'The Truth Behind The Jobless Recovery': Startups Can't Find Funding

Even as the nation lacks the jobs to employ millions of workers, one crucial source of job-creation is being squelched: New businesses, which, according to a new study, contribute a fifth of the nation's new jobs, often can't get off the ground.

After years of lax lending policies contributed to the worst economic downturn since the Depression, banks, which offer businesses the loans they need to get going, have adopted stricter standards. But this newly conservative climate, necessary in some ways to prevent another crisis, is also helping to stall a recovery. With banks less willing to take risks, would-be entrepreneurs are hitting a wall. The close relationship between banks and business owners, which drives the economy forward in good times, now poses a threat to recovery.

As a means of healing the national unemployment rate, now at 9.4 percent, business-creation is essential. New businesses contribute a full 20 percent of new jobs, despite the fact that those jobs constitute only 3 percent of the nation's total job pool, according to a study released Tuesday by Bank of America Merrill Lynch, entitled "The Truth Behind the Jobless Recovery." Without new businesses being formed, the rate of job-creation will remain painfully slow.

"Banks are being much more picky," said Sam Thacker, a partner at Austin-based Business Finance Solutions. "A start-up is going to have to prove that they have domain expertise in the field that they're trying to start a business in."

To some extent, this new strictness is beneficial for the economy. Thacker characterized the banks' behavior before the financial crisis as "the wild west of lending," with banks throwing loans at virtually anyone with a business plan and a credit score. But others say banks have learned their lesson too well.

Banks have become stricter at a time when leniency is more important than ever, experts argue. After markets crashed in the fall of 2008, creditworthy borrowers saw their credit scores compromised, sometimes through events they couldn't control.

"The extent to which wealth was destroyed in this recession was dramatic," said Michelle Meyer, a Bank of America Merrill Lynch economist and the new report's principal author. "Balance sheets were hurt quite a lot."

One in seven creditworthy Americans were unable to pay their bills at some point after the financial crisis, often due to a job loss, according to a study released late last year. As otherwise responsible borrowers contend with an isolated credit flaw, credit scores have become an increasingly unreliable measure.

"The world of credit scores has been badly tattered," said Marilyn Landis, president and CEO of Pittsburgh-based Basic Business Concepts. "Much of the information no longer reflects the ability of the individual to pay."

Would-be entrepreneurs have few options. With home prices continuing to fall, it's more difficult to use a house as collateral for a loan. Meyer, the author of the study, described an "adverse feedback loop," in which low home prices make banks less willing to extend credit, which stifles the creation of jobs, which, in turn, keeps home values from climbing.

The jobs situation is plagued by such feedback loops, beneficial in good times and ruinous in times bad. Small businesses are locked in a co-dependent relationship with small banks. Business owners depend on the personal care they can get from their local bank, and local banks depend on loans from small businesses. As HuffPost reported, both parties in this key relationship are keeping each other down.

Much talk in Washington has justifiably been spent on small businesses. The Bank of America Merrill Lynch study estimates that 45 percent of the nation's jobs are at establishments with fewer than 50 employees. By the Obama administration's estimate, small business payrolls contain 70 percent of the nation's jobs. But policies to address the impediments to business-creation are lacking, Meyer said.

"There's been so much focus on small business broadly," she said. "Do you come up with a mechanism to help new businesses start up, or help existing businesses?"

Comments

[Bizzable]

05:39 PM on 02/11/2011

The Very BIG List of Venture Capital Partners for Seed, Early Stage and Startup Companies
Most of these companies like tech & healthcare but there are other sectors with funding.

http://bizzable.com/tips/2011/01/the-very-big-list-of-venture-capital-partners-for-seed-early-stage-and-startup-companies/

[M0 Beta]

02:33 AM on 01/22/2011

Startup that need money should raise it like Groupon. The only starter that I've come across that is fully funded and is headed for pure profits is....http://adwhisperer.thinkadzzoo.com

[Don Turnblade]

05:30 PM on 01/18/2011

Cost of capital and terms have led us to use organic growth in preference to loans. Working to move from our virtual offices to a physical office has been delayed by funding terms for years at this point.

Banking reports that small business is not requesting credit is mistaken, rather small business already knows the terms or unacceptable and will not bother to apply.

[gerald4]

06:04 PM on 01/14/2011

Most of the permanent jobs in the USA are and were created by greedy individuals, partnerships, corporations and other greedy private business entities in order to increase their own personal wealth through business profit. Those businessmen were greedy or they would not have created those businesses and those related jobs.

