Since $500,000 will permit only a limited number of research studies in 1962, the following factors will be used in selecting the recipients of the grants: (1) Importance of the subject matter proposed taking into consideration such factors as (a) availability of current information on the subject, (b) the number of small businesses that might be aided by the results, and (c) whether the subject matter is susceptible to worthwhile results. (2) Quality of the institution and its staff. 1 The increase in the estimated business loan application level from 900 to 1,000 per month may require in increase of $700,000 in the transfer to "Salaries and expenses." JUSTIFICATION FOR ESTIMATE OF SUPPLEMENTAL APPROPRIATION REQUIRED FISCAL YEAR 1962 The accompanying statement of "Program and financing" reflects a revised appropriation estimate of $150 million, in comparison with the original estimate of $20 million, for additional capital for the revolving fund, established by section 4 (c) of the Small Business Act to finance business and disaster loans and the taking of prime contracts for subcontracting to small business firms pursuant to sections 7(a), 7(b), and 8(a) of the Small Business Act, and to finance the program of investment and development company assistance (exclusive of administrative expenses) under the Small Business Investment Act. Section 4(c), as referred to above, authorizes appropriations of not to exceed $1 billion to the revolving fund, with maximum amounts thereunder available for each of the programs, as follows: Program Small Business Act: Financial assistance: Business loans__ Disaster loans. Prime contracting Statutory authorization (millions) $575 150 Small Business Investment Act: Capital and loans to small business investment companies and loans to State and local development companies... Total authorized appropriations‒‒‒‒‒‒‒ -- 25 250 1,000 Actual appropriations to date total $760 million including $20 million additional for 1962 as provided in H.R. 7577 recently passed by the Congress. Additional capital of $130 million for the fund as covered by this revised estimate is required in order to finance an anticipated increase in business loans and for capital funds and loans to small business investment companies and for loans to State and local development companies, as discussed in more detail below. Financial assistance-business loans.-Where the financial assistance needed by small firms is not available on reasonable terms, business loans are authorized to be made by SBA, directly or in participation with banks or other lending institutions. All loans shall be of such sound value or so secured as reasonably to assure repayment; except for the purpose of constructing facilities are limited to a maturity of 10 years; and except for "pool" loans, bear interest at a maximum rate of 51⁄2 percent per annum on the agency's share thereof. The agency's maximum commitment to any one borrower is limited to $350,000 and the participation in a loan is limited to 90 percent. From the beginning of the lending program on September 29, 1953 through June 30, 1961, a total of 25,351 loans have been approved in a total amount of $1.205.6 million (including participating institutions' share of $181.9 million). Sixty-three percent of these loans have been on a participation basis. Based on prior experience and the projection of an increase in activity which normally could be expected, the original 1962 estimate developed last fall was predicated on the receipt of an average of 900 business loan applications per month, compared with an estimate of 800 per month in fiscal year 1961. For the first 8 months of 1961 through February, applications were received at an average rate of 746 per month. However, beginning in March, the number received during the next 4 months increased to an unprecedented level and at the present time shows no sign of any appreciable slackening. March applications totaled 1,332; April, 1,066; May, 1,209; and June, 1,305. These figures represent the highest level reached in each of these months in all of SBA's history, and the fiscal year 1961 total of 10,880 established a new record. The previous high was fiscal year 1959 with a total of 10,213 applications. Thus, instead of the estimated average of 800 per month, the average for 1961 was 907. In view of the sharply increased rate and trend, it is evident that the average monthly application figure of 900 used in developing the original 1962 estimate was too low. Since the March-June period generally has been the high point of each year's activity, an average of 1,000 per month represents a conservative figure for the number of applications which can be expected in fiscal year 1962. The revised estimate is predicated accordingly on this average number. 75285-61- -13 The policies and procedures applicable to the business loan program have been undergoing a critical review during the last several months to determine what actions should be taken to make the program more effective and responsive to the financial needs of small firms. This review has disclosed a number of changes in operations, which when made fully effective, will simplify the work in processing applications and also will expedite the subsequent closing of approved loans. Some of the changes have been put into operation, others are in process. In addition to the program changes, the interest rate on the SBA share of loans to firms in areas of substantial unemployment has been lowered to 4 perIcent as one of several Government measures undertaken for the purpose of stimulating the economy of such areas. It is anticipated that the changes referred to above will not only contribute to an increase in applications but also will reduce the percentage of application withdrawals and loan cancellations and will increase the rate of loan approvals. Calculations based on these developments and assumptions account for the increase of $58 million in the amount of loans to be approved. After taking into consideration the adjustment to reflect commitments for deferred participation loans at 30 percent of the total approved, repayments, cancellations and the net excess of interest and other expenses over interest and fee income, additional capital funds of $74.3 million will be required to provide for the net additional new loan commitments estimated to be made during 1962. Disaster loans.-SBA is authorized to make such loans as the Administrator determines to be necessary or appropriate to homeowners and business firms who have suffered losses from floods or other catastrophes, and in excessive rainfall or drought areas designated by the President or the Secretary of Agriculture to small business firms who have suffered economic injury as a result of such excessive rainfall or drought conditions. No restrictions exist as to the amount of a single loan, the maximum term is 20 years and the interest rate may not exceed 3 percent on the SBA share of the loan. In view of the unpredictable nature of the program, it is impractical to estiImate the volume of new loans which may be committed in 1962. For program purposes, a nominal amount of $14 million in new commitments has been assumed which represents about 100 loans per month on the basis of the average size of loans approved through 1960. Subsequent to the submission by the President of this budget request, the Congress in section 305 of the Housing Act of 1961 (Public Law 87-70, approved June 30, 1961) provided for an expansion of SBA's disaster authority to cover loans to small firms sustaining economic injury because of forced relocation because of federally aided urban renewal, highway and other construction activities. The statutory limitation on disaster loans of $150 million referred to at the beginning of this justification reflects an increase of $25 million for this new disaster program. Prime contracting.