. The funding levels required to meet the demand
by licensees, and the needs of small businesses themselves, dramatically exceeds
the current appropriations.

Mr. Chairman, the provisions in the recision bill passed in the Senate which
would pare the SBIC appropriation by $15 million will certainly cripple the
ability of SBICs to invest in small companies. We urge you to consider the
impact of this amendment and how it will stall the growth of small businesses in
Missouri, the Midwest, and around the country.

We ask for your help now and also otYer ours, in this current en\ironment of
fiscal restraint, we believe it is critical that we continue to explore all possible
means of reducing the role of the Federal government and budgetary cost to the
Federal government of the SBIC program— without undermining the tremendous
contribution the program makes to the U.S. economy. We, as an industry, and
me personally as an SBIC professional, are committed to studying every possible
means of reducing the cost of the SBIC program to the American taxpayer.

We believe that it is possible to design a program that would reduce or eliminate
the need for direct, annual appropriations while providing a consistent source of
funding from the capital markets to enable SBICs to continue providing
long-term patient capital to small growth companies. We will be pleased to
present our research on this privatization plan to you and members of the
Committee when completed. In the meantime, we urge your support of current
and future funding levels for the SBA and the SBIC program.

In closing, I'd like to call your attention to a study conducted by Arthur
Andersen's Enterprise Group and National Small Business United in 1993.
Thirty percent of the survey's respondents claimed that access to capital is a
significant challenge to the growth and survival of their small and mid-sized
companies. In preparation for the upcoming White House Conference on Small
Business, SBA's Office of Advocacy recently conducted a study called, "Small
Business and Entrepreneurship in the Twenty-First Century." Various focus

groups were called together to discuss the obstacles and opportunities that small
businesses will face in the year 2005. The discussions were provocative, in each
focus group, they discussed repeatedl) the cunent and future abilit> of small
business owners and entrepreneurs to gain access to the capital they need for
growth and expansion.

The SBIC program has served the small business community well over its
36-year history. Today's SBICs are better managed and better capitalized. They
operate in a more reasonable regulatory environment and are able to fill the
capital needs of small business. Most importantH'. today's SBICs are committed
to invest in and work with America's small growth companies to help them now
and well into the future.

Again, thank you for this unique opportunity to share information about the SBIC
program. We have appreciated your leadership role as Chairman of the Senate
Committee on Small Business and look forward to working more closely with
you to make the new SBIC program better and American small businesses
stronger. Thank you and I submit this testimony for the official record of the
Committee.

Chairman Bond. Thank you, Mr. O'Donnell. I have written to
the Committee on Appropriations, and Subcommittee Chairmen,
objecting to that based on information that we received from the
SB A after the action was taken, and we hope that we can use the
information that you have provided and they have provided to turn
that around.

Let me turn now to Mr. Zielonko.

STATEMENT OF WILLIAM M. ZIELONKO, SENIOR VICE PRESI-
DENT, THE BOATMEN'S NATIONAL BANK OF ST. LOUIS, ST.
LOUIS, MISSOURI

Mr. Zielonko. Thank you for inviting us to be with you today.
Senator Bond. Boatmen's is very active in all aspects of small busi-
ness banking, and we are pleased to share some of our experiences
with you.

Through our small business unit, which we call business bank-
ing, Boatmen's has a depth of experience in SBA lending. We rank
first in SBA loans in Eastern Missouri with over $9 million loaned
in the past two years. We made 78 SBA loans from '92 to '94 and
have also made one of the first LowDoc loans in the area. We are
one of 19 banks nationally that are participating in the FasTrak
pilot program, and we have 50 local lenders trained under the Cer-
tified Lender Program.

We are also active in small business funding through the Civic
Ventures Investment Fund, a Specialized Small Business Invest-
ment Company or SSBIC whose mission is to help socially or eco-
nomically disadvantaged entrepreneurs and their communities by
helping them create successful business ventures. Boatmen's orga-
nized and is a lead investor in the Fund which uses private capital
and SBA funding to provide a combination of equity financing and
loans for disadvantaged small businesses and minority entre-
preneurs while providing a reasonable return for the business in-
vesting in the Fund.

As successful businesses are built, new jobs created will stabilize
communities, increase the tax base, and influence other positive
outcomes. Although financial return is secondary to the community
benefit, the rate of return for investors is expected to be 18 percent.
We bring this to your attention because we believe it is a successful
example of private industry filling a social need with minimal as-
sistance from the government. To date, we have raised over $3 mil-
lion from private investors.

We consider the SBA an important partner in the delivery of fi-
nancing to small business. We are pleased to report that the St.
Louis District Office is responsive and has been highly visible in
supporting efforts such as Small Business Week; the Small Busi-
ness Development Center with St. Louis University; and SCORE,
Service Corps of Retired Executives. In addition, the LowDoc and
FasTrak programs represent important new developments for
small business owners, while the 7(a) program serves more estab-
lished businesses.

But we feel that while the 7(a) program has worked successfully
for many loans, it can be improved by reducing paperwork. As
bankers, we lend money every day. We have invested heavily in de-
veloping streamlined procedures and advanced technologies and

are experienced in underwriting, processing and funding loans
quickly and efficiently. We know how to deliver loans, and we find
that excessive paperwork strangles this efficiency. Banks are forced
to spend unnecessary resources on SBA paperwork, and small busi-
ness owners wait an unnecessarily long time because of the re-
quirements.

We recommend that the SBA allow banks to leverage their inter-
nal investments by linking SBA documents to their own remote
document printing technologies. Banks should also be able to gen-
erate documents themselves, as in the FasTrak pilot program, for
7(a) and 504 loans.

Reducing paperwork makes us more efficient and also saves the
government money. Banks want to incorporate SBA loans into
their normal lending process. If we have to establish a separate de-
partment to handle unique paperwork, we cannot make a profit.

Paperwork is the first major issue facing borrowers and lenders;
the lack of collateral is the second. We do cash flow analysis, we
do credit underwriting; but we cannot compensate for lack of collat-
eral. The SBA loan guarantees are extremely important to filling
this gap.

Most small businesses, especially service providers, have no hard
dollar assets. Therefore, it is even more difficult to get financing,
especially if the business is a start-up. The SBA loan guarantee re-
mains critical. However, we feel that guarantees could be reduced,
especially if we can do our own documentation.

We have a few other recommendations. We suggest that SBA
eliminate IRS tax verification for loans under $100,000 dollars.
This process can delay a loan for 10 days to several weeks. We also
ask that the SBA recognize that the St. Louis area is one market
that spans two states. Illinois businesses that use Missouri banks
are forced to go to Springfield, Illinois SBA offices. We recommend
that the bank's location rather than the borrower's location be the
prime determinant in which an SBA office is used. We understand
this is under consideration.

Finally, we ask that you recognize the caps on rates and fees,
combined with a proposed bank fee of 30 basis points, will place a
severe squeeze on the profitability of small loans. When developing
fees, guarantees and pricing caps, the government should differen-
tiate between programs targeted to smaller loan requests and the
general 7(a) loans. It should also differentiate between loans which
were sold on the secondary market and the less risky and more
profitable loans that are held in a bank's portfolio to maturity. In
addition, by raising fees, this makes it more difficult for banks to
maintain our current level of commitment to SBA loans.

We are appreciative of the benefits the SBA guarantees offer to
small business owners. We would like to make more small business
loans. However, we are not in the business for transactional pur-
poses. Our interests lie in long-term relationships with business
owners. We are a portfolio lender, and we want to help businesses
move out of the SBA products into regular loan products and long-
term prosperity, building enough capital so SBA guarantees are not
necessary.

Previously, the SBA was often used for loans banks did not want
to make. Now, by helping businesses meet collateral criteria, the
SBA is a critical partner for many small businesses.

Thank you for the opportunity to present our views.

Chairman BOND. Thank you very much. And now we will turn
to Mr. Coleman.

STATEMENT OF DENNIS G. COLEMAN, EXECUTIVE DIRECTOR,
ECONOMIC COUNCIL OF ST. LOUIS COUNTY, ST. LOUIS, MIS-
SOURI

Mr. Coleman. Senator, good afternoon and thank you. It is an
honor to be here. My name is Denny Coleman, Executive Director
of the Economic Council of St. Louis County, a not-for-profit eco-
nomic development agency whose mission is to create high quality
business and employment opportunities for long-term, diversified
economic growth throughout St. Louis County and the St. Louis re-
gion as well. My agency oversees a wide variety of regional eco-
nomic development programs, including the World Trade Center
St. Louis, the St. Louis Defense Adjustment Program, the Critical
Technologies Partnership in conjunction with Civic Progress, and
many small business financing programs.