I believe that the only financial beneficiaries of "Free Trade Legislation" are the foreign manufacturers, foreign workers employed in foreign factories, US congressmen and Senators that took perks and campaign money from lobbyists, and the US consumers who benefitted from lower prices that were created from foreign imported products that were made with less expensive labor and less expensive environmental compliance costs! I cannot think of any other beneficiaries, can you?

The more that I think about it, the corporations and other businesses did not just ship their jobs overseas, they just started buying the same products, parts, subassemblies and services from foreign overseas industrial and manufacturing companies, and then stopped buying products made by US manufacturers who then closed their own US located factories and fired all of their US employees as allowed, encouraged and ECONOMICALLY REQUIRED by the US "FREE TRADE" laws that were created in the last 40 years by the Republican and Democrat members of the US congress that the US citizens elected.

[gerald4]

06:02 PM on 01/14/2011

Jobs created by US individual citizens, US businesses and US corporations today will mostly be created in foreign countries to take advantage of the "FREE TRADE" laws that were created by the elected Democrat and Republican members of the US Congress that US citizens elected in the last 30 years that removed the import taxes on imported products to ALLOW, ENCOURAGE, and ECONOMICALLY REQUIRE the use of less expensive foreign labor and less expensive foreign country environmental compliance laws.

This is required in order to give the US consumer the absolutely lowest possible price for each product, without the private US manufacturing company going bankrupt.

Businesses are greedy, but without greedy individuals, businesses and corporations starting businesses and providing jobs for US citizens in order to try to create wealth for themselves, most US citizens would have to live off of the land or be beggars in the streets.

Who else other than greedy individuals, businesses and corporations have ever hired very many US citizens other than some tax supported government authority?

Jobs created with taxes by local or Federal US government do not create wealth, but take a portion of the wealth from those who produced wealth to pay the bureaucratic payrolls for various public services that the producers could perform for themselves.

[gerald4]

02:35 PM on 01/14/2011

HOW COULD THE US GOVERNMENT GET SOME MORE MONEY TO HIRE MORE PEOPLE?

The private sector business profits are the MAIN source of wealth available for the government to take in the form of taxes in order for the government to pay for BUREAUCRATIC GOVERNMENT EMPLOYEE PAYROLLS and other government expenses, except for funds that the government raises by borrowing money (printing and selling US Treasury Bonds that obligate our children and future unborn generations to work harder than ourselves to repay these bonds when they become due).

There are a few additional sources of Government revenue such as Import duties, mineral right royalties from government lands, sales taxes, etc.

Private businesses must must be profitable and generate wealth so that a portion of that wealth can be skimmed off as taxes to pay for various Government expenses.

Private sector businesses, Industrious individual businessmen, and Corporations are and always have been the MAIN sources of REAL JOBS for US citizens that CREATE REAL NATIONAL WEALTH for the USA that can make a net increase of national wealth of the USA.

To ignore the US government deficit spending will certainly destroy purchasing power of the US dollar when industrial nations stop buying the Freshly printed US Treasury Bonds that the FED periodically prints and sells at auction (discount) to get US dollars back from the Industrial nations that make the products that the US consumes!

[Rich Baska]

12:52 PM on 01/14/2011

Small businesses are only potential job creators based on historical data. The loan officers are smart to be "picky" because our economy has reached a tipping point of dependency on multinational corporations with a diversified product offering. We no longer value competition, we value efficiencies and economies of scale. I often read about the "evil government" that should remove itself from the equation, but that is a naive and backward proposal. That suggestion can basically be interpreted as frustration with the multinational corporations that are siphoning our economy into the hands of fewer and fewer individuals. In essence, we're simply fighting over the scraps left on the carcass. The government of the people has been railroaded into lowering taxes on the multinationals which is the exact OPPOSITE of what we, the people, should be doing. We actually DO need a redistribution of wealth and it can either be orchestrated through the will of the people, or it will come in a fury of "market corrections", devaluations and deflation. It's the inevitable result of unbridled and deregulated capitalism.

[gerald4]

12:33 PM on 01/14/2011

HOW MANY NEW AND EXISTING GOVERNMENT TAX FUNDED JOBS CAN THE NATION AFFOR TO PAY FOR?

Primitive civilizations such as early pioneers and settlers of the USA had to provide their own military defense against indians, police, firefighters, teachers, medicine, water, sewer, roads, bridges, welfare and other services as best as they could.

After the early pioneers and settlers could produce enough necessities of life for themselves and also to also support a rudimentary civilization, would they then combine their meager resources/or and tax themselves to hire bureaucrats as soldiers, teachers, water system operators, police, firefighters, and other services but limited these bureaucrats to the number that they could afford to support. These bureaucrats did allow the producers to become more productive by not having to worry about providing those services for themselves (and for their own families).

