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NASE Submits Testimony Regarding the Small Business Administrations (SBA) Micro-Loan Program

Friday, July 13, 2007
Testimony of Kristie Darien, Executive Director
The National Association for the Self-Employed
“SBA’s Micro-Loan Program"

House Committee on Small Business
July 12, 2007

On behalf of the National Association for the Self-Employed (NASE) and our 250,000 micro-business members nationwide, I would like to thank the House Committee on Small Business for allowing me to speak here today regarding the Small Business Administration’s Micro-Loan program and how it assists the access to capital needs of this important and unique demographic of the small business population.

The NASE’s membership represents a wide variety of industry sectors, with the largest segment from the services/consulting sector and the construction trade. Approximately 60% are sole proprietors and 53 percent run their business out of their home. With an average size of four employees, close to 50 percent of our membership employ family members and spouses in their micro-business. In 2005, an NASE member’s business had median gross revenue of $112,400; the median annual household income was $71,000. As you can see, our membership is quite reflective of our nation’s middle class, familyowned and operated small businesses.

A key obstacle faced by this segment of the business population is the lack of access to financing, which is essential for the start up and continued growth of micro-businesses. Sixty-one percent of NASE’s members feel that there are not adequate funding resources for the micro-business community. Traditional lending institutions such as banks and angel investors are unlikely to offer loans and investment capital to these micro-firms due to a variety of issues. One barrier to micro-lending is the concern that start-ups and smaller enterprises are risky investments since growing businesses typically exhibit erratic bursts of growth and downturn. Thus, the perceived high risk reduces chances for micro-business start-ups to obtain financing. Another issue is that micro-businesses by and large require smaller amounts of capital and thus, banks or investment companies often believe that it is not an efficient use of their time or resources nor will they receive a substantive return on investment from such a small amount. Additionally, increasing mergers and consolidations of banks have led to larger regional or national banks buying out small, local banks. Large banks tend to be less interested in making micro-loans to small, local businesses. Where a micro-business owner once had a long-standing, cultivated relationship with his/her local bank, the owner will now be forced to deal with a new system and staff. This all affects lending.

With this in mind you may then ask how micro-business owners are currently financing their businesses. Well, according to a March 2007 NASE survey, approximately 58 percent of our members use their personal savings to start their business. Ten percent utilize credit cards and a little over nine percent use a home equity loan for start-up capital. As micro-business owners look for ongoing financing in order to maintain or grow their business, 36 percent continue to use their personal savings while over 21 percent turn to credit cards. Both of these avenues do not promote long-term stability for the owner and the company.

The use of personal savings puts a micro-business owner in a precarious position in which he or she would be unable to recover financially should an unexpected personal or business expense occur such as a medical illness, necessary home repair, or an economic downturn. In addition, capital from personal savings used for the business takes away money that can be used towards retirement savings for the self-employed individual and their family.

The high usage of credit cards and personal lines of credit put the owner and the business at risk. High and fluctuating interest rates can increase debt and affect the ability of the business owner to pay back the money. This, in turn, can negatively affect a microbusiness owner’s credit score creating another obstacle towards qualifying for loans. Twenty-six percent of our membership indicated that they believe their credit score was their biggest barrier to obtaining financing. In addition to those entrepreneurs with lower than required FICO scores, many also do not have extensive credit histories which influences their ability to be considered for a loan. Overall, the reliance on FICO credit scoring by traditional lending resources to examine potential borrowers is a critical hurdle faced by micro-businesses.

With all of this said, the one shining beacon of opportunity for a micro-business owner in the challenging realm of business financing, is the Small Business Administration’s loan programs, such as the Micro-loan program. This program addresses all of the above barriers that affect access to capital for micro-businesses and gives them a chance to start and grow their business.

While banks are an important component in the program due to their work with microlending intermediaries, micro-business owners applying for financing through the Micro-loan program are not subject to the biases or barriers of traditional lending institutions. They are able to work with community-based, non-profit intermediaries whose sole focus is to assist them in their endeavor of starting a micro-business. Microlending intermediaries offer financing opportunities via the SBA Micro-loan program for those needing small amounts of capital (under $35,000) and for entrepreneurs with lower credit scores or minimal credit history.

Most importantly, these intermediaries have essential expertise on the needs of this key demographic. The technical assistance component to the Micro-loan program is a crucial element which enables intermediaries to assist micro-business owners step by step through the development and growth of their business. This training and assistance not only increases the likelihood of full repayment of the loan, but increases the likelihood for business survival and success.

