United States. Congress. House. Committee on Small.

SBA's pilot microloan program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, March 14, 1995 online

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\^ ^ SBA'S PILOT MICROLOAN PROGRAM



I



Y4.SI1 1:104-18

SBA's Pilot Hicroloan Progran. Seri...

HEARING

BEFORE THE

COMMITTEB ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION



WASHINGTON, DC, MARCH 14, 1995



Printed for the use of the Committee on Small Business



Serial No. 104-18




U.S. GOVERNMENT PRINTING OFFICE
WASfflNGTON : 1995



For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Wa.shington, DC 20402
ISBN 0-16-047719-0



SBA'S PILOT MICROLOAN PROGRAM

'Y4.SI1 1:104-18

SBA's Pilot flicroloan Progran^ Seri...

HEAKING

BEFORE THE

COMMITTEE ON SMALL BUSINESS
HOUSE OP REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION



WASHINGTON, DC, MARCH 14, 1995



Printed for the use of the Committee on Small Business



Serial No. 104-18



'''''m,r,




1995



D^COi



i9ST0l\l



U.S. GOVERNMENTT PRINTING OFFICE
89-291 CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office. Washington, DC 20402
ISBN 0-16-047719-0



COMMITTEE ON SMALL BUSINESS
JAN MEYERS, Kansae, Chair



JOEL HEFLEY, Colorado

WILLIAM H. ZELIFF, JK., New Hampshire

JAMES M. TALENT, Missouri

DONALD A. MANZULLO, Illinois

PETER G. TORKILDSEN, Massachusetts

ROSCOE G. BARTLETT, Maryland

LINDA SMITH, Washington

FRANK A. LOBIONDO, New Jersey

ZACH WAMP, Tennessee

SUE W. KELLY, New York

DICK CHRYSLER, Michigan

JAMES B. LONGLEY, JR., Maine

WALTER B. JONES, Jr., North Carolina

MATT SALMON, Arizona

VAN HILLEARY, Tennessee

MARK E. SOUDER, Indiana

SAM BROWNBACK, Kansas

STEVEN J. CHABOT, Ohio

SUE MYRICK, North Carolina

DAVID FUNDERBURK, North Carolina

JACK METCALF, Washington

Jenifer Loon, Staff Director
Jeanne M. Roslanowick, Minority Staff Director



JOHN J. LaFALCE, New York
RON WYDEN, Oregon
NORMAN SISISKY, Virginia
KWEISI MFUME, Maryland
FLOYD H. FLAKE, New York
GLENN POSHARD, Illinois
EVA M. CLAYTON, North Carolina
MARTIN T. MEEHAN, Massachusetts
NYDIA M. VELAZQUEZ, New York
CLEO FIELDS, Louisiana
WALTER R. TUCKER III, California
EARL F. HILLIARD, Alabama
DOUGLAS 'TETE" PETERSON, Florida
BENNIE G. THOMPSON, Mississippi
CHAKA FATTAH, Pennsylvania
KEN BENTSEN, Texas
KAREN MCCARTHY, Missouri
WILLIAM P. LUTHER, Minnesota
PATRICK J. KENNEDY. Rhode Island



(II)



CONTENTS



Page

Hearing held on March 14, 1995 1

WITNESSES
Tuesday, March 14, 1995

Daugherty, Scott, executive director, North Carolina Small Business Develop-
ment Center, Ralei^, NC 25

Forbes, Patricia, Deputy for Economic Development, Small Business Associa-
tion; accompaniea by John Cox, Associate Administration for the Office
of Financial Assistance, SBA, Jody Raskind, Financial Assistant, Office
of Financial Assistance, SBA, Mike Curren, Budget Office, SBA 3

Golden, Ellen, Coastal Enterprises Incorporated, Wiscasset, ME 14

LeGrand, Etienne, Women's Initiative Tor Self-Employment, San Francisco,
CA 20

Martinez, Joe, economic development director, Chicanos Por La Causa, Phoe-
nix, AZ 16