Cities and States could un-incorporate or declare bankruptcy and allow private businesses to buy their distribution systems and plant infrastructure, and then the business can sell water and sewer services to pay to re-build or expand those infrastructure if the local (city) government cannot afford to pay for their own infrastructure.

[gerald4]

12:12 PM on 01/14/2011

COULD THE FOLLOWING ITEMS BE THE MAIN REASONS FOR THE LACK OF JOB CREATION BUSINESS ACTIVITY IN THE USA?

IF THE US LABOR COST AND ENVIRONMENTAL COMPLIANCE MANUFACTURING COSTS ARE UNKNOWN, how can a business determine if starting and/or expanding their operations in the USA and/or hiring new US employees is going to be profitable when compared to foreign manufacturing costs that are generally known.

How much is the US government is going to raise the current amounts that the government charges businesses for unemployment insurance rates next year? The government has twice extended the number of weeks to pay the unemployed, and the government might extend the number of weeks of benefits again, and the cost increases to businesses for unemployment "insurance premium" increases are absolutely certain, but the amount of the increase is unknown.

The national healthcare cost estimates are probably similar to the initial Medicare cost estimates, and then the healthcare costs will probably be many many times more expensive that the government initial annual cost estimates, and these costs will be passed onto the businesses. The amount of the payroll tax increases to pay for national healthcare are unknown.

Existing environmental laws, and the anticipated costs of future environmental legislation that will be "piled onto" our remaining US located industries (that stay in the USA) will be another factor causing the remainder of our US industries and US jobs to relocate to overseas locations. Foreign environmental manufacturing costs are generally known.

[gerald4]

12:09 PM on 01/14/2011

WHY CAN'T THE US GOVERNMENT LOAN MONEY TO NEW START-UP BUSINESSES AND CAYSE THEM TO CREATE NEW JOBS?

If federal government should had established its own very large venture capital fund for loaning money to start-up businesses, and had ignorant (non-technically educated) government bureaurocrats loaning money for every hair brained start-up scheme that is proposed, then that fund would vaporize into executive paychecks, marketing expenses, because the entraprenuers would normally bleed all of the assets out of each start-up company into their own pockets.

When start-up businesses are started with borrowed money instead of using the entrepreneur's own money, that entrepreneur will be less careful about how he spends that borrowed money than that if the entrepreneur was spending the entrepreneur's own money.

[gerald4]

02:51 PM on 01/14/2011

WHAT IF THE US GOVERNMENT BORROWS A LOTS OF MONEY AND THEN SPENDS THIS BORROWED MONEY ON GREEN JOBS, RENEWABLE ENERGY, INFRASTRUCTURE RENEWAL, AND OTHER SIMILAR EXPENDITURES?

Spending federal tax collections plus money borrowed from individuals in various industrial nations and then spending this money for green jobs, renewable energy, infrastructure renewal, welfare, unemployment, social security, national healthcare, police, firemen, school teachers and other similar non wealth creating expenditures will only increase the "Soverign Debt" of the Nation that our children will have to work hard to pay back the loans that we promised the US Bond purchasers that our children and future unborn US generations would work hard and repay those loans that we used to pay for our government expenditures and our imported consumer products.

Foreign individuals in foreign industrial nations that create wealth will eventually own everything of value in the USA as they redeem their freshly printed US Treasury Bonds and US dollars that they earned by manufacturing US consumer products for title to assets located in the USA. Foreigners will then become the major (or maybe the only) source of employment for US citizens.

The US population will then become employees; possibly indentured servants; or maybe even beg to become slaves owned by the foreign countries and/or foreign individuals that will own everything of value in the USA in the very near future if the US government continues to destroy the US economy and the purchasing power of the US dollar with deficit spending.

[gerald4]

11:07 AM on 01/14/2011

Mr. Bruce L. Hardgraves USN Retired, of Worland, Wyoming, self describes himself as a "Former Drunken Sailor" corrects record in his posted opinion in the Northern Wyoming Daily News, April 2, 2010 where he states in a letter to the editor that, "I object and take exception to every one saying that Obama and Congress are spending money like a drunken sailor. As a former drunken sailor, I quit (spending) when I ran out of money."

When Obama and Congress ran out of money, they just borrowed more money from the countries that create wealth, and spent that money to buy more votes and friends in the USA.

[tedawson12]

09:31 PM on 01/13/2011

Yea, "feedback" loop? But nothing to feed us with, is right!

