Hearing of the House Small Business Committee: Creating Opportunities for Small Businesses in an Economic Recovery

Statement

Hearing of the House Small Business Committee: Creating Opportunities for Small Businesses in an Economic Recovery

The hearing of the Small Business Committee is now called to order.

This September, in the face of the collapsing housing market and the staggering crash on Wall Street, Congress took action. Since then, talk of the growing financial crisis has dominated American conversation. From Capitol Hill hearing rooms and newspaper editorial boards to kitchen tables across the country, it seems everyone has a theory about how we got into this mess. And now, of course, everyone has an opinion on how we should get out of it.

Congress is now contemplating the next steps in stemming the financial fallout. As the process moves forward, Congress' economic models and philosophies are up for consideration. But while it is all well and good to discuss the theory of financial crisis, it is far more important to hear from the people who are living it. It is far more important to understand and act on what Main Street is actually facing.

In today's hearing, we will do just that. This morning we will hear from small business owners who are experiencing the full effects of the current downturn. Like the rest of the nation, they have watched their home values plummet and their 401(k)s evaporate. Now they're seeing their piece of the American dream suffer too.

This committee recently compiled a report on the effects of the financial crisis on small businesses. The results of the study, which we are releasing today, were nothing short of (astounding ?). As today's witnesses can attest, small businesses in every corner of the country, spanning every segment of the economy, are suffering. The reality is that many small firms are struggling to meet their most basic obligations, such as making payroll and stocking their shelves.

Not surprisingly, the credit crunch is largely to blame for this. And the extent to which that is true is quite startling. Small businesses are facing credit lines that have been drastically reduced, and in some cases (revoked ?) altogether.

The recent Federal Reserve senior loan officer survey found (65 ?) percent of lenders are enforcing stricter loan standards. That figure is up a full 58 percent from one year earlier. Even small firms that manage to make ends meet are now abandoning plans for growth (efforts ?) that would otherwise create jobs.

According to the National Federation of Independent Business's monthly index, few small firms have immediate plans to expand or hire additional workers. During past recessions, the Small Business Administration has served as a lifeline for struggling startups. Unfortunately, even these programs are on the decline. With SBA funding down 25 percent from 2007, many fledgling companies, the sort that drive innovation and expand industry, may never get off the ground.

There are a lot of different takes on the current financial crisis, and even more opinions on how we should dig our way out of it. But regardless of your thoughts on the matter, one thing is very clear. Small businesses will be the key to economic turnaround. Whether it is by expanding the SBA's role or providing targeted tax relief -- (inaudible) -- have access to all the tools they need. They must have access. They have powered this country out of other recessions, and they can do it again today.

While current circumstances may be different from those in the past, the blueprint for recovery remains the same -- more jobs and greater economic growth. That is the formula we need, and that is the formula small businesses can provide.

I'd like to thank all of the witnesses in advance for their testimony and for taking time out of your busy schedule and jobs to be here with us. And I am pleased that they could join us and look forward to their insight on this critical matter.

With that, I yield to the ranking member, Mr. Steve Chabot, for his opening statement.

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REP. VELAZQUEZ: Thank you, Mr. Chabot.

And it is my pleasure to welcome Stephen P. Wilson. Mr. Wilson is CEO of LCNB Corporation, the holding company for LCNB Bank and the Dakin Insurance Agency in Lebanon, Ohio. Mr. Wilson also serves as chairman and director to both companies. He's here to testify on behalf of the American Bankers Association. Founded in 1975, the American Bankers Association represents banks of all sizes on issues of national importance for financial institutions and their customers.

Welcome.

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REP. VELAZQUEZ: Thank you, Mr. Wilson.

Our next witness is Margot -- Ms. Margot Dorfman. Ms. Dorfman is the founder and C.E.O. of the U.S. Women's Chamber of Commerce.

Ms. Dorfman has an extensive background in business ownership, publishing and non-profit leadership. The U.S. Women's Chamber of Commerce is dedicated to champion opportunities to increase women's business growth, career and leadership advancement. Welcome -- (inaudible) --

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REP. VELAZQUEZ: Thank you, Ms. Dorfman.

