able to use those funds to help more businesses in its community. SBA was instrumental in providing credit, which might otherwise not have been available, to a deserving business.

Now for the sad part. On April 1, 1980, the banker advised the business of its quarterly interest adjustment. The rate on that date went to 22.5 percent. The increase in the interest-not the entire interest payment-just the increase in the interest, was $4,250 a month. The business now owes over $50,000 in accrued interest. Even though the business had a good year it cannot afford to stay in business any longer because of the cost of borrowed money.

The point of the example is to illustrate that borrowed money is no substitute for equity capital and the sources of equity capital for small business are extremely limited.

The SBA's direct loan program, which is designed to aid groups who historically have had a difficult time gaining access to normal sources of credit (for example Vietnam vets, women, and minorities) will probably put about $1 million into the small business economy in fiscal year 1980. This is not too significant when viewed in light of the total needs.

Our tourism related loan program has generated 76 loans for $2,589,950 since its inception in October 1979. This too, is a help but it is a band-aid approach available only to eligible businesses within the nine-county area. The answer to the larger problem lies in a more favorable tax treatment of the small business by his government. He must be permitted to retain more of his earnings for capital expenditures, current expense, and normal growth and development. Small business is essential to the free enterprise system. If it does not get this type of help it will vanish and so will the system as we know it today.

Thank you.

Senator BAUCUs. Thank you very much, John.

[The attachments of Mr. Cronholm's prepared statement follow:]

I am writing in response to your request for my "thoughts on the problems small businessmen are having in obtaining and retaining equity capital.

Our bank attempts to satisfy all the local loan demand by all segments of the local economy. All the businesses in our area are small and this includes the farmer. As a result we work closely with them attempting to build a more progressive and viable community. If our community is to prosper we must see existing business grow and attract new businesses.

The small businessman has a number of problems in todays environment and it is my opinion the most pressing is the acquisition and retention of sufficient equity capital.

The economic structure of our country is based upon the motive of reward for those who are productive and take risks. The American dream is founded on the principal of self-worth. Everyone who contemplates beginning a new business has this dream in mind. Funding that dream is this country's major challenge.

Raising venture capital today is very difficult due to a number of reasons. The most important one now being the many economic uncertainties our country's economy is facing. One thought on attracting additional venture capital to small firms would be to allow entrepreneurs to roll their investments tax free into small businesses. Additionally, retaining equity capital is an ever greater problem. Retained earnings are obtained after taxes. Additionally inflation puts a large requirement on companies to retain capital just to maintain its current status without any real growth.

Compounded with the above is the large additional burden put on all businesses by record high interest rates. Finally many small businesses are

Mr. John R. Cronholm

Page 2

April 4, 1980

family owned and I feel the elimination of the inheritance tax is imperative to give incentive back to the entreperneur to build successful family business and to reward those who are truly the builders of our country, the saver and the risk taker.

I hope my thoughts are of help to you.

Very truly yours,

при

Michael E. Grove

President

Per your telephone request, I will attempt to outline several items which I feel are important to the subsequent success or failure of a small business in relation to its capital adequacy.

1.

2.

3.

The single most important cuase for the failure
of a small business is the lack of adequate equity
capital which is compensated for by short-term loans.
Under the guidelines established by the regulatory
authorities of banks, savings and loans, credit unions
and financial institutions, they cannot extend credit
to small businesses for operating beyond a one year
duration. Under this criteria it is quite evident that
financial institutions cannot obligate themselves to
a small business due to the restrictions without sub-
sequent guarantees from one of the federal government
agencies.

Small businesses cannot operate on a revolving line
of credit and remain competitive and vibrant due to
the term of the debt involved.

4. Without sufficient operating capital, small businesses
cannot compete in this economic climate.

5. Without operating capital a small business cannot purchase inventory to supply those goods and/or services necessary to survive.

6.

Short term operating lines are totally inadequate and
it is my firm conviction that small businesses must
receive adequate capital on a term basis in order to
survive in the ensuing years.