The National Association for the Self-Employed strongly supports the Micro-loan program and we have consistently advocated for increased funding, lower lender and borrower fees, and improvements upon SBA loan programs. Based on our initial review, the NASE is supportive of the Committee’s draft legislation to improve upon the SBA Micro-loan program. In particular, the NASE is pleased to see the bill include provisions to facilitate the transmission of credit reporting information by establishing a process for intermediaries to provide information to the major credit reporting agencies about a borrower’s payment records. This would significantly assist in adding to and improving upon a micro-business owner’s credit history.

As a membership organization representing micro-businesses, I cannot express to you more intently the importance of the SBA loan programs, especially the Micro-Loan program. In fact, access to financing is so critical to our membership that our association launched in 2006 a Micro-Business Development Grant program to assist our membership. Through this program, NASE members can apply for a grant up to the amount of $5,000 for a specific business need such as equipment, technology, marketing campaigns, etc. Since May of 2006 we have given out 44 grants totaling just under $200,000. We have designated an additional $200,000 to be given out this year in grants. The program is the first of its kind and the grants have been of immense assistance to our members who need small infusions of capital for their micro-business.

In conclusion, I would like to leave you with some comments from some of our microbusiness members who have been the recipients of SBA loans over the years so that you may know how important these programs are to self-employed and micro-business communities:

NASE Member Mark Zoller, President of Zoller's Outdoor Odysseys Inc in Washington state said, “My father started a white-water rafting business 34 years ago and he and the operation was simply tired at the end of his tenure. He had great vision for how the company could expand, but not the energy or capital. I applied and received an SBA loan which enabled us to purchase and built a new facility, and expanded our offerings. In the six years since, we have over doubled the business and now have 30 whitewater guides on staff along with several support staff. Six years ago our annual revenue was $200,000, and this year looks to be $550,000+. The SBA kept our family operation alive and gave us the opportunity for great achievement.”

NASE Member Shonda Parker, owner of Naturally Healthy a medical and birthing supplies company in Louisiana was trying to expand her operation. In efforts to find financing she went to area banks to apply for a loan. The loan officers were not interested in assisting her and turned her down right away. The only financing she was offered were personal lines of credit at high interest rates. She was encouraged by a friend to look into an SBA loan. She applied and received an SBA loan at an affordable rate with the assistance of her local bank. Shonda was able to grow her business and then ultimately sell it at a substantial profit. She believes the SBA backing made all the difference.

Thank you again for allowing the National Association for the Self-Employed weigh in on the importance of the SBA Micro-loan program and the issue of access to capital for micro-businesses. I encourage you to continue to support these programs and ensure their viability and success by pushing for increased funding and improvements.

NASE Member Poll

March 2007: Financing your Business
Whether it be financing for a new business or existing business, the self-employed and micro-businesses have a very difficult time gaining access to capital from traditional lending resources such as banking. In addition, government resources such as the Small Business Administration’s loan programs are not extensive enough to meet the funding needs of the micro-business community. To assist the growing capital needs of the micro-business community, the NASE launched last year our Business Development Grant program. However, we know more must be done to help you finance your business. Please take this short member survey to assist us on determining how this issue affects you and your business.

1. What primary source of funding did you utilize to initially start your business?
(Choose only one)
58% Personal savings
9% Home equity loan
6% Borrow from friend or family
10% Credit card(s)
7% Other loans from traditional lending institution (i.e. bank)
1% Government funds/loans (local, state, federal)
4% Other
3% No Opinion

2. What primary source of funds do you use for the ongoing financing of your
business? (Choose only one)
36% Personal savings
8% Home equity loan
4% Borrow from friend or family
21% Credit card(s)
8% Other loans from traditional lending institution (i.e. bank)
0% Government funds/loans (local, state, federal)
15% Other
8% No Opinion

3. Do you believe there are adequate funding resources for micro-businesses?
16% Yes
61% No
23% No Opinion

4. Which is the largest obstacle you face in gaining access to capital? (Choose
one)
26% My credit rating
22% Lack of collateral
15% Bank regulations and paperwork
9% Amount of loans (i.e. too large, too small)
5% Other
22% No Opinion

5. What is the likelihood you would apply for funding from associations and
nonprofit organizations, if they provided grants and loans for small businesses?
50% Highly likely
28% Somewhat likely
11% Not very likely
6% Not at all likely
5% No opinion

Total Respondents: 469