Schall, Robert, president, Self-Help Venture Fund, Durham, NC 28

Toolan, Matt, president, Grade A T.EM.P.S. Corporation, Durham, NC 22

APPENDIX

Opening statements:

LaPalce, Hon. John J 39

Meyers, Hon. Jan 41

Poshard, Hon. Glenn 43

Prepared statements:

Daugherty, Scott 44

Forbes, Patricia Forbespatricia 79

Golden, Ellen 132

LeGrand, Etienne ^ 143

Martinez, Joe 149

Schall, Robert 155

Toolan, Matt 163



(III)



SBA'S PILOT MICROLOAN PROGRAM



TUESDAY, MARCH 14, 1995

House of Representatives,
Committee on Small Business,

Washington, DC.

The committee met, pursuant to notice, at 3 p.m. in room 2359-
A, Raybum House Office Building, Hon. Jan Meyers (chairwoman
of the committee) presiding.

Chairwoman Meyers. The committee will come to order.

The Small Business Administration's mission for many years has
included increasing small business' access to capital. To fulfill this
mission, programs such as the 7(a) Guaranteed Loan Program and
the Section 504 Certified Development Company Program were
born. But despite the success of these programs, there was one type
of small business that continue to have difficulty getting the fund-
ed it needed to start, to grow and to succeed. This was the entre-
preneur who was truly the smallest of businesses, whose capital re-
quirements were under $25,000. Such loans were unattractive to
banks because the cost of servicing exceeded the profit the bank
might make in fees and interest.

To meet that need, Congress created the Microloan Demonstra-
tion Project through Public Law 102-140 in October 1991. This
f>ilot loan program is a partnership between the SBA, nonprofit
ending intermediaries and technical assistance providers. The SBA
provides loans to the intermediaries which, in turn, makes loans to
microborrowers and the loans made by SBA provide the basis for
a revolving loan fund managed by the intermediary. Furthermore,
grants are made to provide technical assistance to borrowers.

This program was expanded last year to increase the number of
intermediaries fi"om 35 to 101. The number of technical assistance
providers has increased, as has the aggregate amount of SBA fund-
ing available to intermediaries. In addition, a pilot guarantee-based
program was added.

It is our purpose today to examine this pilot project and see if
it has fulfilled its stated mission of providing very small loans to
business owners, loans that would not have otherwise been avail-
able through conventional lending sources. Furthermore, we will
look at the technical assistance provided to see if it is making a dif-
ference in the small business success.

Our witnesses will be grouped into two panels and the first panel
will consist of the program managers from SBA and the second will
consist of lenders, technical assistance providers and a borrower.

Our first witness is Ms. Patty Forbes, the Deputy Associate Ad-
ministrator for Economic Development. She will be assisted by Mr.

(1)



John Cox, the Associate Administrator for the Office of Financial
Assistance.

Is Ms. Raskind here?

Before we begin, I would like to recognize Mr. LaFalce.

Mr. LaFalce. Thank you very much, Madam Chairman. I'm
pleased to be here for hearings on the Microloan Program origi-
nally authorized by the Congress 4 years ago.

Under this program, the Small Business Administration, in co-
operation with generally nonprofit delivery mechanisms called
intermediaries, provide small amounts of seed capital to the very
smallest of small businesses. These businesses are so small that
they generally do not have any employees and they usually operate
on a shoestring from the owner's home. Their financial needs are
minuscule, often just several thousand dollars. In no case may the
program loan more than $25,000 to one borrower.

There are two unique aspects to this program. The first is the
training and development aspect. It is not sufficient simply to
make loan capital available to these small firms or would be small
firms. If it were simply money alone, most of them would be
doomed to failure. They also need training and education. The
intermediaries provided not just the business aspects but fre-
quently basic education itself.

