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.
Great insights. However, I disagree with your apparent assumption that any business owners that would accept loans provided by this bill would invest it in customer satisfaction or new customer acquisition — directly customer-facing in some way.
I wrote a counterpoint of sorts to your post in which I argue that in the face of reduced consumer spending, many small businesses would use more cash (debt) to invest in their workforce, so that when conditions improve and consumer spending is up, they will be much better equipped to capitalize on that for long-term growth: http://bit.ly/9Jei4g
Thanks for spurring dialogue on this; it’s important.
Mark,
My point is that however they spend it, to pay back the debt, they will have to acquire more customers to cover the incremental increase in overhead to service the added debt.
I think that using it to build up a workforce that they may or may not need at some point in the future is risky.
I see what you are trying to argue — that more access to debt leads to hiring which leads to more people with jobs and income to spend which leads to more consumer spending which leads to growth in the small businesses that hired the workers in the first place.
The problem is that most small businesses are in very weak financial condition right now. If they keep adding debt to carry them until spending kicks in, it is doubtful that they can make it long enough to enjoy the benefits.
Thanks for your comments.
Thanks for posting my comment, and replying to it so quickly, Jeff. I do see your additional points; I agree with you that doing as I suggested is still a risky path. I probably should have acknowledged that in my comment and blog post. I guess the bottom line is that until lending opens up in a big way via banks and VCs (Sramana Mitra is doing good front-line research and work to spur the latter, or at least increase dialogue on that), and until consumers feel comfortable in their savings rate, their job security and the economy as a whole to spend much like they used to, small and midsized firms will continue to be squeezed.
Hi Jeff, I liked your article and I agree on some of your points. However, being a small-business owner (service sector), I can think of two things that I AM going to use this bill for.
1. Lower the cost of my current debt. I do not run a high debt ratio now. This bill, however, might allow me to move the debt I currently have over to a lower rate, freeing up some monthly capital. Free money, the way I look at it.
2. Expand my business. The idea that there is no business out there is ridiculous. Like most small businesses, I have
For a marginal small business, legislation easing the path to more debt is not a good thing. But many small and medium-sized firms — less than $20 M — see opportunities, but can’t get even a regional lender to hear them out. Their models now stress bigness, which they equate to safety and ease of servicing.
Community banks might like to assist, but face capital ratio issues. This money will help — not solve a multi-faceted problem. The same is true of the capital investment incentives. Some such investments are worthy because they produce operating efficiency that lower costs; the best of them cover the added debt burden quickly. Others allow for greater output and there are many business that cannot meet demand they know is there. The sluggishness in the economy is not across the board.
The key point to bear in mind is an offshoot of your statement that a complete recovery will be a long slow process. It also requires many small steps — there is no magic bullet that will fire it all up.
I have no idea what you mean when you say a “fundamental change in our economic policy” will do that. How will that bring housing and all industry related to sales/construction back? How will that restore the massive wealth lost in the 2008 debacle that consumers now are slowly seeking to rebuild with savings and reduction of their own leverage? That engine of past growth is gone for 5 years, minimum. Something else must replace it and the people who will build the future economy need capital — and the bailed out banks right now are sitting on it and banking on large-scale trading margins for their profits.
The bill just passed is a sound, small step. Community banks and the SBA are not going to agree to unsound loans. They will open the door to many businesses who could not get past security at Wells Fargo or Bank of America.
My chase business banker recently blurted to me that it considers the following as small business lending criteria
1. If a small business like mine does not really need the money then it is a good candidate for the loan.
2. Is the small business doing better this year than the last year.
American socialists in congress are three years late and billions of dollars short on small business relief.
Your article treats small business as if they are all the same. You state that more debt is not needed. It seems that you are informed of the difficulty that many small businesses are having when the try to renew their lines of credit. These LOCs finance inventory and working capital. Many major banks have been pulling in these lines.
The biggest threat to my small business is my bank. . . at many banks, government regulators are scrutinizing every loan and demanding the bank put up reserves to prepare for the percieved risk. The banks come up with this cash by pulling in their loans. LOCs (lines of credit) are the easiest to pull in and the banks have been doing just that.
This small business bill encourages lending to small business. This will not increase small business debt, it will give small businesses a chance to refinance their LOCs which in many cases will save them from insolvency caused by their bank’s demands to pay down their LOC right now, at the worst time in 80 years to have your LOC called in.
I am living the nightmare right now and the passage of the bill gives me hope and some relief from the chest pains that I have suffered for the last year.
I have many peers in the same situation.
The authors assertations that such debt is bad for small business clearly puts him in the same out of touch class previously reserved for Obama himself.
I also believe the bill is a good step forward. The tax benefits as well as the SBA benefits allow me to create a startup business. Something I could never achieve without this bill.
You end your article with the comment that basically business won’t improve without a fundamental change in economic policy. A very easy statement. Just like the Tea Party states, we are for small government. While I can agree with that, it is easy to say, hard to formulate a plan.
Enlighten us as to how economic policy should change. The problem today in politics is the critics can criticize but have no answers.