One of our organization and the region's most successful lending
programs over the past decade has been the SBA 504 loan pro-
gram. The closure of the SBA district office in St. Louis that has
been discussed, which is the largest metropolitan area in the Mid-
west Region 7, will be highly counterproductive for many reasons.

St. Louis County is currently the ninth most active lender in the
nation out of approximately 375 nationwide CDCs. When the Coun-
ty is combined with St. Louis City, our region ranks among the top
five in the nation. Furthermore, the St. Louis district SBA office is
number one in LowDoc loan processing in Midwest Region 7. The
St. Louis district office also has the largest portfolio in Region 7
with over 3,500 loans worth neaHy $400 million, figures which also
represent the largest loan volume in the Midwest.

In the first six months of the current fiscal year, the St. Louis
district office has acted on 473 loans and expects to reach 1,000
loans this year. Within our organization alone, 1994 was a record
year in which we disbursed 34 SBA 504 loans, which represented
over $30 million in new investment in St. Louis County and nearly
500 jobs. To date, our organization has disbursed over 675 loans to-
talling $1.1 billion with a default rate of 1.3 percent.

Other strengths for St. Louis include its recent selection as a site
for women and minorities prequalification pilot loan programs as
well as its designation as one of 11 cities nationwide to receive an
Export Assistance Center.

In focusing on specifics of the 504 program, two of its most note-
worthy aspects are its low-loss, low-cost rates and its gap-financing
features. The 504's actual federal appropriation is only 0.57 percent
of the loan guarantee amount. Thus, the appropriation for this year
will result in nearly $1.5 billion in actual loans, which will, in turn,
result in significant new job creation. In fact, over 400,000 jobs
have been created and documented as a result of this program
since its inception.

The gap-financing benefit of the 504 program means, in its most
basic and important sense, that the vast majority of 504 borrowers
could not have financed their fixed-asset projects if it were not for
the existence of the 504. St. Louis County alone can document nu-
merous borrowers whose businesses have thrived after receiving a
504 loan but whose growth was dependent on it.

A prime example of this is Bock Pharmacal, a family-owned
small business whose utilization of the 504 program was a catalyst
for tremendous growth. Bock needed to expand its pharmaceutical
sales and distribution business and, through the 504 program, was
able to construct a building in St. Louis County with a down pay-
ment of only 10 percent of the total project cost of $900,000.
Through this program, when the loan was disbursed in 1986, Bock
had net revenues of $3.2 million and 40 employees. At the end of
last year. Bock's revenues had grown to over $71 million and now
employs 350 people.

Bock has also used the program to help purchase a building to
accomodate the growth of its spinoff company, Highland Packaging.
At the time of the loan application, the company had 22 employees
and net revenues of $5.2 million. Today, Highland employs 100
people and had year-end revenues of $23 million. Bock Pharmacal
has been extremely vocal in its support of the 504 loan program
and the incredible role it played in the future success of the com-
pany. And this is, as I said, one of only many examples we could
offer.

In respect to the Small Business Development Centers, I feel
that these important examples of public/private partnerships
should be retained and should have appropriate coordination with
economic development organizations in their respective regions.
The SBDCs would be a perfect complement to our many small busi-
ness development services provided by economic development orga-
nizations.

In addition, I would suggest that the SBDCs be not only allowed,
but perhaps even mandated, to charge a service fee where partici-
pating companies match part of the dollars put up by the centers.
Such a schedule would lower government cost, leverage resources
better, and assure more relevance since businesses would be paying
for a portion of the service provided.

Our organization has enjoyed tremendous success with a similar
prototype we implemented through our region's Defense Adjust-
ment Program. This program was called our Management Assist-
ance and Technology Transfer project or MATT. It helps defense
companies' transition to commercial marketplaces. Business owners
which participated in the program were mandated to match our in-
vestment dollars up to 50 percent. To date, MATT has worked with
companies representing over 5,800 St. Louis employees. Companies
involved in the program have ranged in size from 7 to 2,500 em-
ployees, in age from 2- to 100-years old and in products from ma-
chine parts to highly sophisticated guidance systems. We believe
that the success of the MATT program could be duplicated to
SBDC type operations throughout the country.

The 504 loan program is of great value to our area's small busi-
nesses and the entire St. Louis region. Its elimination would hurt
growing small businesses and, as a result, would cost our region

hundreds of thousands of jobs each year. In addition, the St. Louis
office's consohdation with Kansas City would leave a great void in
our region that would be difficult to fill. Kansas City is a business
day's travel from St. Louis, making face-to-face business dealings
difficult and time-consuming for small business people for whom
time is money. Eliminating such a successful program and closing
such an important office are not the best solutions.

In conclusion, we recommend the continuation of the SBA 504
loan program and the continued operation of the St. Louis district
office. We also urge continuation of the SBDC centers, but rec-
ommend their placement within local economic development orga-
nizations and that a service charge or fee schedule be implemented
in which participating companies match the dollars put up by the
centers. Thank you very much.

Chairman Bond. Thank you very much, Mr. Coleman. I might
note that we have requested information from the SBA on justifica-
tion for their proposal. We are going to take a very careful look at
it and look rather skeptically at it. Let me ask you gentlemen to
comment on some testimony we are going to receive from a very
distinguished witness later on who voiced many small business
problems, including the huge budget deficit which is draining funds
from the private capital market, high tax rates, and the burden of
regulations. Certainly the burden of regulations is one of the things
that we are looking at. He goes on to raise the question that since
less than 1 percent of the millions of small companies ever receive
an SBA loan and the other 99 percent have to pay taxes to support
them, given the deficits we have, how would you justify the con-
tinuation of the SBA?

Now, let's start with you, Mr. O'Donnell. And you all have ad-
dressed that, but in this particular context.

Mr. O'Donnell. Well, I think statistically what was said might
be true. There are many, many, small businesses; but a lot of these
businesses are one-person businesses. When a business grows to a
medium stage, it needs some additional bootstrapping and financial
support, and that is where the SBA comes in to get it over that
hurdle; and perhaps later the SBIC program comes in to further
expand its growth.

Very large companies are not creating jobs. The Fortune 500 has
a net job loss that is highly material in the last 10 years. Jobs are
being created out of small businesses. I hope they get spared. To
take the number of SBA financed businesses in the numerator, and
the total number of businesses in the denominator, does not work
fairly. It skews the perception.

Chairman Bond. Mr. Zielonko.

Mr. Zielonko. One of the ways that we could maybe broaden the
universe would be to lessen an amount of guarantees on a particu-
lar loan. And as I said, we are willing to accept this in the banking
industry given that we have some trade-offs in the expansions to
float these loans.

The second thing I think we should point out is that the govern-
ment is not loaning these funds directly to the borrower. The banks
are using their money to make these investments. And we are just
asking that the government part of the program be involved, much

like an insurance policy, to help us underwrite the collateral risk
involved in the start-up of — in start-up situations.

Chairman BOND. Mr. Coleman?

Mr. Coleman. I would like to speak first to the regulatory issue
of your question of small and medium-sized businesses that we
talked with. If we are having regulatory problems with one type or
another, it is typically with the changing nature — constant chang-
ing nature of regulations. I think most of them would desire that
regulations that are in place stay the same so they could play with
the same set of rules year to year to year rather than having a con-
stantly changing landscape. That is more problematic to them, I
think, than other issues.

On the financing aspect of this program versus many others in
the federal budget, I would just say that I would hope that some
element of looking at the leverage that is created by the variety of
different cuts that they proposed in the federal budget be appre-
ciated and looked at, because this program in particular leverages
such substantial amounts of private sector participation on the
lending side as well as investment on the private business side.
And whatever expenditure there is, there is a significant amount
of payoff, a very direct payoff, in investment in American busi-
nesses.

Chairman BOND. Mr. O'Donnell, you do not believe that the pri-
vate sector funding would be available absent the SBA type pro-
grams?

Mr. O'Donnell. For larger companies where the markets are ef-
ficient, there would be private sector funding. But for smaller busi-
nesses that need smaller amounts of money, more patient capital,
there would be a real problem.

Chairman Bond. You said that you are going to share with us
the outline of the programs to reduce or eliminate the need for ap-
propriations. Do you have any suggestions for us or thoughts on
the direction that is going to be going?