The second aspect is the commonality of interests of these bor-
rowers. SBA does not provide the loan directly to the borrower.
Funding is provided to intermediaries which in turn make loans to
the small business borrowers. Only if the borrower successfully re-
pays the intermediary does the money turn over and become avail-
able to make loans to additional small entrepreneurs. Thus, finan-
cial needs of future borrowers depend largely upon loan repayment
by present borrowers. This establishes a strong repayment incen-
tive from the borrower's peers, a concept successfully developed
elsewhere.

Interest in this program has been nothing short of phenomenal.
We started, as you know, with a very small pilot and we've in-
creased its scope on two subsequent occasions. The Microloan Pro-
gram now exists in all but two States — although the approved
intermediaries do not necessarily provide coverage in every area of
the State.

I look forward to receiving firsthand information on the operation
of the program and I congratulate Chairman Meyers for calling
this hearing. I think it's an excellent idea to have a hearing on this
program.

We're also very pleased today that we will be receiving the very
first congressional testimony of Patricia Forbes. All of us have
come to know her through her work on the Senate Small Business
Committee and we're delighted that she is now serving the admin-
istration through the SBA.

Ms. Forbes, we look forward very much to hearing from you.

Chairwoman Meyers. Thank you for being here and proceed, Ms.
Forbes.



TESTIMONY OF PATRICIA FORBES, DEPUTY FOR ECONOMIC
DEVELOPMENT, SMALL BUSINESS ASSOCIATION; ACCOM-
PANIED BY JOHN COX, ASSOCIATE ADMINISTRATION FOR
THE OFFICE OF FINANCIAL ASSISTANCE, SBA, JODY
RASKQEVD, FINANCIAL ASSISTANT, OFFICE OF FINANCIAL
ASSISTANCE, SBA, MIKE HEARNE, BUDGET OFFICE, SBA

Ms. Forbes. Good afternoon, Madam Chair and members of the
committee. I want to thank you for inviting me to appear before
you this afternoon to talk about SBA's Microloan Demonstration
Program.

In the interest of time, I would like to summarize my written
statement and I ask that the full statement be included in the
record.

Chairwoman Meyers. Without objection.

Ms. Forbes. Thank you.

I'm particularly pleased to be able to talk to you about the
Microloan Demonstration Program because I've been involved with
the program since its creation in 1991 when I was counsel for the
Senate Small Business Committee.

The Microloan Demonstration Program is a small program that
makes a big difference. The program is testing the value of Federal
investment in the smallest of businesses which are not served by
commercial lenders or by SBA's other lending programs. Through
a unique public/private partnership, microbusinesses are accessing
financing and expertise at affordable rates.

In the summer of 1992, SBA funded 35 intermediaries to provide
microloans and technical assistance in 30 States. Today there are
101 intermediaries providing microloans and technical assistance
in parts of 48 States, the District of Columbia and Puerto Rico.
Only Wyoming and Rhode Island do not offer SBA microloans at
this time. The goal of the program is that microloans should be
available in every State and throughout every State.

I'd like to turn to this chart right now. I'll show you how this pro-
gram works, although it sounds like you have a pretty good idea
of it already. Notice we are color coded here to Administrator
Lader's case for SBA for access to capital.

The way this program works is Congress appropriates the sub-
sidy for the loans and the SBA borrows the rest of the loan money
from the Treasury. The loans are made to the intermediary lend-
ers. The lenders, in order to qualify for the loans, must come up
with a 15 percent cash match. That match can come from local
communities, as long as it's non-Federal money. That is the only
requirement regarding the match. The money is put in an account
and moved to a loan loss reserve as each microloan is made.

As you noted in your statement, a key component of this program
is the technical assistance. That assistance is provided through a
grant from SBA to the intermediary lender. The grant can be up
to 25 percent of the loan amount. In order to qualify for the grant,
the intermediary lender must provide a contribution of 25 percent
which can be cash or in-kind. These intermediary lenders are non-
profit organizations or quasi-government organizations such as eco-
nomic development districts.

