Economic Perspectives with Hopeton Hay on KAZI 88.7 FM in Austin, TX

New Leader of U.S. Small Business Administration Testifies Before Senate Small Business Committee

Posted by Hopeton on April 4, 2009

L-R: Karen Mills and Senator Mary Landieu

L-R: Karen Mills and Senator Mary Landieu

Karen Mills was confirmed by the U.S. Senate by unanimous consent as the 23rd Administrator of the U.S. Small Business Administration on April 1.  Enclosed below is an excerpt from her statement to the Senate Small Business Committee on the day of her confirmation.  The Senate Small Business Committee is chaired by Louisiana Democratic Senator Mary Landrieu and its ranking member is Maine Republican Senator Olympia Snow.

Small business is the heart of the American economy. There are over twenty-six million small businesses in this country and they create 70 percent of the new jobs. This means that to find our way out of the current economic crisis, we have to find ways to help small businesses stay in operation and even expand.

There are at least two kinds of small businesses that are served by the Small Business Administration. The first are the small businesses on Main Street – the restaurants, the drycleaners, and the car repair operations –that are a part of our daily lives. These businesses depend on credit from the SBA’s 7a and 504 programs and advice from more than 14,000 SBA affiliated counseling centers.

The second type are the high growth, high impact businesses which have the potential to grow into the next American giants.

Did you know that Federal Express, Apple and Intel all were at one time supported by the SBA? Others include AOL, Ben and Jerry’s Ice Cream and UnderArmor – a company that makes high-performance sports clothing which my family purchases a great quantity of this time of year during lacrosse season – it was started not far from here in a basement in Georgetown.

These businesses all started out getting an SBA loan, a government contract or an SBIC investment. For all of these enterprises, from Main Street shops to the next potential Intel, we know one thing: if the SBA can help these small businesses grow and prosper, jobs will be created, and America will be able to compete anywhere in the world.

Today, however, small businesses face an uncertain future.  The recession has reduced demand for their goods and services. With the credit crisis, it is increasingly difficult for them to find financing for normal business activities and expansions.

Currently, loan guarantees from the SBA are down by over 50% from their levels a year ago. There are several causes of this decline—and they are inter-related: lower creditworthiness of borrowers, tighter lending standards, lack of liquidity in bank balance sheets, and a frozen secondary market for SBA guaranteed loans.

The Congress and this Committee deserve great praise for recognizing these problems and for incorporating important proactive measures for small business in the Recovery Act. This Act reduces fees to both borrowers and lenders, increases the guarantee percentage on SBA loans and works to unfreeze the secondary markets. In addition, many viable but struggling businesses will get a $35,000 lifeline to bridge them for 6 months of interest and principal payments—which the SBA will fully guarantee.

As you all know, on March 16th, the President committed $15 billion from the Troubled Asset Relief Program to be available to purchase SBA guaranteed paper in the secondary markets. This effort in conjunction with the SBA 90% guarantees and the fee reductions will go a long way to unlocking the credit small businesses need.

If confirmed, I pledge to work as a partner with this Committee to fully implement these important recovery programs.

Senators, today small businesses are suffering and the SBA has lacked the leadership and the resources to help them. These are problems we can fix.

If confirmed I will work on three important fronts:

First, the SBA must continue executing the plans in the Recovery Act and get capital flowing again through the core SBA loan programs.

Second, we must reinvigorate the Agency by attracting a strong and passionate leadership team and investing in the information technology the agency needs to operate.

Finally, we must – and I will – act as an advocate for small business across the administration. As Chair Landrieu and Ranking Member Snowe have suggested, I will coordinate with other Agencies, including Commerce, Labor and Energy, whose programs also affect small businesses.

To listen to Karen Mills’ tesimony before the U.S. Senate Small Business Committee click the following link: Karen Mills Testimony

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One Response to “New Leader of U.S. Small Business Administration Testifies Before Senate Small Business Committee”

  1. Is the new SBA lending program simply more bailout for bank’s or truly designed to help the stuggling small business owner?