Mr. O'Donnell. As far as the SBIC program, we are putting to-
gether a plan right now to privatize that program. We think that
a federal agency similar to Fannie Mae would be very feasible and
very practical for SBICs. We are going to need some time to do
that. It cannot be done overnight; it would possibly take us a year
to two years.

In the interim, we need to prevent the carpet from being pulled
out from under us. We need to be able to continue our funding
while we execute the plan that I have described. We expect to have
that plan to you and the House Committee within the next few
weeks.

Chairman Bond. We will be looking forward to receiving that.
Mr. Zielonko, you talked about reducing the guarantee at the 50
percent. Now, under your guarantee, are you saying that any losses
would be shared fifty-fifty between the lender and the government,
or are you saying that that 50 percent — are you willing to take the
first 50 percent?

Mr. Zielonko. I think we are. Under the new FasTrak program,
the guarantee would be 50 percent. And part of the parameters of
that are that we participate in any foreclosure proceedings, and we
are very confident in our underwriting capability. All of our loans

that are non-SBA program, we take 100 percent. So we would be
willing to do that.

Chairman Bond. Now, this is one of the areas we are looking at.
More and more, lenders are telling us that if they can do their own
paperwork and we put them at the front of the line in terms of
risk, they are willing to step up. Let me ask you, have you looked
at the fee schedule that has been proposed in SBA reorganization
which will raise the fees and increase the costs of the 7(a) lending
program? Will this have a negative impact on your ability to par-
ticipate in it?

Mr. ZlELONKO. It very definitely would, mainly because these
small loans — I mean, it costs me just as much to make a $1 million
loan as it does to make a $25,000 loan. That is how our systems
are set up.

If we have to give away additional parts of the profit, it makes
it less advantageous to us; and, of course, we have higher risks in-
volved. So I would see it would have a big detriment to the growth
of the program for small businesses.

Chairman Bond. Mr. Coleman, do you have any thoughts on the
new proposal for increasing the fees, particularly on the 7(a) loan
program?

Mr. Coleman. We do not deal directly with the 7(a); but I would
agree with Mr. Zielonko that the fees can be detrimental, particu-
larly at the smaller end of the spectrum, for the businesses. We
have to be cognizant of the fact that we are dealing with people
who do not have a lot of cash up front; that is why they are still
small.

Chairman Bond. You mentioned the SBDC and the charges that
you would propose to make. I have talked to some of the people
who benefited from the SBDC program, and very often it appears
to me that one of the reasons they are working with the SBDCs
is they do not have the resources to get that funding. And does that
concern you? Would a back-end fee or an equity participation, or
minor equity participation, suffice?

Mr. Coleman. There are numerous ways that that could be
structured. The principal issue here is that to have the full atten-
tion of the business and to make sure that from the service deliv-
ery perspective we are being relevant to the business, some type
of charge or fee that is associated with that service is important.

I might add that I am also a member of the statewide SBDC
Board. And we are not just talking about experience in St. Louis;
but the entire statewide program, I think, could, in fact, benefit by
that type of approach. We have seen businesses, who do pay some-
thing into the program. The attention of the CEOs to that service
and the quality of the service they are getting has to be much
greater because they are paying something for that service.

That is the benefit to us as an agency, because I know that the
services we are providing are relevant because the companies are
willing to pay for them.

Chairman BOND. That is a principle I used to apply when I used
to give speeches for honorarium fees. I found that people paid at-
tention a lot more to what I was saying when I collected a fee for
it. Maybe that would have the beneficial impact. [Laughter]

Well, Gentlemen, we very much appreciate your testimony. There
will be a lot of other testimony today; we invite you to stay around
for it. And should you have other thoughts on the issues that we
raise, certainly we would like to have further suggestions that you
think of; and if you have any comments, we would welcome any
further written views or ideas that you have. And that obviously
goes for the other members of our audience today. Thank you very
much for your time and the efforts you put in in making such fine
presentations.

Next I would like to call panel number two. Tessa Greenspan,
President of Farmer's Market; Ramon Gallardo, Founder of Casa
Gallardo; and Virginia Kirkpatrick, President and Owner of the
CVK Personnel Management and Training Specialists.

Ms. Greenspan, could you begin, please.

STATEMENT OF TESSA GREENSPAN, PRESIDENT, SAPPINGTON
FARMER'S MARKET, ST. LOUIS, MISSOURI

Ms. Greenspan. Well, my concern was that you are eliminating
or did want to eliminate Small Business Development Centers.
Without the help from Small Business Development Centers and
St. Louis University, I would not have been able to put my busi-
ness plan together. I submitted my business plan to 10 banks; all
of them approved the loan. With the help from the Small Business
Development Center, I applied for and got a $400,000 loan from
SBA.

Mr. Chairman. Would you mind pulling that microphone just a
little closer to you?

Ms. Greenspan. I now employ 62 people with projected sales of
$700,000 for the first year. Now, this is for my store. I am just one
of many that this program helps. To me, it is quite obvious that
this program pays for its own in two ways: employing people and
taxes generated.

The impact study done by SBDC, Small Business Development
Center, said that for every federal dollar invested in the program
over $7 in increased tax revenues are generated. A cut of $366 mil-
lion for the SBDC program in five years would yield over $2 million
in lost taxes. Why would the government eliminate a program that
pays for itself, creates jobs, and generates revenue?

[The prepared statement of Ms. Greenspan follows:]

SAPPINGTON

11520 GRAVOISRD.

ST. LOUIS, MISSOURI 63126

(314)843 <i36.=5'

FAX (314) 843-1640

March-31, 1995

Senator Christopher S. Bond
Small Business Development Center
8000 Maryland
St. Louis, MO 63105

Dear Senator:

I am writing to express my concern for the total elimination
of federal funding for the SBDC program in a document from
Representative John Kasich's office entitled "Illustrative
Republican Spending Cuts" dated March 15, 1995.

Without the help from Ginni Campbell of SBDC I would not
have been able to put my business plan together.

With the help from SBDC I applied for and got a $400,000.00
loan from SBA and now employ 62 people with projected sales
of $7,000,000.00 the first year.

I am just one of many that this program helps.

It is quite obvious that this program pays for itself in
two ways; employing people and taxes generated.

The SBDC is not a bureaucratic program; it has local
administration and control.

In 1992, consultation with SBDC resulted in the creation
of 2,574 new jobs .

Why would the government eliitiinate a program that pays for
itself, creates jobs and generates revenue?

Please respond to this question.

Thank you.

f Tessa Greenspan /
President

TG/djl

Chairman Bond. Thank you very much. Mr. Gallardo.

STATEMENT OF RAMON A. GALLARDO, FOUNDER, CASA
GALLARDO RESTAURANTS, ST. LOUIS, MISSOURI

Mr. Gallardo. Mr. Chairman, I strongly appreciate the oppor-
tunity to make the following statement in regard to the 7(a) pro-
gram. In 1974, I approached several loan officers of numerous lend-
ing institutions in an effort to obtain financing to open a res-
taurant.

I had been working in the restaurant industry for the previous
13 years, and I felt that I had the capability of going into business
for myself.

I prepared a business program which I presented to a number of
banks, and they all thought I had a great idea, my presentation
was wonderful, and the numbers made sense, but did not think
they could lend me the money. And, again, after turndowns and
many frustrating experiences, the Small Business Administration's
name came into the picture. With the help of a young loan officer
at the West Port Plaza Bank, Gary O'Neal, I applied for an SBA
loan in the amount of $160,000.

Within a couple of weeks, the loan was approved. First of all, I
was shocked as to the quickness in which everybody moved. And,
again, the loan was approved in 1974. I opened my first Casa
Gallardo Restaurant in April of 1975. It was so successful that I
was able to repay my loan in full within 18 months.

While in the process of expanding the concept to a second and
third location, a conglomerate by the name of General Mills came
along and offered to buy the company with plans to expand the
concept. After months of negotiations, I agreed to the sale; and
Casa Gallardo became a subsidiary of General Mills. I remained
president of Casa Gallardo to oversee its expansion. It grew to 38
restaurants and $60 million in sales, employing 3,000 people.
These restaurants are located in the Midwest and throughout the
Southeast.

My involvement with General Mills ended in 1986. Since then,
I have opened other businesses with my partner Pat Hanon. He
was an employee at the Henry VIII Hotel at the time, and I talked
him into joining me to open the first restaurant, Patrick's, in West
Port Plaza.

Now, at that time, he was making a six-figure salary being the
general manager of food and beverage at the Henry VIII Hotel, so
he took a big chance in quitting his job and joining me in the ven-
ture of owning Patrick's Restaurant.