Once the intermediary lender has its funding, it provides loans
and technical assistance to all the microborrowers. They either



start businesses or grow their businesses. They provide profits and
taxes and investments back to the local communities. They pay
back their loan to the intermediary lender and the intermediary
lender pays back the Grovernment.

As we can see from the chart, a key component of the demonstra-
tion program is the technical assistance which always accompanies
a loan to a microborrower. Providing appropriate technical assist-
ance to accompany loans is the best way to improve the odds that
businesses will succeed. Technical assistance may be offered in
peer group settings, in classrooms or as one on one business coun-
seling.

A good example of how this program works comes to us from one
of our intermediaries in Kansas, the South Central Kansas Eco-
nomic Development District. In 1994 a man came to the
intermediary with an idea of starting a company to provide occupa-
tional and physical therapy personnel to health care facilities on a
contract basis. Although the man had no hard assets for collateral,
he did have years of experience in the health care field, a willing-
ness to learn and the determination to succeed. In May of 1994 and
January 1995, he received two microloans totalling $25,000.

Prior to receiving the first microloan, the borrower also received
help from the intermediary in preparing his financial statements.
Since receiving the microloans, the borrower has continued to re-
ceive technical assistance. The intermediary regularly conducts site
visits to the borrower's work place to help him solve problems as
they arise. The intermediary also helps the borrower monitor his
receivables to make sure he s getting paid in a timely way. Today
his business has grown from a one man operation to an enterprise
employing 18 full-time and 6 part-time occupational, physical and
speech therapists.

According to South Central Kansas Development District, the
jobs created in his business pay an average salary of $46,000 per
year. None of this would have been possible without the SBA
Microloan Demonstration Program.

In addition to the main Microloan Program, the SBA is author-
ized to test two variations of that program. One variation the SBA
is testing is the effectiveness of providing only technical assistance
grants to nonlending technical assistance providers. These organi-
zations, which I believe are represented here today by the Women's
Initiative for Self Employment, or WISE, from San Francisco, pro-
vide business oriented technical assistance to low income persons
with the goal of assisting them in acquiring financing from private
sector lenders. Often using funding from other sources, our
nonlending technical assistance providers act as guarantors on
loans made by local banks. At other times, these organizations act
as liaisons between various State and local programs and investors
as they match microbusiness owners with financing sources.

Last year's SBA Reauthorization Act authorized SBA to test the
other variation of the Microloan Program, a guaranteed microloan
program. In this program the loans will no longer come from SBA.
They will come from private lenders and they will be guaranteed
up to 100 percent by SBA, The loans from the intermediary to the
borrowers will still be direct loans and the technical assistance will
still be funded by the SBA and the intermediary.



Within the short time the program has been in operation,
microloans have provided highly visible results. Jobs are being cre-
ated or retained at a rate of 3.28 jobs per microloan. In some in-
stances, microloans are providing a way off welfare. Microloans
have been for as little as $125 and the national average size of a
microloan is $10,700. Let me repeat, that's more than 3 jobs cre-
ated or retained for every $10,700 loaned to microborrowers.

At this juncture, about 2V2 years since the first intermediary was
funded, 100 percent of the loans to intermediaries are current.
While we are very pleased with this fact, we do recognize that it's
a very young program and as the program matures the currency
rate may drop below 100 percent. It is our expectation however
that the 15 percent loan loss reserve will be more than enough to
protect the Government's interests.

Who are these borrowers? Forty-three percent are women owned
businesses. Thirty-six percent are minority owned businesses, 12.5
percent are veteran owned businesses and 40 percent are startup
enterprises. Businesses receiving microloans are in many indus-
tries. Thirty-four percent are in the service industry. Almost 15
percent are manufacturers. Over 27 percent of microloans have
gone to retail establishments.

As you can see, Madam Chair and committee members, this dem-
onstration program is off to a good start. When Administrator
Lader testified before this committee several weeks ago, he showed
you many ways the SBA of 1995 is not your father's SEA. The
Microloan Demonstration Program is an excellent example of the
new SBA. We hope to continue working with you, the Congress,
and with various other public and private organizations to better
serve the needs of the smallest of small businesses in the most effi-
cient and cost effective way.

