8 Hard Truths About Stimulating Small Business
The trouble with a small business bailout is deeply rooted in practical logistics. Small business is as diverse and wide spread as the country is. There are something like 25 million small businesses, and 20 million of them have no employees. How does the government help them?
It's time to look at some facts: correct me if I'm wrong, but I've been starting and running businesses for 30 years now, the following feel like simple hard cold facts to me:
- Job creation comes from growing existing businesses or starting new businesses.
- Both of these take money. You can call it capital. It means startups typically spend more than they get back in sales, and they have startup costs. Existing businesses have to spend extra -- new employees, more marketing, better products, new offices -- to grow.
- They can spend would-have-been profits to grow. You would have had X as profits, left over from sales minus costs and expenses; but you spend more than that instead, so you have no profits. Not a bad idea. That tends to create jobs, and growth. And -- aha! -- that makes tax rates irrelevant. Much ado about nothing.
- If it doesn't come from would-have-been profits, then money to grow is either a gift, or investment, or borrowed.
- Gift? Yeah, right. I'm amazed at the clamor around bailouts, where small business spokespeople talk about getting ours. Really, is the government going to just give away money? We already have a lot of fake small businesses on the tax roles, I bet, just because of tax strategies. Just wait until we start giving them money. By the way, they call those grants, and they do happen, rarely, when government agencies want to sponsor public goals like research, or sometimes development in disadvantaged areas. Most of the traditional government actions in this area are low-interest loans.
- Investment means ownership. You sell a portion of your business to investors. Then you have partners, and if you sell a large portion, new owners. So does small business want to sell shares to the government? I don't. I doubt many do.
- Borrowed money means higher risk, but you don't dilute ownership. Generally the existing businesses have access to commercial credit if they have stability and good financial health. Lately -- we did a survey on the credit crunch here, last month, confirming this -- the system got constipated.
- Hiring employees is risky. You make a commitment to somebody. More so in small business than large business, it's a personal commitment. You have to offer fair wages, and benefits, if you're going to have a healthy long-term relationship. And that's scary. That makes for what we call fixed costs -- you pay them regardless of sales -- and in small business, we fear fixed costs.
What can the government really do?
So when the spokespeople for business groups talk about tax breaks, consider what that really means. First, somebody is going to call that "tax breaks for the rich." Second, it encourages profits rather than reinvestment in growth. Third, if you try to cut taxes on employment, that's tempting, there must be waste there, but start trying to manage that when nobody ever agrees on what's a small business, and 20 million of the 25 million small businesses in this country don't even have employees. See facts #3 and #8 above.
And if the government tries to increase available investment money, that translates to another "tax break for the rich" too. Because the people who invest in small businesses are either the owners themselves, or wealthy people. Personally, I'm a lifelong business owner and entrepreneur, I tend to vote towards liberal, but I think this is one "tax break for the rich" that's going to help create jobs. Make it an incentive to invest, though, not an incentive to make higher profits. See facts #2, #3, #4, #5, #6, and #7. Freeing up credit is a good idea. By the way, we did a survey on the credit crunch here too, and -- no surprise -- it's really hurting small business.
What else can the government do?
I was pretty much thinking that was it, settling down for a long exhale and getting back to work, when I caught John Jantsch -- the Duct Tape Marketing expert -- suggestions on the American Express Open Forum. He calls it What Small Business Needs from the Economic Stimulus Package.
John makes four specific suggestions.
1) Really fund the SBDCs and SCORE and every other group providing education, support and training for small business.
I second that one. I've worked with SBDCs for 15 years now, helping people plan business and start new businesses. They're the best bargain in small business know-how and consulting. And funded by the SBA, state governments, and higher education.
2) Fix the Uncle Louie problem along with the banks - Yes, we need credit and we need banks to survive and start making loans but, Uncle Louie, who's sitting on $500,000 and believes in supporting his niece's crazy big business idea needs a tax credit to make that loan (while we're at it we need bigger credits for investing in our own business)
The rest of us might call that "friends and family" financing. And I agree, that addresses the investment issue that comes up in facts #2, #3, #4, #5, #6, and #7. But it might also end up getting chewed up and spit out by the opposition as a "tax break for the rich." Uncle Louie has half a million stashed away, so he's doing okay. And the other thing we'd have to be careful with is easing up the regulation that keeps the Uncle Louies from getting swindled on bogus investment deals (no offense to his niece).