Our next witness is Mr. Richard A. Brown. Mr. Brown is president and COO of Krause Corporation in Hutchinson, Kansas. Krause was founded in 1916 and currently employs around 225 people. He is here to testify on behalf of the Association of Equipment Manufacturers. The AEM is the trade association that globally represents more than 800 companies that manufacture equipment worldwide in the industries of agriculture, construction, forestry, mining and utility.

Welcome

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REP. VELASQUEZ: Thank you, Mr. Bradbury.

The chair recognizes Mr. Chabot for the purpose of introducing our next witness.

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REP. VELAZQUEZ: Thank you, Mr. Franke.

Mr. Bradbury, if I may, I would like to address my first question to you. The primary storyline on the credit crunch has focused on major financial institutions on Wall Street. However, many have argued that this credit issue is creating even more daunting problems for businesses on Main Street. As a small-business owner, what have you seen in terms of accessible and affordable credit over the last 12 months?

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REP. VELAZQUEZ: Mr. Franke, you testified that Riemeier's long- time lender essentially told you to go elsewhere for financing when times were tough. Can you talk to us about the struggles that you faced in identifying alternative sources of credit for your company?

MR. FRANKE: We tried numerous sources. I guess first, second and third-tier lending, and we decided against third-tier lending. And we really couldn't find first or second-tier lending. There were no banks that were interested.

REP. VELAZQUEZ: Can you talk to us as to the primary reasons why those financial institutions did not offer financing to you?

MR. FRANKE: We were on a pretty good cash burn. We had lost significant money in 2007 and continued that into 2008. That was the primary reason.

REP. VELAZQUEZ: Mr. Brown, you discussed that agriculture is the economic foundation for thousands on Main Street across the country. Do you feel that the struggles facing rural America have been largely ignored in this recovery process?

MR. BROWN: Yes, we do, Madame Chairwoman. The items I identified earlier, which are foundational health care costs, have continued to escalate at an unacceptable rate. Usually, if you think of a farmer, it's a farmer and his family, and he has to buy his or her own health care.

Secondly, agriculture historically has fully depended upon availability of credit to the farm. Farming is a very high-risk operation, the vagaries of weather, pestilence, disease, et cetera. And it requires significant money for feed, fertilizer, fuel at this time of the year for the spring plant. Likewise, it's not unusual for a 3,000-acre corn farmer to have to buy 10,000 gallons of diesel fuel to run his or her combine in the fall.

None of these, to the best of my knowledge, have been addressed in the economic programs discussed. I think rural lenders are attempting to do a very good job. I do not find fault with them other than when you get on the downside of the slope and your financial ratios start to slide, when you need the help the most is rarely when you get it.

REP. VELAZQUEZ: Thank you, Mr. Brown.

Ms. Dorfman, every day we hear stories, anecdotal stories in papers, on TV about small businesses complaining about the credit crunch, that they are not able to access affordable capital, lines of credit. And the SBA and their business loan programs are there. And yet, you'd think that this is a time for those programs to be basically used. And what we hear is that the lending volume for SBA loan programs has been declining.

Based on what you hear from your members, do you believe that this is an accurate claim, that businesses simply are not seeking loans and capital during this economic downturn?

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REP. VELAZQUEZ: Mr. Wilson -- (audio break) -- our hope was that this program will do -- (audio break) -- conventional lending pulled back. So why are we not seeing -- what do you think are the reasons for this steep decline in SBA lending programs?

MR. WILSON: I think it has a lot to do with the application process. I believe also that the costs have risen to the point where small business -- (audio break) -- that an application maybe being denied but having a lot of expense involved. Banks aren't concerned because of the process.

So as I stated in my testimony, I think there are some things that could be done with the SBA program, including raising the limit on guarantees so that more communities and more businesses would be touched by the SBA. And you're absolutely right; this is exactly the time when we need SBA to step forward and to take a larger role in funding small businesses.

