It looks like the so-called Small Business Bill is about to become law. So what will it offer our ailing small businesses? More debt and more government intervention.
Most of the attempt at stimulating small business in the Small Business Bill comes in the forms of offering more loans to small businesses. This is coming from government pumping money into community banks and through opening up SBA lending.
But with small businesses seeing weak sales and narrowing profits, more debt is the last thing they need. More debt will only make small business more vulnerable to failure in the long-run. Recovery for the small business sector of the economy is going to be a long, slow process that is based more customers willing to spend money. It is not going to come from easier access to the artificial cash flow that comes from taking on more debt. Higher debt payments raises the fixed monthly overhead expenses for these businesses, which pushes their breakeven point even higher. That means that they are going to have to generate even more sales to pay their higher fixed monthly bills. In a recessionary economy, expecting that growth in revenues can come quickly enough to cover the cost of added debt is a very risky gamble.
Many banks actually have cash to lend right now. They are just not seeing many small business deals that have an appropriate level of risk to make them “bankable.” Pushing more money into a weak system in the form of debt runs the risk of created yet another bubble, much like the one we saw in the housing market.
The Small Business Bill also offers targeted tax incentives aimed at manipulating the behavior of small businesses. The Bill tries to get them to buy more equipment through an incentive of immediate tax write-offs. But who needs more equipment if there are not customers willing to spend money? None of the surveys of small businesses cite lack of capacity as their problem for weak sales. The problem is that customers are not spending money like they did in the past. Recessions can do that.
The scariest part of the Small Business Bill is that it sharpens the teeth of the IRS by significantly increasing various penalties that most often impact small businesses. In addition to the normal risk of tax problems that come from a tax code the is approaching 100,000 pages, small business now have the added requirements for 1099 filings that came with the Health Care Bill. Small firms will be extremely vulnerable to running afoul of the growing monstrosity that is our federal tax system and there are now much higher penalties for any mistakes.
What small businesses needs right now is cash. But, the cash they need is the cash that comes growing demand that creates operating cash flow. That will only come when the economy recovers. Going further into debt is only a short-term fix that will only further weaken many already fragile small businesses. Without a fundamental change in our economic policy, there is little hope for a small business recovery anytime soon.