3) Want to create jobs? - Don't make hiring an employee the most expensive, regulatory nightmare a small business has to go through. Depending upon whom you ask the economic stimulus act is slated to create jobs through spending that will cost between $70,000 and $200,000 per job created. Here's my advice: give ½ of that to a qualified small business and let them create real, fulfilling, and permanent jobs. Any small business owner worth their salt knows how to take a buck and turn it into a buck fifty.
Sounds good to me, but how do we do it? Before the job is created, or after? As a tax break? But taxes are on profits, and the real growth in employment tends to decrease profits. We sacrifice now for later, and invest in growth.
4) Fix health care - I know this is a biggie, and it impacts more than small business, but millions of Americans are trapped in unfulfilling cubicles by the fact that pre-existing health conditions make it impossible for them to escape. Fix this and the surge of entrepreneurial investment and innovation would take on tsunami like characteristics.
Right on, John, I totally agree. Health insurance is normally something the business owner pays, all or part, for employees. It's expensive, and it doesn't work. As an employer, I don't want to not pay for health insurance for my employees ... I just want to have what I pay work to give the employees decent health care. And if it costs my company a bit less, that's not bad either.
And, finally, what do real small businesses think about this?
God only knows. That's a totally diverse group. The best thing I've seen on this is from Dawn Rivers Baker, an expert on microbusiness, when she said:
I find all of this political theatre entertaining, but most microbusinesses don't want all of these details. They want to know specifically what's going to impact their businesses. I find that microbusiness owners care about policy, but they don't want to hear about the politics.
I agree. We're out here in the front lines, watching our spending, watching our sales, trying to stay healthy, trying to grow.
United States Small Business Administration
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Alot of great ideas and views... the beauty of blogging here... thank you. However, So much of this, and stimulus talk in general, seems to be missing dialogue about... *qualifying* for credit, not just offering it. With the economy the way it is, there is a huge increase in the number of individuals, and small businesses, who'd credit rating has suffered.
Insurance... tax credits... incentives... how about just giving a break, in some shape or form, to those who were humming along fine until the last year or so... who are stagnant now because their credit is now very poor. How about offering them credit based on their credit rating then, so they can move forward with investing in their their businesses... buying a new car, purchasing inventory, starting a new business, continuing education... all very stimulative stuff!
What seems to be missing from all this is that all small business wants is equal access to all markets. If "private" enterprise denies this, then government should guarantee it. You have 43,000 employees in a group insurance? Well, then we have 43,000,000 who don't. That is something that no one individual, or company, can propose. Only the government can do that. I'm not asking for anything I don't deserve, I'm only asking foer something everybody should deserve - whether they work for a giant conglomerate or not. That shouldn't be the dividing line. It shouldn't be a prerequisite. Do we have a nation or don't we? Are we not together or are we? Are not small business citizens or are we not? This is not an idle question, it is the core of what we are. We hang together, or we hang separately. Your call.
Part II
So the 4 things to do?
1: Use Social Security for Social Security. I pay double share. Every penny my employee pays I pay too. That's okay. But use it to fund health insurance, unemployment, disability, workman's comp. And lift the cap. Every wage, even those above 100K.
2. Directly fund SBA loans. I've gone through SBA guarantees. What they mean is banks won't loan without the guarantee, and the paperwork's horrific. I'm not Enron. If I default, the taxpayers will get it back. You know where I live.
3. Make the SBA and SCORE useful. File my returns, and stand behind them. They've got time to study tax code; I don't. Tell me what next year's tax code advises me to do, I'll do it or not, but when the IRS wants to talk to somebody, they talk to them, not me.
4. Define small. It must be a single business, whose principals derive the vast bulk of their income from that one business. There are plenty of opportunities to expand as S or C corporations, and good luck and God bless you if you do, but you're no longer a small business.
True small business is the Great American escape valve. It is the engine, it is the innovator, it is the first refuge of the brilliant and the last refuge of the hopeless. It is locked out of equity markets, bond sales, government rescues and group rates. And it doesn't care. It's free.
Part 1
"fend for their own in this Reagan-inpsired "Social Darwinist", "Hungry-Hungry-Hippos" world of Corporate Socialism"
Hmmm. There's a point here. But what it fails to recognize is that truly "small" business is the foil of Corporate Socialism. It wasn't government anti-trust or Rand Corporation that stopped IBM from monopolizing the personal computers, it was upstart Microsoft.