    Well, really, who cares? With all the billions being poured into the financial companies and auto industry, any plan that helps the small business owner, is a good plan, in my book.

    I see three components in the Economic Recovery Act that should help revive lending to our nation’s small business community. That is, IF the banks actually cooperate and finally start to meet their fundamental role of making loans.

    The first program will make available $15 Billion dollars in SBA 7(a) loans and 504 loans backed by guarantees to the banks of up to 90% . Borrowers will not have to pay SBA lending fees which provides a meaningful cost savings in their quest to obtain working capital. It is under this program that our Community Banks have an opportunity to shine and to show our Congressional leaders the vital role they play in supporting the business communities they serve.

    The government originally rolled out the TALF program, designed to jump-start the securitization markets for Credit Card, Auto, Student….. and yes, tagged onto the end, Small Business Loans. In an effort to increase credit availability and support economic activity, the Federal Reserve Bank of New York agreed to lend money, on a non-recourse basis, to investors who purchase Asset Backed Securities from banks. Thusfar, regardless of the guarantees, the TALF program has not increased Small Business lending initiatives by the banks. The reasons are obvious: First, in this economic environment the investors don’t want even the small risk associated with SBA lending. And secondly, because the confidence in these asset backed securities has been completely eroded, no one really wants to buy them. And finally, our leaders have not required the banks to start lending, but merely to file reports that will reflect how little they are doing.

    So with TALF doomed to failure, at least as far as Small Business Lending is concerned, our leaders have gone back to the drawing board to sweeten the pot.

    It’s TALF with a twist. While this $15 Billion program provides the originating bank with a 90% guarantee, the government realized that they would not be able to budge the banks unless the banks had assurances that they could divest themselves of these loans after they made them. With that in mind, our Treasury Department announced that it “will be a ready buyer of the loans in the secondary market.”

    And this is where the community banks and perhaps credit unions will play a vital role in getting these funds into the hands of the small business owner. These banks will originate the SBA loans and sell them, ONE AT A TIME, to the broker/dealer. The broker/dealer will gather these loans together, from the originating banks, and sell them….. directly to the government.

    Since the announcement of this program, there’s been a big to-do about whether the broker-dealers will participate or whether the Federal Plan to Aid Small Businesses is Flawed. It seems that since the $15 Billion dollars, used to fund this program, is coming from TARP funds, the broker-dealers that act as the intermediary between the originating banks and the Treasury may be subjecting themselves to TARP restrictions such as limits on Executive Compensation.

    Personally, I don’t believe that President Obama, our Congressional leaders or the folks in the Treasury Department intended this interpretation. Perhaps the simplest way of looking at this is to see these broker-dealers as ‘contracted intermediaries’ by the Treasury Department. The Treasury cannot be expected to purchase one loan at a time from the banks across our nation. In order for the program to work, they must have a broker-dealer facilitate the purchasing, packaging and subsequent resale of these loans to the Treasury. There you have it – and I am sure over the next few days, and with the encouragement of the SBA’s new Administrator, Karen Gordon Mills, this situation will be resolved to everyone’s satisfaction. Perhaps this is an opportunity for Treasury to create a working partnership with a broker-dealer that didn’t put up barriers to the success of this plan.

    This is a plan that will work. It’s smaller than I would have liked, but it should bring a sense of renewed confidence to our Small Business Community. New money, new loans, community bank lending, and an opportunity to revitalize our economy one business at a time, create and save jobs and send a clear message that the small business owner’s significant contribution to our economic recovery is recognized and supported.

    ARC Stabilization Loan

    The second program, which has not been rolled out by the SBA yet – but coming soon, is the ARC Stabilization Loan (America’s Recovery Capital). These loans are to be originated by pre-approved bank lenders (yes many of those same banks that have refused to make business loans over the last several months but had no trouble taking billions in bailout funds from the government). The loans will be backed 100% by the SBA and will have a maximum loan size of thirty-five thousand dollars.

