Mr. McCURRACH. That is what they have suggested. That is the point. If you want us to do that I think this is a strange way to make the SBIC program succeed. The CHAIRMAN. Let me say as one individual, and I think I speak for the entire committee, we do not want you to convert to a loan company. We want you to stay a small business investment company and be a success, make a profit. We know it takes time over the years to build up these large financial pictures. I think you are doing well. I hope you do not-off the record. (Discussion off the record.) Mr. McCURRACH. The suggestion I made to you this gentleman did not hear, but I wish that you would at least give it some thought. I do not even think-I do not know that it is worth anything but think it over because The CHAIRMAN. We appreciate your suggestion. We thank you for coming. Mr. Mitchell, our counsel. Mr. MITCHELL. You mentioned a matter of dual regulation with the SBA and SEC. Do you have a specific instance where that might have curtailed you or bothered you in some way? I understand perhaps there was an instance involving the sale of your office building or something along that line. Mr. McCURRACH. We have had that problem, and we have had a problem resolving it between the two agencies. I believe that it will be satisfactorily handled. I expressed myself to one of them today in that I felt as though it was a game of badminton, and I was the bird going between the agencies, but I must say that their attitude is cooperative. They have their problems, and I think we will probably resolve it. I hope so. The CHAIRMAN. You are a very good salesman. You sold this committee, and I believe you will be able to sell your board of directors on some advantages. Mr. McCURRACH. Thank you very much. The CHAIRMAN. Thank you kindly. The committee will call next the representative of the General Business Investment Corp. in the Nation's Capital, Washington, D.C., Mr. T. L. Tsui. Mr. Tsui, the committee will be pleased to hear your testimony. I believe you are president of the General Business Investment Corp. here in Washington. Mr. TsUI. Yes, sir. The CHAIRMAN. You may proceed as you wish. TESTIMONY OF T. L. TSUI, PRESIDENT, GENERAL BUSINESS INVESTMENT CORP., WASHINGTON, D.C. Mr. Tsui. First of all, permit me to express to you, Mr. Chairman, my appreciation for your kind invitation to me to appear before your committee. Before I read my statement, may I say that as our corporation is small in size and is catering to really small businesses, our policy must necessarily be one of compromise and different from the large companies. General Business Investment Corp. (GBIC) was organized and licensed in May 1960, with an initial private capitalization of $159,510, which capital has been increased by subscription to $202,010. GBIC has 102 stockholders with an average investment of about $2,000 each. The Small Business Administration has made available to GBIC in the form of subordinated debentures and loans the sum of $267,806 at an interest rate of 5 percent per annum. In 43 months of operation, GBIC has made 43 loans and investments ranging from $2,000 to $60,000 each, totaling over $441,000, which amount is presently outstanding. The borrowers are engaged in diversified small businesses, such as water transportation, real estate development, building demolition, meat packaging, restaurants, groceries, sightseeing, plastic coating, refrigerated trucking, et cetera. To break the 43 loans down, there are 9 loans to restaurants, 4 to construction including roofing, building maintenance, 6 to building demolition, 3 to plastic coating and plastic products, 4 to real estate development, 4 to water transportation, 2 to refrigerated trucking, 4 to groceries, including wholesale of meat, fruits, et cetera, and 7 to miscellaneous services including laundries, sightseeing, artificial flowers, and rug packaging and sales. GBIC was given the option to buy into the business of six borrowers; but thus far it has only a very small equity interest in the business of one of the borrowers, and that particular business is now unfortunately in liquidation. The annual business volume of the borrowers ranges from $40,000 to $1 million, with from 1 to 30 employees each. The loans and investments are secured by second trusts, chattel mortgages and/or personal endorsement. The interest rate on loans varies from 6 percent to 12 percent per annum. Three of the borrowers who were benefited by the assistance of GBIC did so well in their business that they have prepaid their loans. One of the three is a roofing company in Maryland which needed a long-term loan for its cash flow and expansion program, and failing to secure such type loan from a commercial bank, the borrower came to GBIC and secured a 5-year loan of $20,000. The borrower expanded and improved his financial condition to such an extent that at the end of 34 