Software is easier. A good idea, a carton of Skittles and plentiful supplies of Jolt Cola is most of the capital one needs. Manufacturing and retailing is different. You need equipment, inventories, buildings - real things that cost real money.
I'm cautiously hopeful this crash, if left to work its course, might enable that to happen. Small businesses have been locked out for more than three decades - a good return for an honest business is 3-5%, if you pay your bills and honor your contracts. In an economy dominated by the dogma that you can "easily" average 9% just by investing in the stock market, nobody could be bothered to invest in real value. Banks dominated by loan salesmen paid on commission, who then bundled and resold loans, couldn't give a whit about a small business that was frugal, borrowed only what it needed, and paid it back.
It is the small business people who have turned their back on Corporate Socialism. They risk literally everything so they don't have to live in that world. The cure to Enron, to AIG, is allowing truly small business to prosper.
Thanks, great Job and many good examples. When I heard that the govt was going to help small businesses, I wondered how much the grants would be and how much would come out of the grant agents and actually make it to the businesses. Most of the people I talk to wouldn't take a loan right now for any interest rate, as margins are so tight, hiring is dead.
To our company, health care is the big one when we need to hire. I would surely like to see some kind of reform, especially evening out the field for the little guy. To recruit good people, we have to compete with large companies and especially the public sector, both able to furnish more health benefits and retirements for less money. Maybe tax some of the high public/private benefits and that will speed up reform.
We need property and income tax breaks to try and survive this thing. If the businesses that are still open now aren't SAVED, getting new ones to open and take their place will really be tough. And don't even think about card check, unless there is a small business exemption, say 500,,,,,,,,that would be the ultimate private sector job and business killer.
Good post Tim.
Of the 20 countries attending the G20 next month, 19 are in recession. The one that is not (yet) - Brazil. Brazil did not escape our melt-down - Lehman Bros was a giant in Brazil's economy.
Brazil's 7+% annual growth over the last 6 years has a remarkable foundation. Like most emerging economies Brazil has invested heavily in micro-credit business start-ups. But, over 60% have went on to become small businesses (10+ full-time year-round employees). That is a phenomenal rate of conversion. Consider, if only 10% of our 20 million micro-businesses could add just one employee, half of the jobs lost in this recession would be picked up!
A major key to that high conversion rate has been that during this growth cycle the businesses are virtually exempt from the taxes and regulations that larger companies deal with. The idea is to help those one person companies grow so they can compete with the larger companies. That's a two-fer, it not only creates new employment it keeps larger companies anxiously looking over their shoulder.
Bill Gates commented, "The more money you have, the easier it is to make more money. It should be the other way around".
Why did you say below your parents paid for your college?
If the majority are sole proprietors, or single-person entities (LLCs and S corporations), then don't forget the additional burden of self-employment taxes. Just as we need to decouple property taxes from school funding, we need to decouple Social Security and Medicare payments from payroll taxes, currently the biggest Ponzi scheme going. I'd be happy with a one-time self-employment tax holiday for 2009, myself.
Let me make my case another way:
>>>
Degrees edit Stanford , MBA 1981
Business
University of Oregon, MA 1974
Journalism
University of Notre Dame, BA 1970
Literature
>>>>
Tim Berry edit Founder and president of Palo Alto Software, founder of bplans.com, co-founder of Borland International.
>>>>
I came from the OTHER economy: My parents were poor, then died and orphaned me. I reinvented from loser-dom, retrained and re-educated at the highest educational level/institution I could afford then my job was sent to India and I can't afford marketing - much less healthcare for my kids but I am a skilled independent consultant barely making it. There are plenty more out there far worse off than me, I know this, I see this and I'm thankful to have what I have but the doors are closing in every direction.
What business advice do you have for people in our economy?
@randvictims, I'm sorry to read your story. I'm sorry you were orphaned and lost your job to India and you can't afford marketing.
And I appreciate you noting my achievements. That's very nice of you. But If you want to make me and my background prove your case, I don't think that works very well.
I got married as an undergrad, paid the last semester of Notre Dame myself -- well, my wife worked. Then I got the MA myself -- no, my wife worked again, but we didn't have kids. Then worked for $115 a week starting pay at UPI and worked my way up and waved money, and when I got that MBA at Stanford my wife and I had 3 kids so my wife wasn't working outside the home, and so I worked full time and studied full time both to both support my family -- without any help from anybody except my wife -- and pay tuition. I'm very glad I did. And proud.
So my background doesn't prove your point about education being inaccessible.