Thank you for the opportunity to testify today. I'll be pleased to
answer any questions you may have.

Chairwoman Meyers. Thank you very much, Patricia.

[Ms. Forbes' statement may be found in the appendix.]

Chairwoman Meyers. I'll ask one short question and then recog-
nize Mr. LaFalce and then we will just take the Members in the
order in which they came in.

Ms. Forbes, you said something about so far the program was in
very good shape, that we anticipated that as the program got older
that maybe we would begin to see some problems. I guess this just
follows with some logic. The more people you have participating,
you're liable to have more problems.

But let me ask this. What is our loss rate right now? What is

Ms. Forbes, there are two types of loans here. The loss rate on
the loans from the SBA to the intermediary is zero.

Chairwoman Meyers. Good.

Ms. Forbes. The loss rate from the intermediaries to the borrow-
ers is less than 2 percent, which is excellent. But 100 percent is
probably an unrealistic number.

Chairwoman MEYERS. Yes, because until recently we only had 25
and 30 intermediaries, didn't we?

Ms. Forbes. That's right.

Chairwoman Meyers. Now we have authorizes going to about
100.



6

Ms. Forbes. It's 101 right now, but the authorization that was
passed last summer raised it to 200.

Chairwoman Meyers. Two hundred, OK. But the 101 are al-
ready up and operating?

Ms. Forbes. That's correct. However, some of them were just
started last summer or last fall.

Chairwoman Meyers. All right. Thank you very much.

Mr. LaFalce?

Mr. LaFalce. No questions. I just want to thank Ms. Forbes for
her testimony and also on the job you're doing at SBA.

Chairwoman Meyers. Mr. Manzullo?

Mr. Manzullo. Thank you.

I appreciate your coming here this afternoon.

Could you tell us exactly how much money this program costs
the Federal Government? Do you know what the outlay is to the
banks and the rate of return?

Ms. Forbes. Are you talking about the appropriation or the ad-
ministrative costs?

Mr. Manzullo. I'm talking about the total costs — everything. -

Ms. Forbes. I can tell you for this year. The administrative costs
are about half a million dollars. I'm not sure I could tell you for
the 2 prior years.

Mike Heame is from our Budget Office. Maybe he can address
this.

Mr. Hearne. For fiscal year 1995, we had $1,216 million appro-
priated for the guarantee program and $1.9 million appropriated —
pardon me, $5.3 million appropriated for the direct program. In ad-
dition, there was $9 million appropriated for the microioan grants.

Chairwoman Meyers. Now, say that again. I'm sorry.

[Editors Note: Figures in brackets indicate new dollar amounts
subsequently supplied by the witness.]

Ms. Forbes. It's about $12 milhon [$16 milHon]; $12 milHon
[$15.5 million] appropriated plus half a million in administrative
costs.

Mr. Hearne. And the first two numbers I spoke of were the sub-
sidy budget authority for each of the two programs.

Chairwoman Meyers. Well, that's confusing. Tell us what we ap-
propriated.

Mr. Hearne. That is what was appropriated.

Chairwoman Meyers. That is the appropriated amount?

Mr. Hearne. Yes, ma'am.

Chairwoman Meyers. $12 million [$16 million], right?

Mr. Hearne. That's correct.

Chairwoman Meyers. And then a half a million for the adminis-
trative costs. So, the total cost of the program then would be $ 12.5
million [$16 million], counting both administrative and the subsidy
for the loans.

Mr. Manzullo. Does that seem high, a half million dollars, for
a $12 milHon [$15.5 million] outlay?

Mr. Hearne. Mr. Manzullo, if I could address that. The half mil-
lion dollars is supporting a budget authority of possibly $6 million
[$6.5 million], which is then leveraged to an amount exceeding, $50
million [$37 million].