months after the loan was made the roofing company prepaid its loan from GBIC. One building maintenance concern in Virginia needed a long-term small loan of $5,000 to strengthen its working capital with a view to accepting more business. The borrower did not have enough assets or operating background to secure a loan of this type from a commercial bank. However, GBIC made the loan and in 6 months' time after the loan was made, the borrower increased its business volume 250 percent and its work force from 5 to 12 employees. An enterprising and frugal Chinese cook in the maritime service was discharged from his position with a shipping company after the wartime shipping boom in 1953, and went to work as a cook in a Chinese restaurant in Washington, D.C., where he was able to gain sufficient restaurant experience and to accumulate some capital, together with the help of a 5-year loan of $8,400 from GBIC, to purchase in 1962 a restaurant in nearby Maryland. He now operates a successful restaurant business with about 10 employees, and is contemplating opening additional branch restaurants, and each branch will employ from 12 to 14 workers. In another instance, a drive-in restaurant in nearby Maryland required $60,000 to open up two additional branches in the metropolitan area of Washington. Needless to say, such equity financing was not available through commercial banks. However, GBIC made the long-term loan in this case and obtained an option to purchase 25 percent of the capital stock of this business. With the loan of $60,000 this borrower opened the 2 additional branches and each branch employs 12 to 14 workers. There is also a dark side of the picture for GBIC. For example, one borrower failed in business because of his disregard for advice and counseling by GBIC and because of his lack of experience and poor management of his business. Fortunately, the borrower paid his loan in full. Another loan which was secured by a second trust became delinquent, and it was necessary to foreclose on the trust. At present there are three other borrowers which are delinquent in their loan payments, the reason for which we attribute to poor business judgment and mismanagement by the borrowers. Their businesses are in the process of liquidation. In reviewing the applications received by GBIC from small business concerns, it can be said that the main purposes for their seeking loans and financing are: 1. To strengthen their working capital after a period of poor business or in anticipation of better business; 2. To develop, manufacture, and market a new product; 3. To finance an expansion program; 4. To establish branches or diversify into new lines of products; 5. To start a new business; and 6. To seek additional finance for a business which was started with insufficient capital. Out of every 10 applications, GBIC has to reject 9 for the following reasons: 1. The ability and integrity of the management is insufficient. 2. The borrower does not have enough security and collateral. 3. The business or product has no potential market. 4. The borrower is engaged in a technical line with which the officers of GBIC are unfamiliar. 5. The borrower has no capital of its own to commence its business. In its 4 years of operation, the officers of GBIC have come to the following conclusions: 1. There is a limited number of long-term credit facilities for small business, which is still the backbone of American economy, and every small business is in dire need of long-term loans and financing at reasonable rates. 2. The financing of small business is very hazardous, and thus it is difficult for small business investment companies to attract private capital. 3. The reserve rate of 10 percent as allowed by Internal Revenue Service is still insufficient to cope with the risk that SBIC's take in making loans. 4. The interest rate of 5 percent per annum for funds to SBIC's as charged by the Small Business Administration is extremely high. This corporation, since the commencement of business in 1960, has paid to SBA over $34,000 in the form of interest payments and commitment charges, but has only paid about $17,000 to stockholders in cash dividends. 