REP. VELAZQUEZ: So you feel that the cost of the loans, that the government provides a higher loan guarantee. It will incentivize for financial institutions to make those loans?

MR. WILSON: That is correct.

REP. VELAZQUEZ: Thank you. All right, I recognize Mr. Chabot.

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REP. VELAZQUEZ: Thank you.

Mr. Franke, the reason we called this hearing today is to hear from you and see how can Congress take actions to be able to provide tools and help to assist small businesses that are the job-creators in our country? I can tell you that help didn't come soon enough for your business, but I hope that in the process of discussing a second stimulus package, that we are able to use the insight that we are getting from you today to be able to have some input into the end product of that second stimulus package.

So I would like to ask you -- we know that the company you run has been in operation since 1925 and I'm sure that you have faced many obstacles throughout those times. However, you discussed how the problems in the housing market compounded the challenges facing your lender. Do you believe that if credit was made more available, that companies like yours might be able to rebound rather than shut their doors?

MR. FRANKE: I think probably if they would have remained tightened earlier we wouldn't have hit this wall. So now, yes, probably, but -- yeah, I would say probably so.

REP. VELAZQUEZ: Mr. Wilson?

MR. WILSON: Yes.

REP. VELAZQUEZ: From your testimony it is clear that banks want to lend, but, again, we have heard so many businesses express difficulty in getting loans.

How can we resolve this disconnect and help businesses find lenders who are ready, willing and able to help?

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REP. VELAZQUEZ: Mr. Bradbury, over the past few months, there has been a wide discussion on the challenges facing the automakers in the United States. How important is the domestic auto industry for small businesses like yours and others across the country?

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REP. VELAZQUEZ: Thank you.

Mr. Brown, you discussed many small manufacturers are currently struggling with decreased demand for their products. Has your company's sales been affected? And are you considering layoffs or delaying expansion plans?

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REP. VELAZQUEZ: Thank you.

Mr. Wilson, in your testimony you note that the economic disruptions are now affecting commercial real estate and small business lending. Do you believe that small businesses will have greater access to financing if the TARP were used to purchase or guarantee a broader class of loans, including commercial real estate and small business loans?

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REP. VELAZQUEZ: Mr. Wilson, but I believe that hundreds have given the authority to the secretary of the Treasury to use TARP and extend it to include commercial real estate and small business loans.

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REP. VELAZQUEZ: Well, they're working on regulations, but what I'm saying is that we do not have to revisit the loan that we passed, because the authority is already there. And we will work with the Treasury for them to understand that it will be an important tool for small businesses

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REP. VELAZQUEZ: Mr. Brown, you mentioned that many rural Americans and small businesses, as a result of the current crisis, are losing faith in our economic system.

Why do you believe that there is a crisis in confidence?

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REP. VELAZQUEZ: Let me -- Mr. Chabot, do you have any other questions?

I just would like to ask my last question to any of the members of the panel. As you know, there are discussions here about a second stimulus package. And I hear you, Mr. Brown, but maybe other members of the panel have other opinions regarding any type of proactive action taken through a second stimulus package.

If we do have the opportunity to work on a second stimulus package, what will be -- you would tell Congress -- should be the first or top priority regarding any second stimulus package?

Mr. Wilson.

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REP. VELAZQUEZ: I echo my -- the comments made by the ranking member and will say that part of the record of this hearing today will be made available throughout any discussion with leadership in terms of the second stimulus package.

And the intent of this hearing was precisely that. Any time that we sit at the table to have meaningful discussions regarding what can -- how can we best stimulate our economy and what type of tools can we provide for small businesses to enable them to continue to grow our economy -- was the main reason for us to call this hearing.

So I want to take this opportunity to thank all of you for your essential information. And Mr. Franke, to you for your willingness to come and tell this story.

You know, so many times we discuss the economy and the numbers and unemployment rates and the deficit, but there is a human face to all those numbers and you signify that to such a great level.

I ask unanimous consent that members will have five days to submit a statement and supporting materials for the record. Without objection so ordered. (Sounds gavel.)

This hearing is now adjourned.

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