After that partnership with Patrick's, we went on to open other
businesses; and we currently jointly and/or individually have
opened the following restaurants: Patrick's — two Patrick's Res-
taurants, Ramon's Jalapeno, Bevo Mill, Ozzie's Restaurant and
Sports Bar, Joe Hanon's Restaurant, and the Radisson Hotel. We
are also part owners and on the board of directors of the Commer-
cial Bank of West Port, which has assets of $60 million.

These establishments generate approximately $20 million in
sales annually, employing over 1,000 people excluding the Commer-
cial Bank of West Port.

It is hard to imagine that all of these started with one small
$160,000 loan mostly guaranteed by the Small Business Adminis-
tration 20 years ago. The SBA continues to help small businesses
to secure the necessary capital needed to stimulate the economy
and provide additional employment.

The Small Business Administration's confidence in my Mexican
concept changed my life and, in turn, altered the lives of many
other people. Several have called this the "American Dream". I call
it a miracle, because I do not believe that this would have hap-
pened in any other place in the world other than this great coun-
try.

Anything I can do to support the Small Business Administration
will never be enough for all that it has done for me and my family.

So, Mr. Chairman, I strongly thank you for this unique oppor-
tunity to allow me to express my views on behalf of the SBA.
Thank you.

Chairman BOND. Thank you very much, Mr. Gallardo. Ms. Kirk-
patrick.

STATEMENT OF C. VIRGINIA KIRKPATRICK, OWNER, CVK PER-
SONNEL MANAGEMENT AND TRAINING SPECIALISTS, ST.
LOUIS, MISSOURI

Ms. KiRKPATRlCK. Thank you. I represent myself as a small busi-
ness person with a company that is about 12 years old, CVK Per-
sonnel Management and Training Specialists. I am also the train-
ing director for a joint program by the National Association of
Women Business owners and the SBA, where we raise private
funds to train women entrepreneurs in the St. Louis area.

I am also director for Allegiant Bank, which is a community
bank with assets of $210 million. We have also made about 20 SBA
loans in the last year; we are very active in the LowDoc program.

And I am also on the board of St. Louis Steel Products, a com-
pany which reopened Missouri Rolling Mill after it had been closed
and then moved to Hazelwood with the help of a 504 loan and em-
ploys about 40 people; it is about $12 million in revenue. And that
company also received help after the big flood of 1993 with the
flood program through a low-interest loan.

I am also Chair of the Capital Formation Committee of the Mis-
souri Delegation to the 1995 White House conference. So my knowl-
edge is really a first-hand knowledge of how the SBA programs
have worked.

I do not have to build a case for the need for small businesses
to be able to get money. I think that has been adequately made
here. Nor do I think I have to remind everyone that small busi-
nesses were creating jobs when large companies were laying them
off. I believe seriously that without programs like the 504, the 7(a),
the LowDoc program, the women's business loans, that many
banks would not make those loans.

In a small community bank like Allegiant Bank, we are able to
make an SBA loan, sell the guaranteed portion of that loan in the
secondary market, and use that money to make another loan. So
it helps our liquidity position a great deal when a small bank has
limited amounts of money to loan.

From the grass roots level, I think that the LowDoc program was
one of the most successful programs I have seen. Let me just give
you an example. Working with the NAWBO-SUCCESSawy and
SBA training programs and counseling program, Gertrude's Beauty
Salon, which is located in North St. Louis at 5367 St. Louis Ave-
nue, was able to obtain a LowDoc loan to finish renovation of two
buildings in an area of St. Louis that very definitely stands out in
those two new renovated buildings.

Joyce Sullivan took over the family business after her sister was
shot by a random bullet coming through a kitchen window as she
was sitting at the table helping her children with their homework.
So she was forced into that position; and as she came in, she
dreamed that she might be able to renovate the buildings and grow
the salon and employ more people and open a beauty products
business which would be minority-run.

But when she went to the bank, they said: You have a credit
problem. Because you do not have a good credit background, we are
not going to be able to make you a loan. She was referred to us
at the NAWBO-SUCCESSawy training program. I was able to
help her get a small loan to finish the renovation in the beauty
salon; and then when the LowDoc program was announced, she
was able to get a $50,000 loan.

I realize that these are small amounts of money that I am talk-
ing about, so it does not sound the same as venture capital. But
to a family and to the 10 people who work there, those are opportu-
nities that would have been lost without that opportunity.

I certainly believe that help at the right time is extremely impor-
tant for small businesses; and I think that without such programs
such as SBA and certainly without the help that the SBDC gives
and that the NAWBO-SUCCESSawy training program gives,
some people would not be able to know even what to do and would
be very despondent, I think, when they cannot get help.

I believe the national budget should be balanced, and I certainly
do not have all the answers. But I am very concerned that we —
that we not have a transition period, where we can plan and work
to cover for areas that are being taken out of the budget. I think
that the SBA has worked best in the field, not in Washington. I
think when you begin to think about taking people out of the field
who work at the grass roots level, something has to take its place.

So I appreciate the opportunity to give you some background,
and I certainly hope that any transition that is made is going to
be orderly enough that we do not destroy the help that has been
available to small businesses.

[The prepared statement of Ms. Kirkpatrick follows:]

SENATOR BOND'S OFFICE
SMALL BUSINESS COMMITTEE HEARING

Testimony of C. Virginia Kirkpatrick

Owner: CVK Personnel Management & Training Specialists

Founded in 1983 : Consult primarily with small businesses in
Human Resource Management field: Provide consulting
services in all areas of HR Management; write supervisory
manuals and provide training for supervisors; develop
policies, procedures and programs to utilize human resources
more effectively.

Training
Director:

SUCCESSawy Training Program conducted in St . Louis
Metropolitan area with funding assistance of the Small
Business Administration. Conduct training classes and
consult with women who want to start or grow a business.
Approximately 3 00 women go through the program annually.

Bank Investor and director of Allegiant Bancorp which has five

Director banking locations in Missouri - a small business with
approximately 210,000,000 in assets. Member of the
executive loan committees of the St. Louis Bank.

Board St. Louis Steel Products, Inc. A St. Louis manufacturing

Member & company employing 40 people. Reopened closed company -
Director Missouri Rolling Mill and were able to make move when forced
out of the city by "shopping center," reopened a GM
plant using the SBA 504 loan program. The company also
received a disaster loan following the big flood of 1993.

Chair of the Capital Formation Committee of the Missouri Delegation to
the 1995 White House Conference on Small Business .

My first hand knowledge of the SBA has been through the direct loan and
loan guarantee programs, as well as through the training program we are
able to provide for women who want to open or grow a business in the
St. Louis Metropolitan area.

I don't believe I have to build a case for importance of available
capital to meet the need of small businesses; nor do I need to
establish the importance of small businesses to our economy. The
recovery is still new enough for all of us to remember that large
corporations were laying off people and small businesses were creating
all the new jobs. High unemployment may be just a memory to some, but
to the unemployed, it will never be forgotten!

From my experience on a loan committee reviewing and approving loan
requests, I know that many loans to small businesses are more
attractive to the bank because of the SBA guarantee. The ability to
sell the guaranteed portion of the SBA loan on the secondary market is
an added attraction for banks making SBA loans. And, private investors
are more willing to invest in a small business when they know that
capital for expansion is obtainable from the bank. That's how the
capital is formed!

From the grass-roots level, the Low Doc Loan Program was extremely
helpful and successful if its purpose was to encourage economic growth.
An example may illustrate better than words how helpful the Low Doc
loan program has been:

Gertrude's Beauty Salon is located in North St. Louis at 5367 St.
Louis Avenue. The salon has been at that location for 30 yrs . and was
started by Gertrude Mooring. As Gertrude's health failed, her
daughter took over the operation of the salon. After that daughter was
shot by a stray bullet which entered thru the window and killed her as
she sat at the kitchen table helping her children with their homework,
Joyce Sullivan had to step in and run the family business.

Joyce had dreams for renovating the two buildings owned by the family,
growing the salon and establishing a minority owned beauty supply
business in the second building. With her savings of $30,000, she
started the renovation. When all her money was gone, and the job
wasn't finished, she came to the bank to get a loan. Since she had a
blemish on her credit record which was a carry-over from her recent
marriage and the credit problems they had-, Joyce was not eligible for a
loan .