5. There is a great amount of paperwork required of SBIC's by governmental agencies due to a duplication of regulations by both SBA and SEC, to which many reports and statements must be filed periodically. Experience has shown that small SBIC's have difficult problems to overcome in their operations, especially if they wish to help the small businesses prosper and grow. Since financing of small businesses by SBIC's involves very high risks, it is urged that some form of a Federal insurance program for smaller SBIČ loans of $20,000 or less, similar to FHA mortgage insurance, be developed by SBA for congressional approval. Congress recently made several amendments to the Small Business Investment Act which will be of some help to the small business investment program. The SBA has also been taking steps to facilitate the operations of SBIC's. And the National Association of Small Business Investment Companies has been building a better image of SBIC's and promoting the program to the general public. It is, therefore, to be hoped that with the cooperation of all, the SBIC program may have smoother sailing in the future. I thank you. The CHAIRMAN. A very nice statement, Mr. Tsui. Thank you for giving it. We can certainly agree with most of what you have to say. You mentioned that the reserve rate of 10 percent allowed by the International Revenue Service is insufficient to cope with the risk. Mr. Tsui. Yes, sir. The CHAIRMAN. Can you tell the committee the loss reserve rate authorized for Federal savings and loan associations, and banks? Mr. Tsui. I do not know; but I presume their loans are more secure. Our corporation takes in loans that the savings and loan associations, and banks, do not want, so our risk is much greater. The CHAIRMAN. Do you have a specific figure to which this should be raised that you would recommend? Mr. Tsui. Well, in our own instances we have built up a reserve of $30,000 since our commencement. However, in reviewing our portfolios, we find that the reserve is not sufficient. The CHAIRMAN. You recommend something in the way of a Federal insurance program similar to FHA? Mr. TSUI. Yes, sir. The CHAIRMAN. This is interesting. Do you suggest it be operated by SBA or some other agency of the Government? Mr. Tsui. I am quite sure SBA can take care of that. The CHAIRMAN. You have 120 stockholders. Are they all small businessmen or bankers or financiers who comprise these? Mr. Tsui. No, sir. We are all small stockholders, and that is our trouble. We have a very small company, but we have to register with the SEC. So we are under both SEC and SBA. That means we have to work much harder. The CHAIRMAN. This is a complaint that is repeatedly made by everyone that appears before this committee, and this is a difficulty that I for one hope can be resolved to alleviate this constant uniformity of complaint by everyone in this area. We have been told by SEC when they appeared before us at other times that it is only a minimum regulation when you propose to issue stock. How we can get you exempt from advising the SEC when you go public I just do not know unless you can give us some Mr. Tsui. In our case we go public just for the fact that we are two stockholders over the exemption. The SBA exempted us from registration when our stockholders were not more than 100. Unfortunately we are two over, so for those two stockholders we have to register with SEC. Mr. MULTER. Why don't you buy back the stock of those two stockholders? Mr. Tsui. We wish we could, now, thinking back. The CHAIRMAN. What is the maximum interest rate you are permitted to charge under your license? Mr. Tsui. It is not more than 15 percent under the SBA regulations. But our maximum is 12 percent. The CHAIRMAN. Your company is minimum sized, and you are rendering a real service to truly small business individuals that are going into the restaurant business, and a number in the real estate business. Mr. Tsui. Yes. The CHAIRMAN. You are making some profit, declaring some dividends. Mr. Tsui. We make profit mainly by cutting down our expenses, cutting down our own salaries. That is the way we are operating, because we want first to serve SBA. We want to meet all of our obligations to SBA, including the interest payments, and then we want to serve our stockholders. So in 4 years' time we made two 5-percent cash dividends because our stockholders are small investors that need cash income. The CHAIRMAN. You mentioned the 9 out of 10 loan applications that are filed with you that are turned down, and you have given several reasons why 9 out of 10 have to be rejected. Mr. Tsui. Yes, sir. The CHAIRMAN. You must be a very sound, solid, stable, conservative, prudent organization. Mr. Tsui. Well, we may say that at the beginning we were not too conservative because we were much more bold than we are now. At the present moment we are consolidating, so as to straighten out some of our former loans which are not in too good a condition. The CHAIRMAN. Off the record. (Discussion off the record.) Mr. Tsui. We take in certain loans just on personal endorsement. The CHAIRMAN. Are you taking any equity stock in the small business companies? Mr. Tsui. Yes; but we find it quite difficult. As I said in the statement, six borrowers gave us options to buy into them. As we are dealing with small businesses, good small businesses do not want others to interfere in their ownership. So they do not want to give away. Those poor businesses, they want to give you everything which of course we hesitate to take. The CHAIRMAN. Well, that shows you are a good businessman. Mr. MULTER. May I go off the record? |