Mr. KERRY . Mr. President, I want to say a few words about S. 1196, the Small Business Investment Company, SBIC, Amendments Act of 2001.
For those who don't know, the SBIC program is a very successful partnership between the SBA and private venture capital firms. It has accounted for about half of all venture capital deals done in the country over the past few years, and it has helped finance some of America's companies that are now house-hold names--Federal Express, Intel, Outback Steakhouse, America Online, Callaway Golf, and Massachusetts' own Staples.
The main purpose of this act is to adjust the fees charged to Participating Security SBICs from 1 percent to 1.38 percent. The change is necessary because, at the President's request, all funding for this program was eliminated. I disagree with that. I preferred to show fiscal responsibility by level funding the program and then increasing the fees only as much as necessary to raise the program level from $2 billion to $3.5 billion. Consistent with that opinion, as my colleagues may remember, Senator Bond and I offered an amendment to the Budget Resolution, Amendment No. 183, that did just that. It was agreed to in the Senate by voice vote in April and retained in the final budget resolution. Unfortunately, the appropriators had very tough decisions to make and the funding agreed to in our budget amendment was not included in the appropriations process. Despite my disagreement, I am supporting S. 1196 because if we want to continue this program, it must be funded entirely through fees, which forces us to authorize the fee change.
For the record, let me state that the National Association of Small Business Investment Companies testified before both the Senate and House Committees on Small Business in favor of increasing the program level from $2 billion to $3.5 billion and raising the fees to make that level possible. As I just explained, this legislation makes that possible.
This bill also includes modifications to the program in order to strengthen the oversight and authority of the SBA to take action against bad actors, to protect the integrity of the SBIC program, and to streamline operations.
With this bill, I am offering an amendment, cosponsored by Senator Bond, to reinforce our efforts to keep the economy strong. The amendment strikes section six, which my colleagues in the House included when they deliberated and voted on this bill, and replaces it with similar language which accommodates changes requested by the Administration. Specifically, starting in FY2003, it reduces for two years the fees for the Small Business Administration's 7(a) and 504 loan guarantee programs in order to make these loans more affordable for borrowers to access capital and lenders to make. In reducing the fees, it gives the largest reduction to the smallest small business borrowers, those who take out loans of less than $150,000. It also provides fee relief for small business borrowers who need working capital for medium-sized loans, those in amounts of between $150,000 and $700,000.
The 7(a) program is one of the SBA's most popular and successful small business credit programs. In FY2000, 43,748 small businesses were approved for 7(a) loans, which added up to $9.3 billion. Of those billions, 31 percent went to minority business owners, 11 percent went to veteran business owners, and 16 percent went to women business owners. These loans would not have been made but for the SBA ; in order to get an SBA loan, borrowers must demonstrate that they are unable to get comparable credit, at comparable rates, from an area lender. Year after year, as this program has generated billions of dollars in small business development, fueled job creation and generated tax revenue, its default rates by cohort have dropped sharply since 1990 from more than 6 percent to less than 2 percent. Not only have these loans contributed to the economy, but the program has largely paid for itself. From fiscal years 1992 through 1998, Congress appropriated close to $1.4 billion to run the program, and the lenders and borrowers paid $1.3 billion more than necessary in fees to participate in the program.
The track record of the 504 program is equally impressive, and they too have overpaid because the SBA and OMB have over-estimated the cost of providing these loans. Reducing fees will help encourage lending at a time when surveys from the Federal Reserve have found that anywhere from 35 to 45 percent of banks have tightened credit to small businesses, making it harder and more expensive to get loans.
Originally, my amendment also included a provision to require the SBA to give new markets venture capital companies two years to raise their matching capital. Even though we had legislated in the 106th Congress to give them two years, and Senator HOLLINGS and Senator GREGG reinforced this by making the relevant matching capital available until expended as part of supplemental funding to the FY2001 Commerce, Justice, State appropriations bill, the Small Business Administration required the approved new markets venture capital companies to raise their money first in six months, and later proposed extending the period to one year. The declining economy, particularly in the aftermath of September 11, has made raising capital even more difficult. Consequently, these companies need more time than one year. Here is what Dr. Julia Sass Rubin, a community development venture capital expert from the Harvard Business School, has explained about the nature of raising funds these days: ``This task of raising capital for a new fund is particularly challenging during an economic slowdown, when the sources of funds for any kind of venture capital become more difficult to access. Additionally, with the dramatic recent slowdown in initial public offerings, even traditional venture capitalists are having a very difficult time raising money. It is simply not practical to expect a new CDVC fund to capitalize within one year.''
I am very happy to report that we were able to work out a compromise with the Small Business Administration to give these companies to year and half to raise their capital. It's not the full two years, but I am hopeful that the new markets venture capital companies can raise their capital in the that time. The Administration has also recommitted to offering a second round of funding starting in the August/September time frame of 2002.
Let me quickly explain a bit about this innovative venture capital initiative. The new markets venture capital initiative is modeled after the SBA's very successful SBIC program, which I talked about earlier. However, unlike the SBIC program which makes larger deals, new markets venture capital companies target smaller investments to the development of high-growth small businesses in our country's poorest urban and rural areas. They tie those investments to the creation of local jobs with livable wages and benefits for individuals who historically have no opportunities for employment or who are the working poor. One excellent example of such a company is City Fresh Foods in Dorchester, Massachusetts. They run a smart business, providing a needed service to the elderly in their community by producing and distributing meals for the Meals-on-Wheels program. They hire from the community, and they provide good jobs with sustainable wages. The SBA's new markets venture capital investments, if given a real chance to work, could help develop more companies like City Fresh Foods.
I ask my colleagues to support this bill, and ask my colleagues in the House to pass this bill as soon as possible.