The bank referred Joyce to me and the NAWBO-SUCCESSawy Program. She
was very discouraged and felt all she had tried to build would be lost.
By agreeing to guarantee a loan, I was able to help Joyce get a small
loan to finish the renovation. After the Low Doc Loan Program became
available, Joyce applied using her renovated buildings and revenue
stream as collateral and was able to get a $50,000 loan to finish the
building and start the beauty supply business. Both businesses
together will employ about 10 people.

Help at the right time helped to keep a family business going, provide
employment to 6 people and renovate two buildings which became a bright
spot in a critical area of the city where decline and decay is the
norm. I continue to consult with Joyce when she needs my help. I
don't believe she would have been able to continue without some
guidance and assistance.

I can give other examples of how the SBA Loan Programs have worked for
small businesses and especially for women owned businesses if time
permitted .

I believe the national budget should be balanced; however, I don't
believe that will happen by destroying the vehicles and means of
assistance provided by the SBA Loan Programs. Loan guarantee programs
are not "give-aways," they are at the heart of capital formation made
available to small businesses - and small businesses provide jobs and
income for people who in turn pay taxes to support the government.

The SBA works best in the "field," not in Washington. I sincerely hope
that Congress and the President will preserve the "grass roots"
assistance provided to small businesses (including women owned
businesses) by the SBA.

Chairman Bond. Thank you very much, Ms. Kirkpatrick. Let me
ask all of the witnesses to comment on that. Currently, the top in-
terest rate on the SBA loans is prime plus two and three quarters
percent. Now, compared to other asset-based lenders or commercial
finance company sources, do you feel that you could have gotten
your start if there had been a higher charge for an SBA loan or
a higher interest rate or more upfront fees? Would that have — well,
let me start with Ms. Greenspan.

Ms. Greenspan. Well, more upfront fees? I run a business that
has a very small markup; so when we are talking about more
upfront fees, no, I would say not. As far as my paying — ^Are you
saying me paying?

Chairman Bond. Yes. Somebody has to

Ms. Greenspan. Right.

Chairman Bond. This is one of the proposals SBA has made to
increase the fees and the charges both on the lenders and on the
recipients of the loans.

Ms. Greenspan. Well, I think if you have to — if there is no other
source, then you would have to; but I think it would be detrimental
to many businesses.

Chairman Bond. If there had been a fee, as has been suggested,
for the work — the assistance of the SBDC, which you highlighted
as being very important, do you think you would have been able
to come up with that fee?

Ms. Greenspan. Well, I possibly could have, but there are many
that could not.

Chairman Bond. Mr. Gallardo, what do you think about these
reform proposals?

Mr. Gallardo. Well, I think that this fee could be built into the
overall loan and paid over time.

Chairman BOND. Uh-huh.

Mr. Gallardo. I think that would probably be the easiest way
for somebody starting out a business to pay. On the other hand, if
worse comes to worse, I think when somebody starts a business —
I was willing to pay an individual that would give me a loan, 4 per-
cent of the overall loan just so I could get that loan. And as a mat-
ter of fact, that is how I happened to find out about SBA. He was
going to help me along to SBA. Then when I found that out, I went
over to apply myself

But nonetheless, I was ready to pay that 3 to 4 percent because
I was so desperate to get that loan, being that I was not able to
get it anyway.

On the other hand, I suppose when you talk about fees made to
the lender, you said, again, I think that if those fees were to be
spread over the life of the loan, I do not think that would be overly
critical to the lender.

Chairman Bond. You were not able to get private sector funding
then in 1974? You could not find any place to get that?

Mr. Gallardo. No.

Chairman Bond. Do you see any changes in the market that
might make lenders more likely to lend to start-up businesses, to
entrepreneurs? In other words, do you still feel, notwithstanding
the concerns raised by those who argue that the rest of the busi-
nesses are subsidizing 1 percent, do you still feel that there is

Mr. Gallardo. I do not think that I see any change, particularly
in my industry. Because when somebody approaches a bank, the
bank wants the collateral. There is no question about it.

And as far as the restaurant, the collateral is so untangible be-
cause of the license and use improvements. And, of course, a lender
cannot recoup, cannot resell those loan improvements should the
loan go into default. So it is extremely difficult to find the loans
out there to build a restaurant. Even if you have 50 percent of the
overall capital, I doubt very much that a bank would lend 50 per-
cent on these loan improvements and equipment.

So, yes, to answer your question.

Chairman BOND. Ms. Kirkpatrick.

Ms. Kirkpatrick. Well, I see that fees rolled into the total loan
proceeds paid back with the interest and principal of the loan are
very feasible. I think that if you said to Joyce Sullivan "you have
got to have fees of 2 to 3 to 4 to $500 or you cannot get this loan",
that is prohibitive. That will not work. But I think fees rolled into
the total proceeds of the loan would work and are feasible.

Chairman BOND. One of the suggestions that has been raised, I
believe, by some of the people working on the White House con-
ference group was to privatize the SBA loan function. That has
been suggested before along the lines of Fannie Mae or Freddie
Mac. Have you been involved in those discussions?

Ms. Kirkpatrick. Yes.

Chairman Bond. What are your views on those?

Ms. Kirkpatrick. Well, I think that is difficult to look at. I think
it could be done, and I think that we have a model to follow in
order to do that. My concern is that that is going to take some time
and that it sounds like in Washington we are looking at we have
to do it tomorrow. So therefore, all of a sudden there is not going
to be anjrthing, and there is going to be kind of a void.

In the long run, I think it could be done; and we are going to
certainly come up with a resolution at the White House conference
to that end.

Chairman Bond. Do you think without the collateral — I guess
the big question in the lack of collateral is the common feature. If
you tried to securitize a portfolio of small business loans, do you
see that package beingsaleable when the purchaser has to bet on
the success of enough of the businesses to cover the failures on oth-
ers where there is not collateral?

Ms. Kirkpatrick. No, I do not. I think that — that the reason you
can securitize a loan is because of the guarantee for some portion
of that loan, not because of a collateral that is there. Because that
is really one of the typical things that small businesses — especially
women-owned businesses — in start-up phase or even in growth
phase often do not have the collateral to back up the loan.

And at St. Louis Steel Products, if it had not been for the guar-
anteed portion of the loan, there would not have been private in-
vestors who were willing to put their money into that as well. So
I believe there has to be some sort of guaranteed portion.

Chairman Bond. Mr. Gallardo, you have obviously become very
sophisticated in finance.

Mr. Gallardo. Oh, no. No. [Laughter]

Chairman Bond. What is your view of the possibihty of
securitizing loans and really moving the SBA out of the direct
guarantee process? Do you think a securitized portfolio could be
saleable?

Mr. Gallardo. Well, again, I think that Fannie Mae is an exam-
ple of that; but I think it could work. And I guess it would be —
are you saying it would be taken out of the government's hands
and be in the private sector? But likewise, I agree with Ms. Kirk-
patrick that we need an answer today. And I think that we hate,
to jeopardize the SBA and we understand that we need to balance
the budget and what have you; but, my God, the SBA has been
such a key element in creating so many businesses in general.

Chairman Bond. Ms. Greenspan, any comments on that?

Ms. Greenspan. Well, personally, I could not have gotten a loan
unless the SBA was backing me. That is my personal opinion. I
had some collateral but not enough to warrant $40,000.

Chairman Bond. Well, again, my sincere thanks to all of the
members of this panel. This is a question that obviously is going
to be considered at the White House Conference, and we will look
forward to hearing your work at that conference. And also we wel-
come your comments as this discussion continues, as we see how
various reforms would work and what might be the best means to
assure that that patient long-term capital continues to be available;
which certainly, I think, is of vital importance. Thank you very
much.

Now, I would like to call forth Robert James Cimasi, President
of Health Capital Consultants; Professor Murray Weidenbaum,
Chairman of the Center for the Study of American Business at
Washington University and the real expert on the issues of regula-
tion and economy; and Dr. Robert H. Brockhaus, Director of Jeffer-
son Smurfit Center for Entrepreneurial Studies and the Coleman
Foundation Chairholder.

Welcome, Gentlemen. We are delighted to have all of you with
us. Let's start with Mr. Cimasi.

STATEMENT OF ROBERT JAMES CIMASI, CBI, CBC, PRESIDENT
AND FOUNDER, HEALTH CAPITAL CONSULTANTS, INC., ST.
LOUIS, MISSOURI

Mr. Cimasi. Senator, thank you for the opportunity to address
you today. My name is Robert James Cimasi. I am president and
founder of Health Capital Consultants, a health care consulting
firm of approximately 20 employees headquartered here in St.
Louis, Missouri. I believe that some of the budget cuts and restruc-
turing being proposed for the Small Business Administration may
result in a negative impact on job growth on the U.S. economy.

