CREDIT NEEDS OF SMALL BUSINESS THURSDAY, JUNE 13, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The subcommittee met, pursuant to recess, at 10 a. m., Senator Joseph S. Clark, chairman of the subcommittee, presiding. Present: Senators Clark, Sparkman, Capehart, and Beall. Also present: Senator Bush. Senator CLARK. The subcommittee will be in order. I would like to offer for the record a letter directed to me as chairman of the subcommittee under date of May 9, 1957, from Mr. Wendell B. Barnes, Administrator of the Small Business Administration, together with the material enclosed, consisting of a general summary of both programs of financial assistance to small business and procurement and technical assistance to small business. It will appear after Mr. Barnes' statement. (See p. 352.) Mr. Barnes, we are happy to have you with us this morning. I had the opportunity to read your prepared statement overnight, and if it is agreeable with you I would like to have it filed in the record at the conclusion of your oral statement. (See p. 340.) Mr. BARNES. All right, sir. Senator CLARK. I would like to proceed right away to some questions and considerations, giving you, however, if you want to, an opportunity first to amplify anything that is in your prepared statement, although I would much prefer it if you would not read it. STATEMENT OF WENDELL B. BARNES, ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION Mr. BARNES. All right, sir. As a matter of fact, I was going to suggest the same thing, because we have appeared before this committee earlier in the year, and much of the material there is somewhat repetitive of the earlier statement. I would like to enlarge first on some references I have made in my statement on page 14 to the subject of the State development corporations, following the first paragraph on page 14. The State development corporations are primarily financial institutions. The Small Business Administration has ruled that they are financial institutions and that it will participate with them. The subject of development corporations, their structure, their purposes, and their operations, has been covered in the pamphlet Development Credit Corporations, published by the Small Business Adminis tration in March 1954. In the event that publication has not been made available to the committee, we will at this time make it available, not for reproduction, but for the committee's use. Senator CLARK. The pamphlet referred to by Mr. Barnes will be filed with the record of hearings, but not printed therein. Mr. BARNES. Development credit corporations are generally of two types-statewide development corporations and local industrial foundations, or local development corporations. In the case of the former, the statewide development credit corporation, the fact that the corporation generally includes as members, in addition to stockholders, financial institutions which are required to provide funds. on the call of the corporation, makes it unlikely that they would have occasion to call on the Small Business Administration for loans or for participation as frequently, we will say, as the second type, that is, the local type. The Small Business Administration has made one loan in participation with a State development credit corporation. Senator CLARK. Would you mind telling us which one? Mr. BARNES. It was the Connecticut corporation. Other such corporations are eligible to apply for participations. Some of the State corporations have exhausted or nearly so their lending funds, and this would be one way for them to expand their funds until they have built up sufficient reserves for themselves. Senator CLARK. Would you mind telling us a little more specifically what "this" means when you say "this would be one way." Mr. BARNES. By participations with the Small Business Administration, of course, they could expand the utility of their funds since they could take only a share of those funds instead of having to use all of their funds, or make calls on all of their subscribers in the financial institutions who have agreed to accept these calls. Senator CLARK. That would be a direct participation by the Small Business Administration in a specific loan? Mr. BARNES. Yes, sir. Senator CLARK. Not the general current of loaning authority to the development credit corporation. Mr. BARNES. No. That is right, sir. In other words, we could regard them exactly the same as banks if under the laws in their particular State they qualify as financial institutions, which most of them do-banks in the sense of financial institutions and lending institutions. Senator CLARK. Including perhaps insurance companies. Mr. BARNES. Yes. To the extent that they are usually controlled under separate types of laws. The loans from the State development credit corporations in which they would ask us to participate must comply with the general credit criteria the Small Business Administration uses in connection with its other loans. All of the loans made by the State development credit corporation will not meet these standards, since some of them are made to large corporations, and many loans are of a completely equity-capital type, in which there is no collateral other than common stock, or the collateral is a second mortgage, or a junior lien, with the senior liens having been taken by a bank. Senator CLARK. Are we using equity capital in the same sense there, Mr. Barnes? The representatives of the State development credit. corporations who have been before this committee in the last few days have indicated that it is a very rare occasion indeed in which they will buy stock. Almost always they are making loans. To be sure, some of those loans would probably not meet the criteria of the Small Business Administration. Mr. BARNES. I am not speaking of equity capital in the sense that they are buying stock, but of the type of use to which the funds are to be put. It may be to a corporation in which there is not-shall we say? as much equity capital invested by the owners as would normally be the case in seeking a loan, but this lack is outweighed in the opinion of the officers of the State development credit corporation by its desirability as a business in the State, due to the employment it provides and the effect it has on the local economy. Senator CLARK. But fundamentally we are talking about loans and not stock purchases, are we not? Mr. BARNES. Yes, sir. We are. But I point out in our loans generally we have certain collateral requirements, and it has been possible for some of these development credit corporations to take just stock as collateral, or something else which we do not generally believe should be under our law. Senator CLARK. I understand. That would be what you would not consider to be sound business loans? Mr. BARNES. Yes, sir. Senator CLARK. And probably they would be for a longer term than you are interested in. We Mr. BARNES. No. Their term generally is the same as ours. have one other problem-not a problem, exactly, but an activity which has a bearing on this general subject-since the Small Business Administration does not make a loan if financing is available from other sources. A State development credit corporation is such a source. Our field offices keep closely in touch with the development credit corporations and will make referrals of borrowers to the corporation if it is the type of activity or loan that we know they are seeking and trying to encourage in their State. Many of these referrals have resulted in loans from the State development credit