    The $255 million dollars in ARC funding translates into a significantly higher loan volume because it represents the guarantee and the interest subsidy provided by the program. Borrowers will not have to start repayment for twelve months and full repayment is expected within five years. Since the SBA will subsidize the interest on these loans, the ARC program will provide relief to the business owners as our nation makes its way through the beginnings of our economic recovery.

    Once again, I’m counting on Ms. Mills to move this program along to where it needs to be. I’ve had several conversations with local SBA District Offices and would have liked to see the terms of this program more clearly defined. The big question is this: Will ARC merely provide “six months worth of interest payments on existing loans” to the small business owner? Because if that is the case, then the vast majority of these loans will be for extremely small amounts that banks will be uninterested in processing and ultimately will not make very much difference for the small business owner.

    These first two programs, to be truly meaningful, should allow the banks to refinance some of the smaller working capital credit lines that are, today, being systematically pulled by the banks? I understand that Chase, for example, recently froze working capital credit lines for tens of thousands of their business clients, the vast majority of these lines being under $100,000. And they are not alone in this process. I’m told that it is Chase’s intention to give these customers an opportunity to present updated financial information and to reinstate the credit lines for those businesses found to be credit worthy under the bank’s new credit criteria. Refinancing these credit lines under newly created SBA loans funded by the ARC program or what I lovingly call the ‘TALF with a twist” program, would be an excellent alternative to leaving the viable small business owner without any form of credit. Additionally, and under the right circumstances, one effective use of these funds would be to refinance credit card debt accumulated by our small business owners, many of whom are now subject to the interest rate increases upwards of 20% recently implemented by the banks. Most of these borrowers would significantly benefit from the relief provided by SBA lines and particularly those that provide interest rate relief.

    Make no mistake about it. The ARC program, if used as I describe above, would most certainly be, yet another, bailout for the banking industry. But let’s put that aside for the moment. My concern today is for the Small Business Community who is, once again being slammed by our financial industry leaders when they most need our help. Let us hope that these programs will allow the small business owner to refinance their existing debt, significantly reduce their monthly payments and gain the temporary relief to their cash flow needed to weather this economic storm. We need to help them keep their workers employed, pay their rent and remain in business.

    Don’t be fooled. This is not a bailout program for the business that is out-of-business but hasn’t come to terms with that finality. The ARC program states that the business has to be ‘viable’ and what that means is yet to be determined. Borrowers should expect to provide financial information regarding sales/revenue and income. So for those small business owners that over-extended through the business liar-loans, businesses that ‘stated income’ that they now cannot support with tax returns: I don’t think you will qualify. And if you are one of the small business owners that like to make money, but don’t want to pay taxes: You won’t qualify either. If you can’t make it on your own, then the banks will be writing off your debt and taking the loss. Shame on the banks and shame on you.

    I’d like to add one final observation. When a bank cancels a business credit line, they do this without warning. The line is simply frozen and no additional draws are allowed. A letter is sent to the business owner requesting updated financial information, AFTER the credit line is revoked. In a frenzy, the business owner faxes in their financials to a nameless, faceless person who evaluates their condition. In my experience, I have seen the following reasons provided in the bank’s refusal to reinstate the lines of credit: (a) Decrease in revenue and/or profit (b) weaknesses in cash flow (c) debt to income too high.

    Well, no s_ _ t, Sherlock! We ARE in a recession, and I dare not use the “D” word here. Our country, and the world, is in the grips of an economic tsunami that the banks caused. This situation is rooted in the financial industries endless quest for greater profits and the absence of any safe and sound lending practices, further compounded by our Regulators refusal to halt the industry’s despicable practices over the last ten years.

    We are now caught between a rock and a hard place. These loans are the hardest to underwrite. The smaller businesses that will benefit from ARC funds and from refinancing debt under the ‘TALF with a twist’ funds, simply don’t have anything for the banks to wrap their greedy little arms around. And it will be difficult to determine which company truly has a chance of weathering the storm and which, despite any refinance of debt, will be forced to close its doors. Furthermore, simply terming out working capital lines will not provide the relief needed. We need to slash their interest rates, continue the lines as revolving credit so that it can be used and re-used over the next three years, and then, after a time, term it out. SBA already has the product matching this description. Now the SBA has to give the banks specific criteria so they are comfortable with the conversion. There can’t be any second guessing or Monday morning quarterbacking on this process. If President Obama, our Congressional leaders and our Regulators are truly committed to helping the small business owners across this great nation, then DO IT. Jump in with both feet. Yes, there will be losses. But there will also be jobs saved and tax revenues generated and an increase in confidence so critical to our recovery.