The SBA provides guarantees to lenders on loans they make to
small businesses. We know that small business dominated indus-
tries accounted for 71 percent of the jobs created between June of
'93 and June of '94 and that the service sector of small businesses
has experienced the greatest growth.

Overall, businesses that have employed less than 20 people, and
that is 85 percent of all businesses in the U.S., create more jobs
than the Fortune 500 companies. So even with the slowing growth
of U.S. economy, small businesses continue to be a significant driv-

ing force behind the expansion of job opportunities with the service
sector continuing to lead the way.

Often, those service sectors of small businesses find it difficult,
if not impossible, to obtain from private sector lending sources, the
capital needed to sustain their growth or finance their expansion.
The expansion they need to remain competitive in the market.
Even after two to five years of operation, many service businesses
will have operated successfully but not yet thrown off sufficient ex-
cess cash flow to internally fund necessary investments to meet the
demands of their market.

Commercial lenders in the private sector typically offer asset-
based lending programs that are designed to fit the program of a
small business with a significant tangible or hard asset base. Sig-
nificant hard assets are not a characteristic that is often found in
small service section businesses.

Service businesses require capital to invest in people, their em-
ployees' education, their training, their technical skill-sets, and the
professional development that is a service business engine for fu-
ture growth and improved productivity. These people-oriented, em-
ployment-focused investments are both intangible and are often, by
nature, a long-term investment, the benefits of which may require
a longer period of time to be fully realized than a similar invest-
ment in hard assets.

If we invest in a drill press or pallet machine, that investment
is placed on the balance sheet as a hard asset. If we invest in a
graduate student with a master's in health administration from the
University of Missouri or Washington University, the investment
in their professional development is often not listed on the balance
sheet.

At the same time, service sector small businesses do not have the
same type of access to the capital markets of Wall Street or invest-
ment bankers or venture capitalists as do larger businesses; and
those that do turn to the equity market or seek financing from ven-
ture capital may often find their plans for continued long-term
growth are complicated or thwarted by demands for more imme-
diate returns on investment.

Our firm works within the health care industry, an industry that
represents fully one-seventh of the U.S. economy. We are experi-
encing dynamic, almost turbulent, changes in the health care sys-
tem. In the new health care paradigm, cost containment measures
and other market forces are driving a massive movement from in-
patient services to outpatient and ambulatory care services as well
as a significant growth in the home health sector.

This is both a challenging and exciting time in health care, a
time that is both compelling the significant consolidation and re-
structuring of traditional provider entities, and at the same time
providing almost boundless opportunities to start-up small service
sector businesses. As hospital consolidations and mergers force lay-
offs and significant reductions in the number of service jobs, the
importance of new start-up businesses and the expansion of estab-
lished health care service sector businesses become all the more
important to pick up the slack in employment.

The capital formation needs of these small service businesses are
not likely to be met through private sector commercial lending

sources or other sources related to the venture capital and equity
markets. It is in this area and for these reasons that the loan guar-
antee programs of the Small Business Administration are most vi-
tally needed and must continue.

To be most effective, the total financing of the SBA should be ex-
panded, not reduced. The growth of small businesses and their ex-
pansion of higher-paying jobs allowed through SBA programs has
historically been a successful investment for the United States tax-
payers. It is an investment that should be continued and should
grow.

The loan application and origination process should continue to
be simplified and expedited, and I believe significant gains have
been made in this direction over the past several years through ef-
forts such as the LowDoc program and the Preferred Lender Status
program that the SBA has put into place. The SBA lending pro-
grams should avoid, if possible, raising barriers to the program
such as charging lenders, and thereby borrowers, with higher guar-
antee fees or annual points on outstanding loan balances, because
the impact on service sector small business borrowers may be to
shut them out of the program at a time when the U.S. economy
needs to have these businesses aggressively pursue more growth,
more expansion, and higher paid salaries; not less.

Finally, while some adjustments and revisions in some specific
areas within the SBA's range of programs may need to be ad-
dressed and revised, the overall intent of the program should be
preserved and enhanced. SBA programs make sense for small busi-
nesses. They especially make sense for small service sector busi-
nesses which are still driving job growth, better paying job growth,
even in a slow U.S. economy.

SBA programs make sense for the U.S. taxpayer because the pro-
grams work by helping to put U.S. taxpayers to work. SBA pro-
grams are proof that not all of government is bad. As one of the
smallest agencies in government, the SBA operates, in effect, as a
profit-based business itself, creating jobs and taxes and allowing
American taxpayers to make a profit on the programs.

Senator Bond, I urge you and your colleagues to support and en-
hance the SBA's important role for small business in America.
Thank you.

Chairman Bond. Mr. Cimasi, I am glad to hear the power the
government has had. It is kind of a relief. [Laughter.]

But now it is a real pleasure to turn to an old friend. Professor
Weidenbaum. Welcome.

STATEMENT OF PROFESSOR MURRAY WEIDENBAUM, DIREC-
TOR, CENTER FOR THE STUDY OF AMERICAN BUSINESS AT
WASHINGTON UNIVERSITY IN ST. LOUIS, MISSOURI

Professor Weidenbaum. Thank you, Mr. Chairman. It is a real
_ pleasure to be here. And, yes, I am the heavy that you quoted ear-
^ lier.

X Chairman Bond. I figured you could handle it. I thought I would

let them get their cracks in so you could answer when you came.

Professor Weidenbaum. Thank you, sir. And it is true that most

small businesses do not get any benefit from the SBA, but that is

not the point I want to make primarily. It is that small business

has a rough time getting capital financing. You have to ask,
though, "Why?"

Well, it turns out, among a number of concerns, the Treasury
takes off the top the great majority of all the investment capital
generated in the American economy each year. So if you really
want to benefit not the 1 percent but 100 percent of small busi-
nesses, the obvious thing to do is to reduce those triple digit budget
deficits. And that is where the problem arises.

As you may know, I literally grew up in Harry Truman's Budget
Bureau, so I have been witnessing how budgets grow over the
years. And unfortunately, no disrespect to my fellow witnesses, but
what we have seen here is typical. Every time the Congress tries
to cut any government spending program, the people who benefit
from that program come in en masse and say: This is a terrible
thing you want to do. This is a valuable program. Why don't you
cut the other fellow's program that is full of waste, fraud, and
abuse or whatever?

Well, every program has its beneficiaries. The result is the awe-
some budget deficits that we get today. The National Federation of
Independent Business took a very recent survey of small busi-
nesses, asking them: WTiat are the serious problems on your mind?
The lack of government subsidy, a lack of government help was not
on that list. On top of the list was high taxation and high regula-
tion, and those are two things that are the responsibilities of the
federal government.

That is why I urge you, Mr. Chairman, and the members of your
committee to seriously consider what government could do to re-
duce the burdens of small business; not the relatively few lucky
ones who benefit from the SBA programs, but the whole array of
the millions — literally the millions — of small businesses.

Because if you look at government in its role of helper of small
business today, what I find very frankly is the phenomenon of
something like the dumb motorist who has one foot on the gas
pedal and the other foot on the brake at the same time. The advice
obviously is if you want to move ahead, get your foot off the brake.
And unfortunately, it is the heavier pressure of the government
that is on the brake these days; so that no doubt it is going to be
rough on the beneficiaries of SBA if you tighten the belt by cutting
their budget along with the budgets of all the other federal spend-
ing agencies.

But that is how you truly will help create a vibrant growing
small business sector. Thank you very much, Mr. Chairman.

[The prepared statement of Professor Weidenbaum follows:]

Government Policy and Small Business Financing

by Murray Weidenbaum

Federal government policy for financing small business reminds me of the motorist
who puts one foot on the gas pedal and, at the same time, puts the other foot on the brake. I'll
explain the situation briefly and then show a way out of this dilemma.

Background

First of all, the sad fact is that new and small businesses are the marginal borrowers in
the U.S. economy. They are always hurting for financing. In contrast. General Electric gets
the funds it needs; sometimes it has to pay more. But especially during times of tight credit.
Specific Electric gets rationed out.

Unfortunately, current government policy makes this situation more difficult for small
business. For example. Treasury financing of huge budget deficits drains away a large portion
of the funds in capital markets, making even tougher the competition for the remaining funds.
High tax rates reduce the amount of retained earnings that can be reinvested, reinforcing the
dependence on borrowed money. High capital gains taxes discourage potential investors in
risky new and small companies. In addition, a wide array of regulation and mandates make it
less likely that the small enterprise will make a go of it in the first place.