corporation. The converse has been true. There have been a number of instances where referrals have been made to us by development credit corporations, where they believed it was more the type of thing that we normally do and they perhaps wished to use their funds for other purposes, or may have committed a substantial portion of the funds available to them at the time. Senator CLARK. May I ask you whether you or the Loan Policy Board have made any determination as to where the Small Business Administration should stand generally with regard to a State development corporation? By that I mean, is it your concept that you should not make a loan unless the State development credit corporation has turned it down, or would it be your view that you would be willing to make a loan without having first been shown that the State development credit corporation turned it down? Mr. BARNES. Actually we have operated more informally than that, because there is a great difference between the corporations in the various States and our local offices have merely kept in touch closely with what the local corporation was trying to do. Senator CLARK. So you might have one policy in one State and another policy in another? Mr. BARNES. Generally speaking, yes, except that all of our policy would adhere to what we can do under the law, and to our own policy statement. This means that if we know in a particular case it is exactly the type of thing that this development credit corporation believes in, and believe they were set up to perform, then we will make the referral to them. If, on the other hand, they wish to make the loan, but wish us to participate, we feel we could participate if the loan otherwise comes within our loan policy statement and the law under which we operate. Senator CLARK. As I understand it, you do not make any loans unless you have a written turndown from a bank. Mr. BARNES. Banks. That is right. We do not require the same thing from the development credit corporations because they operate more freely. As I say, they are generally in the same area we are in. As a matter of fact, the Small Business Administration has done a lot to encourage the formation of these State development credit corporations. When I first became Administrator, we had received invitations to go to many States and assist in the formation of these corporations. It was such a huge task that I felt it would be impossible to take it on as a regular function. So we prepared this pamphlet to which I made reference earlier, entitled "Development Credit Corporations," and when it was completed, I think early in 1954, we sent a copy of that pamphlet to every Member of Congress and to the Governor of every State, and to the Attorney General of every State, and to the legislative council of every State. We have had extensive correspondence with other States in encouraging this activity and the formation of these corporations, because we felt it was one way of helping small business. The more of these that were organized and the more active they became, the more small business would benefit from them. Senator CLARK. I think that clears it up pretty well. Why do you require a written turn-down from a bank before you consider a loan? The committee received some criticism from small business organizations that many a bank does not wish to put in writing that it has turned down an applicant and, if they put it in writing and I am not passing any judgment-this is a bit of redtape which makes it pretty difficult for them to move ahead with your organization. I can see administratively it would be easier for you, but it is a pretty rough requirement on many an applicant, is it not? Mr. BARNES. I do not believe it is, sir. When a borrower applies at a bank, the loan officer will usually talk to him after he has consulted with his own loan committe and tell him verbally that the action of the bank is such-and-such. What this means is that he will confirm that by a letter which is between the borrower and the loan officer. We are encouraging banks to make loans or participate in loans, and this reluctance to write the letter I think sometimes results in a participation loan, when otherwise it would not do so. Furthermore, it removes the necessity for us ever to doubt the word of the borrower himself. Senator CLARK. Of course, the question is whether a telephone call would not achieve the same results, or whether you consider that far too informal in a Government organization. Mr. BARNES. The General Accounting Office, when they audit our books, specifically look in each file to see if we have evidence that the credit sought was not available from a bank, or whether the bank itself would not make the loan, because of the requirement in the law that we should not make the loan if the bank is willing to make, or if it is available somewhere else. Senator CLARK. But the law does not require a written turndown, does it? Mr. BARNES. No, sir. Senator CLARK. And plenty of times a file will contain a memorandum of a telephone conversation, and that is usually sufficient for most purposes. I see your problem, though. You are not worried about it and some of these other people are. That is why I raise it. Mr. BARNES. I really think this has resulted in a great many more participations by banks than there would have been otherwise if it had been handled more informally. Senator CLARK. I want to ask you a number of other question about the development corporations, but I want to give you an opportunity to complete your own statement on that subject first. Mr. BARNES. All right, sir. The community industrial foundations or local development corporations-they may or may not be so called-are more limited in the scope of operations and availability of financing than the State corporations. Capital usually must be raised by the sale of stock to local residents, which is a limiting factor in itself. But, on the other hand, there is great civic enthusiasm for a project that may be undertaken by a local corporation-perhaps more so than even a State corpo ration. Additional funds to finance their operations must, therefore, frequently be sought from outside financial institutions on the same basis as other borrowers. They do not have, as statewide development corporations do, a membership composed of financial institutions subject to call for funds. While the statewide corporations are normally profitmaking corporations, the average local foundation or development corporation is a nonprofit organization, the stockholders of which benefit only indirectly through increased business activity in the community, or by the distribution of net assets upon liquidation of the foundation. It is the local type of corporation which will usually turn to the Small Business Administration for financial assistance to assist in the construction of a specific industrial facility. Senator CLARK. Mr. Barnes, you are speaking, when you say nonprofit corporations, of these local corporations, are you not? Mr. BARNES. Yes, sir. Senator CLARK. Because the evidence we have had indicates that most of the State development corporations are set up on a profit basis, even though they do not expect to make much, if any, profit. Mr. BARNES. That was my point. Of these local development corporations there are, according to the figures we have obtained from the Office of Area Development of the Department of Commerce, some 2,200 active in local industrial development groups in the United States. Since 1900 there have been about 3,094 such groups that are 93527-57-21 |