[gerald4]

07:22 PM on 01/13/2011

GOVERNMENT JOBS ARE NOT THE ANSWER!

The US Government cannot continously borrow US dollars back from individuals and governments in the industrialized nations to place each unemployed US citizen onto some government payroll keeping busy performing environmental clean-ups; digging holes today then re-filling the same holes tomorrow; inventing Green Products that will be manufactured in some foreign country, welfare; unemployment; healthcare; pork barrel projects; free educations; free medicine; subsidized housing; humanities; art; music; sculptures; writing poems; make-work schemes; entertainment; education; wars; social entitlements; police; firefighters; etc., and/or similar bureaucratic endeavors that do not contribute anything towards reducing our foreign trade balance and/or to produce any of the food, shelter and clothing necessary for maintaining the lives of the US population.

The only way to create or keep Tax Supported federal government bureaucrat jobs and pay for government contracts to create government paid contractor jobs is for the private sector to be taxed and/or obligate the private sector though bonded endebtedness to create the funds to pay the public bureaucrat employee's salaries and benefits, or to pay some government contractor to perform some government service.

[BuckCarson]

07:20 PM on 01/13/2011

As an entrepreneur with a fledgling technology start-up that actually exports (read: creates wealth for the USA), I'll tell you that no one in emerging tech would ever even think of borrowing from a bank. All of our monies have come from private investors, individuals with enough capital to expose to extreme risk. Bankers don't have the stomach, the training nor the patience for supporting innovation.

Second, I will guarantee you that any government involvement will only breed companies that depend on government itself. Government is just too bureaucratic and myopically focused for significant wealth creation. Companies that focus on government subsidy become dependent on the government and actually have very poor efficiencies.

In my experience, the way to grow jobs is to:

1) radically simplify tax code and ensure government stays out of the mix.
2) Acknowledge governments' part in the great recession, for example Fannie and Freddie have had a very large part in this... creating, in fact, the very conditions giving rise to the banker exorbitant profits.
3) As voters, we need work on ourselves rather than spending our time whining about inequities.

[tedawson12]

09:33 PM on 01/13/2011

I prefer to acknowledge "white mans 700 trillion" dollar market, capital formations away from growing business, plain and simple.

[BuckCarson]

09:56 PM on 01/13/2011

Ted- what do you mean by: "capital formations away from growing business"?

[gerald4]

10:54 AM on 01/14/2011

Thanks!

[gerald4]

07:19 PM on 01/13/2011

THE USA NEEDS TO START CREATING NEW WEALTH AND NEW JOBS!

Real wealth (and the associated jobs to create wealth for others) is created and/or acquired MAINLY when the members of a family (or a nation, city-state, island, tribe, etc.) plant, grow and/or harvest something of commercial value from the earth; extract something of commercial value from the earth; provide professional services (medical, legal, dental, engineering, architecture, accounting, land, surveying technology, etc.); collect payment for patent and copyright uses; manufactures or constructs something of commercial value that is consumable or permanently useful for rental income; and then trades, sells, leases or rents these items and/or services to parties outside of their family, in return for a net transfer of gold, currency or commodities from other parties outside of their family into their own family.

The members of that family can then reflect their real wealth and financial security with the net positive accumulation of grain, gold, cattle, jewels, land, buildings, hotels, casinos, factories, commodities and/or other marketable products for reserve use in times of emergency and/or also to raise the standard of living for the members of that family.

This accumulated wealth is then available to be taxed in order to create funds to repay sovereign national debt, spend for pork barrel projects, green projects, infrastructure projects, water & sewer, wars, streets, bridges, highways, welfare, unemployment, school teachers, policemen, fire fighters, and other government bureaucrat provided services.

[gerald4]

12:35 PM on 01/14/2011

Economics, Trade Deficit, Government Spending Deficit, Jobs for Americans, and the Buying Power or value of the US Dollar are all interrelated. Each of these principles generally affect each of the others, and each is very important. These subjects need to be understood by the General Public. Economics is not that complicated. It is interlocked with understandable cause and affect principals of various economic action options that can be totally understood by almost any High School Graduate, and/or also most High School Drop outs.

US citizens must start creating real wealth by taking actions that result in a net transfer of gold, currency or commodities from parties outside of the USA into the USA.

The USA needs to generate wealth, not re-distribute the remainder of the existing wealth by selling assets to foreigners and distributing that wealth to the poor!

The USA cannot continue to live on borrowed money to pay for our US government expenses that are in excess of our tax revenues, and also to pay for our imported consumer purchases!