There literally are economies of scale in complying with government directives. Giant
General Motors pretty much fills out the same forms and meets the same requirements as small
Specific Motors. The result is that the cost of regulation is a much higher percent of sales for a
small company than for its larger competitors.

Murray Weidenbaum is Director of the Center foi the Study of American Business at
Washington University in St. Louis. This text is from his testimony to the U.S. Senate
Committee on Small Business on April 12, 1995 in St. Louis. The views expressed are his
own.

While regulatory flexibility was supposed to provide small business relief in this area,
little relief has actually taken place. In some instances, small firms are exempted from
reporting requirements, but these are the exception and not the rule. Ironically, even this relief
can work against small firms, placing a "glass ceiling" over their employment gnwth in order
to avoid the high regulatory costs that kick in with the fiftieth employee.

There is good reason for focusing on taxation and regulation. The recently released
survey by the National Federation of Independent Business shows that small companies believe
that, by far, taxes and regulation are the two most important problems facing them.

Changes in Public Policy

It is not surprising, in light of this situation, that the federal government is continually
being urged to do something special for small business. That is the basic justification for the
expenditure and credit programs of the Small Business Administration. Frankly, there is a
basic problem with pushing that approach too far. Specifically, less than 1 percent of the
millions of small companies ever receive an SBA loan. The other 99 percent pay the taxes to
support the program. Moreover, given the deficit problem, every dollar for a higher SBA
budget means another dollar not available in private credit markets.

What should be done? The federal government should take its big foot off the brake.
It needs to reduce the deficit, reform the tax system, and streamline government regulation.
Progress on these three fronts will do far more to ease the financing burden on small business
than any special purpose legislation aimed to help small companies.

I'd like to offer a few comments on each of these points. As an old budget cutter, I
remember Harry Truman saying that he never saw a budget that could not be cut. In that
spirit, no federal program should be "off the table." Congress should look for soft spots in
every department and agency — with no exception.

As for tax policy, we need genuine tax reform. Senators Pete Domenici and Sam Nunn
have been developing a savings-exempt income tax and a companion business cash flow tax.
Their proposal eliminates 80 percent of the provisions of the income tax law and relieves the
tax burden on saving and investment.

As for regulatory reform, the requirement for benefit/cost analysis now being
considered by the Senate is exactly the medicine this doctor ordered. Rules that generate more
cost than benefit do not make sense.

These three sets of actions are needed to create the economic conditions whereby small
companies can generate and attract the capital that they so badly need.

My final point is the standard advice that I give to congressional committees, "Don't
just stand there, undo something."

Chairman Bond. Thank you very much, Professor. We did hold
a hearing this morning in Kansas City on regulatory burdens, and
we will be holding one tomorrow in Memphis and tomorrow after-
noon in Cape Girardeau. Cape Girardeau will be featuring agri-
business and regulatory burdens. But dealing with the burdens the
government places on business is going to be one of the functions
that we will pursue in this Committee.

Well, Dr. Brockhaus, you have had the benefit of all of the testi-
mony before you, so I am sure you can tailor your remarks to deal
with all of the questions that have been raised.

STATEMENT OF ROBERT H. BROCKHAUS, PH.D., COLEMAN
FOUNDATION CHAIRHOLDER IN ENTREPRENEURSHIP, AND
DIRECTOR, JEFFERSON SMURFIT CENTER FOR ENTRE-
PRENEURIAL STUDIES, ST. LOUIS (MISSOURI) UNIVERSITY

Dr. Brocpoiaus. Thank you, Senator. I do want to apologize up
front for the brevity of my comments. I did not learn of this until
Monday afternoon.

Chairman Bond. I know of your long-time work in this area, and
we are very delighted you could join us.

Dr. Brockhaus. Well, thank you. To my esteemed colleague, Dr.
Weidenbaum, being in his institution as his guest today, I should
be very polite to him. But as an alumni of Washington University
where I earned my Ph.D. in a building right across the way, I
imagine he should be very nice to me. [Laughter]

I did establish the Missouri SBDC program, as you know—you
were at our dedication — which I served as the state director on an
interim period. I also served as the national president of the Small
Business Institute. A number of people may not be familiar with
that program, but that is where university students provide free
one-on-one consulting to various small businesses.

I have been a delegate to the 1986 White House Conference on
Small Business and will be going again this summer as a delegate
from Missouri.

I share the concerns and agree with Professor Weidenbaum that
the interest on the national debt acts as a foot on the brake pedal.
That is something that I think is very, very, very detrimental to
the long-term growth and vitality of the small business and entre-
preneurial communities m this country.

But the foot is on the brake; and until somebody really takes
that brake off, the small businesses are the ones who feel the pres-
sure of that brake the most. There needs to be some type of release
mechanism. And that is what I see the current SBA financing and
management assistance programs doing today.

But I would like to address these issues in a more general sense,
if I might. Venture capital is an area that has received a lot of in-
terest; but I do not think too many people realize that less than
1 in 1,000 small businesses in the start-up phase receive venture
capital from formal venture capital firms. More venture capital is
provided through informal private investors — wealthy doctors, re-
tired entrepreneurs, etc., who seek to invest in someone else's busi-
ness. Approximately 12 in 100 start-up businesses receive this type
of informal capital which accounts for about 18 percent of the cap-
ital they receive.

When businesses are small, many get funding from the type of
SBA programs we have heard described earlier this afternoon. The
venture capital firms come in when the amount of money that a
business needs typically is $1 million or more. But there is a gap
that exists from around $500,000 to $1 million. Those gaps vary by
industry and by particular circumstances of the business.

But that is a general area where it is very, very hard to generate
funds if you are growing a successful business. You probably have
gotten all of the funds available from friends or relatives for equity
investment. Banks say you have too much debt compared to the
amount of equity you have, so they are not interested in funding
you. The venture capital people can manage one large investment
easier administratively than two or three smaller investments, so
they are not interested. That is a gap that is very hard for the
growing businesses to jump.

The people who have provided most of the money for this gap are
informal private investors — or angels, as they are referred to. I be-
lieve that is an area that receives insufficient attention today.
There are tax incentives that could help encourage more of these
types of people to become involved. Indeed a marketing effort to
match those businesses that need this amount of money with peo-
ple who are willing to invest these amounts could greatly benefit
growing businesses.

Finally, I would like to talk a little bit about the role of venture
capitalists after they make investments. Out of 10 investments
that venture capital people do make after a great deal of due dili-
gence and careful analysis, 2 will fail; 5 out of 10 are going to sort
of break even — they never make a lot of money; they never lose a
lot of money — 2 out of 10 are fairly profitable; and the profits of
those pretty well offset the losses of those that failed, leaving only
1 out of 10 that is very profitable.

So venture capitalists, while we may think of them as "vulture"
capitalists at times, really do have a position that is not as lucra-
tive as many of us might think. Their position on the boards of di-
rectors of these growing organizations can be useful. Typically, ven-
ture capitalists plan for their investments to last from five to seven
years returning in some form after that.

Entrepreneurs believe the nonfinancial value of this advice is a
mixed blessing. Some believe venture capitalists have provided use-
ful, helpful information. Others do not think they added that much
to the management of the business.

One last comment. Senator, you raised the question about the 1
percent who receive SBA assistance versus the 99 percent who do
not. That reminds me of the olden days when an army would be
going into battle. In front of that army was someone carrying the
flag, the standard symbol of that country or that army. They did
not have a gun, they did not have a sword; but they were there
representing and encouraging those who were behind. That is the
role of the SBA and some of the programs that we have heard dis-
cussed this afternoon. That they are standard bearers; they are the
ones who are encouraging that other 99 percent to follow.

I firmly believe in what the SBA programs can offer. I know per-
sonally, having been in the administrator's office more than once
in Washington, that there is an opportunity for significant improve-

ment in the administration of the SBA both nationally and nation-
ally on a local level. But the image and the importance of the SBA
organization is very important to our entrepreneur businesses.
Thank you.

Chairman Bond. Thank you very much, Dr. Brockhaus. Mr.
Cimasi, we are going to have to make some cuts, and we will make
some cuts, in the Small Business Administration funding. And I
think you said that you felt that raising the fees at the front end
would have a harmful effect on the businesses that need this cap-
ital. What would you suggest? Where can we make savings? What
can we do to take care of the need that you see but reduce the com-
mitment of taxpayer dollars?