I thank Senator Bond for his work on this legislation.
For those who don't know, the SBIC program is a very successful partnership between the SBA and private venture capital firms. It has accounted for about half of all venture capital deals done in the country over the past few years, and it has helped finance some of America's companies that are now house-hold names--Federal Express, Intel, Outback Steakhouse, America Online, Callaway Golf, and Massachusetts' own Staples.
The main purpose of this act is to adjust the fees charged to Participating Security SBICs from 1 percent to 1.38 percent. The change is necessary because, at the President's request, all funding for this program was eliminated. I disagree with that. I preferred to show fiscal responsibility by level funding the program and then increasing the fees only as much as necessary to raise the program level from $2 billion to $3.5 billion. Consistent with that opinion, as my colleagues may remember, Senator Bond and I offered an amendment to the Budget Resolution, Amendment No. 183, that did just that. It was agreed to in the Senate by voice vote in April and retained in the final budget resolution. Unfortunately, the appropriators had very tough decisions to make and the funding agreed to in our budget amendment was not included in the appropriations process. Despite my disagreement, I am supporting S. 1196 because if we want to continue this program, it must be funded entirely through fees, which forces us to authorize the fee change.
For the record, let me state that the National Association of Small Business Investment Companies testified before both the Senate and House Committees on Small Business in favor of increasing the program level from $2 billion to $3.5 billion and raising the fees to make that level possible. As I just explained, this legislation makes that possible.
This bill also includes modifications to the program in order to strengthen the oversight and authority of the SBA to take action against bad actors, to protect the integrity of the SBIC program, and to streamline operations.
With this bill, I am offering an amendment, cosponsored by Senator Bond, to reinforce our efforts to keep the economy strong. The amendment strikes section six, which my colleagues in the House included when they deliberated and voted on this bill, and replaces it with similar language which accommodates changes requested by the Administration. Specifically, starting in FY2003, it reduces for two years the fees for the Small Business Administration's 7(a) and 504 loan guarantee programs in order to make these loans more affordable for borrowers to access capital and lenders to make. In reducing the fees, it gives the largest reduction to the smallest small business borrowers, those who take out loans of less than $150,000. It also provides fee relief for small business borrowers who need working capital for medium-sized loans, those in amounts of between $150,000 and $700,000.
The 7(a) program is one of the SBA's most popular and successful small business credit programs. In FY2000, 43,748 small businesses were approved for 7(a) loans, which added up to $9.3 billion. Of those billions, 31 percent went to minority business owners, 11 percent went to veteran business owners, and 16 percent went to women business owners. These loans would not have been made but for the SBA ; in order to get an SBA loan, borrowers must demonstrate that they are unable to get comparable credit, at comparable rates, from an area lender. Year after year, as this program has generated billions of dollars in small business development, fueled job creation and generated tax revenue, its default rates by cohort have dropped sharply since 1990 from more than 6 percent to less than 2 percent. Not only have these loans contributed to the economy, but the program has largely paid for itself. From fiscal years 1992 through 1998, Congress appropriated close to $1.4 billion to run the program, and the lenders and borrowers paid $1.3 billion more than necessary in fees to participate in the program.
The track record of the 504 program is equally impressive, and they too have overpaid because the SBA and OMB have over-estimated the cost of providing these loans. Reducing fees will help encourage lending at a time when surveys from the Federal Reserve have found that anywhere from 35 to 45 percent of banks have tightened credit to small businesses, making it harder and more expensive to get loans.
Originally, my amendment also included a provision to require the SBA to give new markets venture capital companies two years to raise their matching capital. Even though we had legislated in the 106th Congress to give them two years, and Senator HOLLINGS and Senator GREGG reinforced this by making the relevant matching capital available until expended as part of supplemental funding to the FY2001 Commerce, Justice, State appropriations bill, the Small Business Administration required the approved new markets venture capital companies to raise their money first in six months, and later proposed extending the period to one year. The declining economy, particularly in the aftermath of September 11, has made raising capital even more difficult. Consequently, these companies need more time than one year. Here is what Dr. Julia Sass Rubin, a community development venture capital expert from the Harvard Business School, has explained about the nature of raising funds these days: ``This task of raising capital for a new fund is particularly challenging during an economic slowdown, when the sources of funds for any kind of venture capital become more difficult to access. Additionally, with the dramatic recent slowdown in initial public offerings, even traditional venture capitalists are having a very difficult time raising money. It is simply not practical to expect a new CDVC fund to capitalize within one year.''
I am very happy to report that we were able to work out a compromise with the Small Business Administration to give these companies to year and half to raise their capital. It's not the full two years, but I am hopeful that the new markets venture capital companies can raise their capital in the that time. The Administration has also recommitted to offering a second round of funding starting in the August/September time frame of 2002.
Let me quickly explain a bit about this innovative venture capital initiative. The new markets venture capital initiative is modeled after the SBA's very successful SBIC program, which I talked about earlier. However, unlike the SBIC program which makes larger deals, new markets venture capital companies target smaller investments to the development of high-growth small businesses in our country's poorest urban and rural areas. They tie those investments to the creation of local jobs with livable wages and benefits for individuals who historically have no opportunities for employment or who are the working poor. One excellent example of such a company is City Fresh Foods in Dorchester, Massachusetts. They run a smart business, providing a needed service to the elderly in their community by producing and distributing meals for the Meals-on-Wheels program. They hire from the community, and they provide good jobs with sustainable wages. The SBA's new markets venture capital investments, if given a real chance to work, could help develop more companies like City Fresh Foods.
I ask my colleagues to support this bill, and ask my colleagues in the House to pass this bill as soon as possible.
I thank Senator Bond for his work on this legislation.
