[Off Topic] The Small-Business Dilemma

Radical idea: pay cash.

Expansion often requires credit. If your business has extremely high margins and cash-flow, then it won’t for long! That’s because competitors will enter your market, lower your margins, and force you to keep innovating.

Capital is necessary to “lubricate” change - it’s the way you can continue keeping the “old” parts of the business running while building out the new innovative parts.

There are three ways to get the capital:
1) Equity - selling a portion of your company
2) Debt - borrowing from the bank
3) Cash flow - from revenues.

Equity is used when you use it to buy a long-term capability (e.g. Cisco buying the consumer mass-market company Linksys) and you aren’t going to dilute your existing shareholders more than they want.

Debt is sometimes used to buy long-term capabilities, but the bulk of corporate debt is short-term lending (e.g. the commercial paper market) used to finance the acquisition of raw materials that you will quickly convert to finished products. This is, to paraphrase Wimpy, “I’ll gladly pay you Tuesday for the cow you sell to me today that I’ll make into hanburgers and sell tomorrow.”

In commodity businesses, this kind of lending is essential to keeping the business growing. The faster the growth, the more essential a credit facility so you can take advantage of the opportunities.

Finally, since many profitable companies don’t have the margins of a Google, Apple, of Microsoft, cash flow isn’t a reliable source of cash for big opportunities.

In the end, entrepreneurs take risk when starting or growing a business. If you strip all the potential rewards of success while leaving all the potential shame of failure you’ll simply get fewer entrepreneurs pursuing fewer opportunities.

Why anyone would think that the collective wisdom of that horde of rapacious mediocrities known as “Members of Congress” will lead to better outcomes? (And don’t use the bankers as an example of the evils of entrepreneurialism - those jokers take risks with other people’s money, not their own - just like Congress).

Peace,
Doug

#2 hit the nail on the head: we may not see short term employment growth in small business because they can’t get the credit to finance raw materials to service increased sales opportunities and therefore don’t need to hire anyone new to make the new finished goods to get the new sales.  Vicious circle!  In my career, I have seen several start-ups on the verge of making it big; but they stalled because a lack of credit made the step up to the next level impossible.  Unless they sell out to a buyer interested in the bigger opportunity, I suspect these operations die because the incipient opportunity disappears for one reason or another.

I suggest folks read Econoclasts. The basic issue is that the President is supporting a Keysenian approach to economic growth with high taxes, and high social and government debt. Interest rates are being held low allow the government to manage the interest on the debt while providing expansive services. All the while, investment capital is chasing better opportunities overseas, most notably in countries where flat rate taxes (but especially versions of the Fair Tax) have been implemented and where government regulation remains low.

Investment capital is the key for supply-side economics to work; investors seek the best return possible, allowing business to re-engineer, retool, and expand in times of economic slowness. The downstream impacts allow people previously under employed to find new opportunities.

Voters and the government need to wise up that attempting to take this Keynesian approach only works as long as there is free money, like cash for clunkers, and evaporates when withdrawn or payback time arrives (like the income tax some of your will pay this year for using cash for clunkers or the piling debt obligations of the US government). As long as taxes and debt are high and interest rates are low, investment capital will move from the US to other countries. We must reverse this trend an take a proven supply-side approach by reducing debt obligation (i.e. higher taxes on those who have investment capital), allowing the interest rate adjust in a free market, and eliminating the present income tax system in order to attract investment capital and grow tax revenues to eliminate the deficit. What I suggest is in stark contract with the US government currently attempting to prevent capital leaving the domestic US markets, raising taxes, and keeping interests near 0% while borrowing more money.

He who has ears, let him hear.

And if you want to look for opportunity over the next 10 years, where does the Bureau of Labor Statistics suggest you go? Health care and social services, the areas the government is attempting to socialize. Isn’t that darn interesting, given that Federal Government employment has been the job sector growth leader for the past 2 years. Folks - that the plan in a nutshell. Death to small business, socialize the economy, and tax the Fortune 500 to death.

Another small business dilemma is that we have no way to predict whether we will be forced to provide health insurance, even for part timers, how much the “government approved” version will cost, what our taxes will be and what our cost of capital will be 3 years from now.  The business policy incompetence of the current administration (the last one was no great shakes either) and the confusion it produces is disastrous.

I can’t find a link, but wasn’t there a story recently that only 7% of the Obama administration (the whole exec branch essentially) has had any private business experience?  Certainly no one sitting in the White House has ever run a business, made a payroll, produced something tangible to sell, faced competition, had to innovate, or faced business failure!
Small wonder that they have no clue, no inkling, no instinct, and damn sure no interest in how to put the private sector back to work and why.

# 6 - Some of us have advocated that the government stop the attempt at forcing health care down the throats of small business. If they are serious, we have suggested an alternative: give every business a 2-to-1 tax deduction for every dollar deposited into an employee HSA, and every employee a 2-to-1 tax deduction for every dollar they contribute. Then, allow them to use/save the HSA money to provide for their own health care as they choose. It’s quite simple - no Government intervention needed.

All of the issues, deficits, interest rates, credit, taxes and health care regulation, raised in the NRO article and by earlier commenters are valid.

However, the greatest factor, by orders of magnitude in my view, negatively affecting small business is uncertainty.  The issues mentioned above are representative of the causes of that uncertainty, but the list is actually much longer.  Political uncertainty, focused on the elections in November and frustration with that process, is an additional very important factor, in my view.

Uncertainty leads to hesitation and delay.  Hesitation and delay in making decisions to hire, invest or expand at the micro level leads to deferred economic recovery at the macro level which feeds uncertainty at the micro level.

I work in the equity capital field.  A broad and deep sense of uncertainty is the biggest contributor to raising equity capital for small businesses.  The bankers and other lenders with whom I talk frequently are saying the same thing with respect to debt financing.

Small business investment and hiring, and the equity and debt capital to fund it, will accelerate when we have a better sense of what our world is going to look like in 12, 18 and 24 months.  We are not seeking certainty, just less uncertainty, a balancing of the two which allows better informed risk taking and decision making by small businesses and the entities which fund them.

In #9, the second sentence in the fourth paragraph should read:

A broad and deep sense of uncertainty is the biggest contributor to difficulty raising equity capital for small businesses.

Sorry!

#1-Radical idea: Reduce the corporate tax rate to 23%, eliminate the caplital gains tax, keep the Bush tax cuts in place and take the unspent $600B of the “stimulus” and turn it into across the board tax cuts and/or rebates to individuals. Then we can all pay cash. ps-Party like its 1773.