What advice do I have for small business? Thanks for asking. You can click my name above to see my posts here, or go to http://blog.timberry.com for more.
As a self-employed person for 25 years with many acquaintances who'd love to start their own microbusinesses, I can tell you that the one measure that would grow entrepreneurs is single-payer universal health insurance. Otherwise, the cost to families is too high.
Forget the SBA, SCORE, etc. I took an SBA course early on, and it was filled with wrong information and a total waste of time.
Absolutely true. The risk of a failing business has become very small compared to the risk of failing health - either for the business person or their families.
Tell that to the blogger, he seems to use SBA for a bible.
@randvictims yeah right ... you mean I prefer the actual statistics published by the SBA instead of your "common knowledge" that "most small businesses have gone under"? That you say 5/6 of the world agrees with, and "most respected economists"? Yes, I plead guilty.
@Joyful I've been through that too, paid my own health insurance for my family including 5 kids as a self-employed person for 12 years before my company had its first employee, and it hurt. Very expensive. I agree with you, I'd love to see a better option. By the way, in case it helps you, at one point I got into a group program, although I was still self employed, by joining an association. In my case is was the SAO, Software Association of Oregon, but there are lots of others.
As to your SBA course, sorry to hear that. But, for the sake of others, the quality of the offerings of the SCORE and SBDCs varies, but they're usually a very good option, and a lot more economical than most other options. I'd like to think @Joyful's experience was not typical.
And do I sound like a government mouthpiece? Scary. I'm not, not at all. It's just that I've been involved in small business for a lot of years, and I feel like I owe it to readers to share what I've seen.
Tim Berry
Education:
MBA, Stanford University
MA (Journalism), University of Oregon
Undergraduate degree (magna cum laude), University of Notre Dame
Is this what they mean by "rags to riches" or "bootstraps"? Most people in America can't afford to send their kids to Community College. (below is a link to some data PBS and I "made up")
http://www.pbs.org/moyers/journal/01302009/profile4.html
What about those of us in the OTHER economy who want to have a business???
Globalization and the dumping of Asian goods mysteriously escaped your list.
In case you haven't been paying attention for the past 30 years, - most small businesses went under as a result of perverted Trade rules and U.S. representatives selling our industrial capabilities to countries who mass produce via slave labor and currency manipulation.
This is common knowledge and the analysis is shared by not only 5/6 of the country but also the most respected economists.
Tax cuts, healthcare - blah-blah-blah - All important but you're asking for a sponge in a capsized boat.
Wow, common knowledge, you say? Shared by 5/6 of the country? That's strange, given that half of the employed people in the country work for small business ... and 99+% of the employers are small business. And that small business creates 70+% of the new jobs in the country. Oh, and by the way, that's 6 million small business employers, and 21 million non employer small businesses.
If you're interested in actual information, instead of made up stuff called common knowledge, try http://sba.gov.
Oh!!! The SBA?? The same agency that considered MCI a "Small Business"??
Stick with your WSJ propaganda and I'll stick with my "Made up stuff"
I have been in business a lot longer than you have and I can tell that the government has never helped me. I have helped myself. That is the only way. Forget sucking on the governments and bankers teats. They will only eat you alive after you have been well fed. If you don't know this yet you will learn in time. Lots of luck to you!
Cylindar: who's the "you" in your comment? I hope not me -- author of this post -- because it doesn't fit. Do you read the facts here, the numbered list? Does it sound like sucking on government or bankers? I don't think so. Just FYI, I've been in business on my own since 1983, started on my own and built it up to 43 employees and multimillion dollar sales without outside investment or government loans either. Much like, I suppose, you did yours. But that doesn't mean I don't want programs like the SBA or the SBDC to help other people build their business, or that I pretend that the government doesn't affect business environment like the cost of health care, availability of commercial credit, and the relative balance of investment in new business vs. big business, stocks, bonds, etc.
And let's be honest, both of us, having built up our respective businesses without the government. All business depends on a healthy economy, infrastructure, a minimum set of rules on fraud and theft, taxation, monetary policy, trade policy, and all the rest of it. We owe it to ourselves and our heirs and future generations to have a voice.
Very good advice. If your business can't stand on its own, why should the government help?
Look, I've been a small businessman almost my entire working life, I'm a liberal, a democrat, a former union member (I created my first business as a union shop so I could get certified as a journeyman in case it cratered) and right now I have 0 employees. Let me rant in capitals for a moment. I AM NOT YOUR PARENT AND I AM NOT YOUR NANNY! We've got to get away from this. I don't want to be responsible for your W-2, I-9, 1099, FICA, SUTA, Medicare, Unemployment, Worksman's Comp and (big time) your medical insurance.
