04/18/2009 05:12 am ET Updated May 25, 2011

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: 
  1. Job creation comes from growing existing businesses or starting new businesses.
  2. 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.
  3. 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.
  4. If it doesn't come from would-have-been profits, then money to grow is either a gift, or investment, or borrowed.
  5. 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.
  6. 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.
  7. 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.
  8. 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.