    The third program, which is already in effect, is the expansion of the existing Micro-loan program. These loans are granted by special non-profit community-based lenders throughout the country (microlenders), and not typically by banks. It provides for fifty million in new loans. But don’t count on any special rates. SBA website reports that micro-loan interest rates range from 8% to 13% , which is still better than the usurious rates many banks have started to apply to business credit cards and small revolving lines of credit. Most microloans are directed at the very small and struggling business and yet, these are the loans that come with application fees in the $500 range. I am unmoved by this program and so far, disappointed in the channels that are supposed to get these funds into the hands of the small business owner.

    For those business owners still interested in applying for a micro-loan, finding a lender might prove difficult. You can start by visiting this website: http://www.sba.gov/localresources/district/az/index.html and selecting your local SBA office from the dropdown box.

    Congratulations to Arizona, Los Angeles, San Diego and Santa Ana California, Jacksonville Florida, Boston Mass, Nebraska, New Hampshire, NY-New York, Oregon, Rhode Island, South Dakota, Houston-Texas, Utah, Virginia, Seattle-Washington and West Virginia. If I left any out, I apologize. But COME ON – SBA site developers. The folks out here need help and only 17 of the 71 offices appear to provide any information on current SBA lenders and/or Microlenders in your area.

    And to our New York District Office, our thanks for your prompt reporting of loan volume in your area and the names of the banks that have continued to support our Small Business Community during these last five months. Your site reports that for the SBA fiscal year which ended September 30, 2008 there was an AVERAGE of 290 7(a) loans made each month and over $33Million in 7 (a) loans made within your district each month. However, from October 1, 2008 through February 28, 2009, in this same district, only an AVERAGE of 70 7(a) loans were made each month and only an average of about $14.5 Million in 7(a) loans were issued. These figures support that over the last five months, SBA 7(a) loans decreased in number by 75% and in dollars of loans granted by 56%.

    SBA should require that every district office post up-to-date SBA lending results. It’s important for the business owners in our country to understand which banks are supporting the needs of the small business community and the economic recovery of this nation, and which banks have snubbed their noses at our leaders’ endless pleas to apply the bailout funds to meaningful lending programs. The New York District Report indicates that JP Morgan Chase, who accepted $25 Billion in TARP funds, dropped from the number one SBA lender to number 9, having made a total of 40 SBA loans totaling just over $2.8 Million. Bank of America, who received $45 Billion in TARP funds, moved from the #2 spot to number 33. BofA’s support of the small business owner was represented by 12 SBA loans totaling $410,000. And Citbank, who previously held the number 5 ranking, made a total of 3 SBA loans totaling just over $1 million dollars. This nation provided Citibank with $50 Billion dollars. I leave it to the reader to draw their own conclusions from these numbers.

    To America’s small business owners and to each and every individual, I offer the following advice: Stop complaining and DO something. Go establish a banking relationship with one of your local community banks and reward them with your bank accounts. If possible, pick one of the banks on the top of the SBA participation list. Check out their bank rating here: http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx?t=cb. Find the best bank in your area and encourage all your friends and business associates to move their accounts. Yes, it will be inconvenient to make a move. But if we, the people, act together in unison, we can send a clear message to the financial industry that we will not stand by and let them tear of life out of this country with their greed and avarice, and then reward them by banking with them. We will not do business with them, when they have failed us, and continue to fail us, so miserably.

    And to President Obama and our Congressional leaders: We thank you for your efforts and we look forward to a prompt and effective resolution to the release and implementation of your new SBA Recovery Plan. Please hurry!!!

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