THAT'S WHAT THE GOVERNMENT IS SUPPOSED TO DO! I don't know precisely how to change this. Maybe a Value Added Tax. Maybe a direct tax on all wages. But the fact is that after 30 years of providing employment, I will never have an employee again. I've gotten hit with huge liens because Social Security transposed numbers on a W-3 from a dozen years ago. I've got the Ogden office of the IRS trying to give me a refund on W-2s the Cincinnati office is trying to fine me for never having filed. And now people I would otherwise respect want to mandate I pay half as much as total wages to some private bloodsucking health insurance company?
(Indulge me) ENOUGH! I'll repeat. I'm no dittohead. But for God's sake, stop making me my brother's keeper. I'm running a business, not a church.
You want people to work for free for you without health insurance? You are 150 years late or so. Slavery is so over.
In any case, if you hire someone you are responsible for them. You have to take care of their well being at work, if nothing else. You are also responsible for correctly filing your documents. I believe it says so on the forms you have to fill out when you start a business. It's not even fine print.
No, I am not responsible for them. I am responsible for my business. And no, it is not in any forms you have to fill out to start a business - the only form necessary is application for federal EIN (if you don't want to use your Social Security number) and in my state a state sales tax form.
And no, I don't want anybody to work "for free" but that's not the same thing as without health insurance. Without health insurance is how I work, because small businesses are not qualified for any kind of group rate. And it's by no means 150 years late, the idea of employer-based health insurance only emerged in the Second World War when there were wage caps, and it was a way for employers to offer more "money" without violating the caps. Nor is it by any means slavery. People accept employment or not. There is no coercion involved.
But the attitude here is what infuriates me. I am NOT, repeat NOT responsible for the lives of anybody I hire. I am responsible to pay the wage contracted for work performed. Period. If you want a further "contract" then would you require employees to be equally responsible to me? To promise never to quit, never miss a shift, work without pay if there's no profit that month? Of course not.
do you really think that the rich people who would normally be the ones to put up capital to create jobs are going to find the incentive of a tax break big enough to risk what small fortunes they may have left? if it were me, i would take the tax break and hold onto it, until the economy picks up. i wouldn't want to invest in a new company in these conditions.
But the irony is that those "rich people" you refer to, or at least many of them, are yesterday's entrepreneurs. They weren't born rich. They built businesses, and as long as there's a decent shot at it, they'll invest in building more businesses. Yes, they risked their money to build businesses and yes, or many of them will do that again. Most of the people called angel investors, who tend to do the Uncle Louie investment as in the post, are former entrepreneurs and still entrepreneurs at heart. Even as I type this comment, a lot of new entrepreneurs are looking right now to start new businesses.
You are right about one thing: they're going to decide to take the risk of a new business or not because they believe in the new business; not because of the tax break. What does happen, though, on the aggregate, is that when taxes encourage investment, that's not make or break for any individual new business, but it changes the balance overall and sends more investment money into new business and less into stocks and bonds and such. Which is presumably a good thing, because new business means more jobs.
Give me a break. Circumstance creates winners and losers in this system, unless you're willing to break "The Law". Most "successful" companies are started by people who had family capital and expenise educations funded by family money. The "Bootstraps"/"Cinderella" stories represent less than 5% of the success of entrepreneurs.
The truly "self made" small businessmen I know have either been forced out of business or they are being crushed by an carelfully orchestrated, government assisted monopolies looking to place their tax-deferred, foreign-owned empire franchises on every corner.
Because of obsessive greed, elitist cliques and power lust, we can't have a truly Free Market in this country - we're forced into either Socialism or Corpo-Fascism.
lipservice. these repubs are against health care reform on principal. even if it destroys every US company [except the super profitable health "insurance" industry, whose CEO's are even greedier than AIG's. Actually, they even screw their own employees when it comes to health care. but notthe top brass. they wallow in totally-paid-for health care that would make congresspeople and former USSR politburo members drool. And, then millions in bonuses.
if you really want to help small businesses, then do it. or resign and let someone into office who will.
There is no economic model except that for insurance industries that provides for a profit-based health insurance industry. The more I charge for the fewest benefits delivered, the greater my profit. Nobody disputes this is the model. Does it make sense for anybody except the insurance company?
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