Mr. Manzullo. Well, the $12 million [$15.5 million] produces
how much?

Ms. Forbes. I can explain this. There are three different pro-
grams. The one

Mr. Manzullo. This is the microloan we're talking about?

Ms. Forbes. Right. For the direct loan program to which this
chart refers, the appropriation is $5.6 million [$5.3 million] for this
year. The grant part is $9 million, but the program level was $27
million because the subsidy that Congress appropriates on a loan
program is not the full amount of the loan but the amount to cover
predicted losses. The subsidy for a grant is 100 percent of the
grant.

Mr. Manzullo. I think I was clearer before you attempted to
clear it up.

Chairwoman Meyers. Excuse me. I'm a little confused too.

Mr. Manzullo. Go ahead. You're as confused as I am.

Chairwoman Meyers. The $9 million is not a subsidy, it is the
full amount of the program.

Ms. Forbes. Full amount of the grant.

Chairwoman Meyers. Full amount of the grant.

Ms. Forbes. Right.

Chairwoman ^teYERS. Except they have to match that with 25
percent, don't they?

Ms. Forbes. That's correct.

Chairwoman MEYERS. OK But then the $5.6 milhon [$5.3 mil-
lion] leverages.

Ms. Forbes. Yes, to $27 million.

Chairwoman Meyers. To $27 million, so that .

Ms. Forbes. That has to be matched by 15 percent.

Chairwoman Meyers. I see. I'm coming out with a different total
than $12.5 million now. I'm coming out with $5.6 million [$5.3 mil-
lion] that leverages the loans, $9 million for the ffrant program and
that's $14.6, and a half milHon administrative is $15 milHon.

Ms. Forbes. Then there's $1,216 for the guarantee.

Chairwoman MEYERS. So, the entire cost of the program then is
$16 million?

Ms. Forbes. Just about.

Chairwoman Meyers. Don?

Mr. IVIanzullo. So, $16 million in taxpayers funds went to fund
this program?

Ms. Forbes. That's correct.

Mr. Manzullo. And of that a half million dollars was adminis-
trative?

Ms. Forbes. That's correct.

Mr. Manzullo. Is that administrative in the SBA or does that
include the intermediary lenders?

Ms. Forbes. That's the SBA's administrative cost.

Mr. Manzullo. Isn't that a lot of money for such a small pro-
gpram? A half a million dollars to administer 32 times the amount
of the administrative budget?

Ms. Forbes. This is for 1 year. John, why don't you answer?

Mr. Cox. The half a million dollars is 1 year's cost to handle a
total portfolio of about $48 million right now.

Ms. Forbes. Because it's multiple years.



8

Mr. Manzullo. Is that just the central office?

Ms. Forbes. Right.

Mr. Cox. This is all centralized. There's no field operations to it.

Mr. Manzullo. So what you're telling us is that of the $800 mil-
lion annual operating budget of the SBA, a half million of that is
for administration of the Microloan Program.

Ms. Forbes. That's correct.

Mr. Manzullo. And the most recent figures demonstrate that
$12 million of taxpayers dollars was sent to the intermediary lend-
ers.

Ms. Forbes. Well, if we use the revised number of $16 million,
$15.5 million is leverage for loans or grants: $27 million [$37 mil-
lion] is the amount available and $9 million is the amount for
grants.

Mr. Manzullo. What do these grants do? I'm really confused
now.

Ms. Forbes. I'm sorry. Did you miss that when I talked about
the chart?

Mr. Manzullo. No, I saw that, but I can't figure it out. These
funds don't have to be paid back?

Ms. Forbes. That's right. Grants in the Government generally
don't have to be paid back.

Mr. Manzullo. For technical assistance.

Ms. Forbes. That's correct.


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Online LibraryUnited States. Congress. House. Committee on SmallSBA's pilot microloan program : hearing before the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, first session, Washington, DC, March 14, 1995 → online text (page 1 of 12)