Mr. Cimasi. Senator, if those costs can be built in at the end of
the loan, that might help — or spread out over that period of time.
But I think there are some programs in place that might be the
key to that. First of all, I think that the Preferred Lender program
and cutting back the amount of paperwork, I think the consolida-
tion of offices, is maybe not a bad idea. In the days and age of over-
night couriers and fax machines and those types of things, perhaps
not as many offices are going to be required. Having local institu-
tions do a lot of the loan origination may cut back on costs.

Ultimately, though, I think it is better to shrink the costs of
doing that than to allow the costs to remain the way they are and
then pass those on to the folks that need the capital. Because I be-
lieve that raises a barrier that prevents some of them from being
able to utilize the loan.

Chairman Bond. What would you say in response to Professor
Weidenbaum's testimony about the need to get all of government
spending down and that would thereby release the capital needed
in the private sector to take care of the kinds of businesses that
you have described, particularly in the service area?

Mr. Cimasi. Senator, in all due respect to the Professor's com-
ments, all of us would like to see the burden of government taxes
taken down, and all of us would like to see more capital awarded
to small businesses as opposed to paying off the deficit. I will say
though that I do not have an SBA loan for my firm, but I do not
begrudge — and I pay taxes — I do not begrudge the firms that do be-
cause I do business with them and they generate jobs and there is
a ripple effect that goes through the economy.

So the response of that is, clearly, if we can cut the costs of the
program down and not raise barriers, I would do that; if we can
make more capital available by lessening government, I think all
of us are in favor of that. I think specifically though that I look at
it as saying this is generating new businesses and hiring new peo-
ple; it is creating more opportunity for my firm that would not be
there had the SBA not been there to help these folks form their
venture. I do not mind paying that — whatever small amount of
taxes we all do to support that 1 percent.

Chairman Bond. Professor Weidenbaum, what do you think of
utilizing — if we cut back on the dollars — utilizing the government's
intermediary role in providing and bringing lenders and borrowers
together? Is there a way that we can appropriately, in your view,
utilize the mechanisms that have been developed in the SBA pro-
grams?

Professor Weidenbaum. Well, I am not terribly enthusiastic, very
frankly, about the prospect of, say, expanding the SBIC approach
or the general notion of using the government's credit power. When
I hear that banks are willing to loan money to small businesses,
all they need is a 50, 70, 90 percent or whatever guarantee from
the government, that tells me if the government takes the risks,
they are willing to administer the program.

Well, I think we have to look at the totality of the private enter-
prise system and see not just the immediate direct results of a gov-
ernment spending program, but step back and see how the entire
private enterprise system is truly being devastated by a budget def-
icit that preempts the great majority of the private capital.

The trouble is, you can see, yes — as my fellow witness knows
very accurately — ^you can see the whites of their eyes; you can see
the benefits that you get from dealing with an SBA benefited busi-
ness. But you cannot see the businesses that have not been formed,
the businesses that fall by the wayside because the cap — so much
of the capitalists of this nation has been preempted by the federal
government. And the notion that you can exempt the SBA from the
effort to reduce the deficit and take it out of all the other spending
programs, I think, very frankly is a delusion.

Yes, I do sound a negative cord. As you know, my advice to con-
gressional committees over the years has been: Don't just stand
there, undo something. And very frankly, I think this is a very at-
tractive example of the opportunity.

Chairman BOND. What would you say

Professor Weidenbaum. I do

Chairman Bond. Excuse me. What would you say to the sugges-
tion that we mentioned to the earlier panel that we try to privatize
the SBA and go to a Ginnie Mae or Freddie Mac type operation to
securitize loans?

Professor Weidenbaum. The general notion of privatization, of
course, I find very attractive. They are talking in those instances
in the housing area of privatizing loans with a very substantial
government guarantee on them. So the government is still bearing
most of the risk.

If you can privatize the portions of the SBA operation without
the government still taking on most of the risk, I think that is a
very attractive opportunity. And perhaps a straightforward privat-
ization of SBICs and other SBA functions ought to be attempted.

Chairman Bond. All right, sir. Well, I look forward to exploring
some of those roles with you as we continue our discussions.

Dr. Brockhaus, let me ask your general views on that concept of
reducing appropriated funds either by increasing fees or looking at
privatization or perhaps even lessening the government's role, the
government guarantee, in exchange for allowing the lending insti-
tutions to use their own paperwork. What is the best way to move
in terms of making savings and still providing assistance that only
government can provide to small businesses?

Dr. Brockhaus. Well, I do agree basically with the thrust that
has been developed this afternoon in the sense that I think that
many in the private sector recognize the importance of the reduc-
tion of the federal deficit and is willing to play a part in that. I

BOSTON PUBLIC LIBRARY

42 3 9999 06350 100 9

think you heard that consistently this afternoon, or almost consist-
ently.

It would seem to me that certainly fees for the loan processes,
as they were proposed and talked about this afternoon, makes
sense and would not put an undue burden on businesses if they
were paid off during the process of paying off the loan.

Chairman Bond. Not paying up front?

Dr. Brockhaus. Not paying up front, but paying during the pe-
riod of the loan. The same with services provided by SBDC. I think
people pay more attention to something they pay a nominal fee for.
There may be some exceptions that would need to be built into
that, because I know that the SBDC has clients that come to it who
really do not have very much cash to offer. It becomes a policy deci-
sion at that point whether we want to encourage those people who
are that destitute to actually get into a business or not. I could
argue that one either way.

I think that the SBDC has a role of helping businesses that are
looking for international trade opportunities and are looking for
technology expansion. Those are the types of activities that will in-
crease the number of jobs rather than simply having the business
currently going to company A going to company B, but without a
significant net gain employment.

So I think SBDC should certainly have a role in technology and
export work which our SBDCs in the State of Missouri do have.

Chairman Bond. To what extent are you providing general man-
agement, financing, marketing, production advice and counseling to
these businesses — basic business advice?

Dr. Brockhaus. They receive all of those types of advice as well
as technology advice. As you know, the SBDC does not do things
for them; they help the entrepreneurs do for themselves by raising
issues that they should be concerned about, having them develop
a series of questions that they need to answer, and helping them
understand where they can find the answers. But it is not a proc-
ess that does it for the entrepreneur, which would be a disservice
to the entrepreneur.

Similar to that is the SBI program which I feel encourages future
entrepreneurs, as they help small businesses, to learn about what
it is really like to own a business. Some students are discouraged
by that process; they say: this is not the type of life I want. This
is an important lesson to learn rather than after having a job for
10 years, deciding to start a business and then end up, after invest-
ing a great deal of time and money, failing.

I believe that the SBI program, which I know is eliminated from
the SBA's budget at this point in time, is one that really helps pro-
vide future generations with more than just a passing awareness
of entrepreneurship, its benefits, and its costs.

Chairman BOND. You mentioned the need for better management
in the SBA. Are you talking about managing the agency itself or
providing management expertise and advice to SBA clients?

Dr. Brockhaus. I was talking about the former. I have known
at least one person who I considered a very, very good adminis-
trator, Jim Sanders. In my personal opinion, there have been some
administrators who certainly did not do a very good job. I would
hope that through the oversight responsibilities of your committee

that more attention could be put on the type of person that the ad-
ministration recommends for that key job as well as other key jobs
in the administration.

In terms of the SBA itself, I think it is a good leveraging tool.
I really do not believe that they should be doing much of the man-
agement advising and counseling. I think they can get a far bigger
bang from their dollar through programs like the SBDC and the
SBI program which generate more tax dollars than they cost.

Chairman Bond. That is one of the areas we are looking at. Gen-
tlemen, again, my sincere thanks to all of you. We hope that we
have broadened the discussion and raised perhaps some new issues
for some of you. We would invite you to comment on those. We are
most grateful for the time and effort that you put in to get pre-
pared and come here today to testify. We will take all of this back
to Washington and hope to gain direction, wisdom, and some good
solutions to the problems we face from your testimony. With that,
and my sincere thanks to all of you, this hearing is adjourned.

[Whereupon, at 3:30 p.m., the Committee was adjourned.]

ISBN 0-16-047609-7

9 780160"47609

90000

Internet Archive Audio

Featured

Top

Images

Featured

Top

Software

Featured

Top

Books

Featured

Top

Video

Featured

Top

Mobile Apps

Browser Extensions

Archive-It Subscription

Save Page Now

Full text of "Entrepreneurship in America : focus on capital formation : field hearing before the Committee on Small Business, United States Senate, One Hundred Fourth Congress, first session, Aapril 12, 1995"

See other formats