-Under section 8(a) of the Small Business Act, SBA is authorized to enter into prime contracts with Government procurement agencies and arrange for the performance thereof by subcontracting to eligible small firms. While the authority has not been used so far and no plans presently exist for its use, it is believed the authority is a valuable tool to be kept available on a standby basis in the event circumstances make its use desirable on behalf of small firms. Investment and development company assistance-Purchase of debentures of small business investment companies.-A primary function of these companies is to provide a source of needed equity capital for small business concerns. Το facilitate the formation of such companies with capital funds adequate to meet the demands from small business firms. the Small Business Investment Act of 1958, as amended, authorizes SBA to purchase subordinated debentures of any such company in an amount equal to not more than $150,000. Proposals for the formation of small business investment companies are being received at an increasing rate. For fiscal year 1961 a total of 356 proposals was received. 78 percent in excess of the estimate of 200. A projection of this rate into 1962. after considering other pertinent factors, indicates that undoubtedly the number of proposals received and licenses issued in 1962 will approximately double the original estimate. The proportion of licensees requesting the purchase of subordinated debentures has increased to such an extent that the estimate of fund requirements must be predicated on such financing for at least 90 percent of the new companies. Accordingly, this revised estimate is calculated on the basis of $45 million of new commitments, an increase of $30 million over the original estimate. Loans to small business investment companies.-To further encourage the formation and growth of such companies, the Small Business Adiminstration is also authorized to lend funds to them in amounts which may not exceed 50 percent of the paid-in capital and surplus of a company. As of June 30, 1961, the potential liability for these section 303 loans was $120 million. Although the amount approved through June as a result of such loan requests totaled only $12 million, this source will be increasingly relied on by licensed companies as the financing of small firms by these companies accelerates and the initial capital funds are loaned or committed. A projection of the number of operating companies, capital funds otherwise available and probable financing activities indicates that provision must be made to meet a loan demand of at least $27 million. Loans to State and local development companies.-The Small Business Administration is authorized to lend funds to State development companies for general use purposes; and to State and local development companies for plant construction, conversion, or expansion, including the acquisition of land. The latter type (sec. 502) loans shall be so secured as reasonably to assure repayment, may be made directly or in participation with banks or other lending institutions, and may be made only when the proceeds are for use solely to assist an identifiable small business concern and for a sound business purpose approved by the agency. These loans are limited to a maximum of $250,000 for each such identifiable small business concern. In furtherance of the President's objective of seeking to invigorate the entire economy and to provide prompt assistance to economically depressed areas, increased emphasis has been placed on the State and local development company lending programs. The steps being taken to acquaint communities throughout the Nation with the potential benefits of the program undoubtedly will result in a sharply increasing rate of loan applications. While experience on which to predicate a forecast is not available in detail as in the case of the agency's business loan program, the potential demands are such as to support a revised estimate of $35 million, almost double the original estimate of $18.9 million. The increases in investment and development company activities will require an additional $39.9 million to finance the increased commitments for debenture purchases and loans, after taking into consideration applicable items of income and expense. Additional appropriation requirement.-In order to meet the net additional commitments for the business loan program ($74.3 million) and the investment and development company assistance program ($39.9 million), and to offset the reduction in the amount initially estimated to be available for carryover at June 30, 1961, an additional appropriation of $130 million is required. On March 29, 1961, a budget amendment (H. Doc. 129) was transmitted to the Congress proposing an increase of $320,000 from the original estimate for this appropriation. The proposal herein is in addition to that amendment. The increase for "Salaries and expenses" results primarily from the increased workload arising from the accelerated progress of the programs authorized by the Small Business Investment Act. The increase for "Grants for research and management counseling" represents the resumption of the programs authorized by section 7(d) of the Small Business Act following an appraisal and analysis of the completed research reports which were financed by such grants. The increase in the estimate for the "Revolving fund" results chiefly from steps taken by the administration to expand the loan programs in order to stimulate economic activity and combat the effects of the recession. There is already evident a strong upward surge in new applications for business loans and for the purchase of debentures of small business investment companies. Similar increases are expected in the demand for loans to State and local development companies as policy changes and the new area development program become effective. SMALL BUSINESS ADMINISTRATION, Hon. CARL HAYDEN, Washington, D.C., September 14, 1961. Chairman, Committee on Appropriations, DEAR SENATOR HAYDEN: Reference is made to H.R. 9169, Supplemental Appropriation Act, 1962, as reported by the House Committee on Appropriations on September 12, 1961. The following compares the amounts reported for the Small Business Administration with the requests submitted to the Congress. In Statements are enclosed setting forth the effects of the House reductions. view of the importance of these activities to small business as stated in the detailed justifications previously furnished to the committee, I strongly recommend that each reduction made by the House be restored. If the committee so desires, I shall be glad to appear and answer any further questions pertaining to the requested restoration or other estimates. With kindest regards, I am Sincerely, JOHN E. HORNE, Administrator. |