The state of small business
Mentioning “small business” at least 13 times in his speech (get the full text here), the president unveiled a two-pronged attack to get America’s “true engine of job creation” back on its feet and hiring again. Obama pledged to redistribute $30 billion in repaid bailout money from big banks to smaller community banks “to give small businesses the credit they need to stay afloat.” He also promised to eliminate all capital gains taxes on small business investment, to give tax breaks for small businesses who raise wages or hire more workers, and for those who invest in new plants and equipment.
Nydia Velazquez, the chairwoman of the House Committee on Small Business, said the president clarified the “central role small businesses play in our economy,” and added the tax initiatives “would spark growth by helping firms reinvest in their facilities.”
Washington, DC-based tax policy expert Clint Stretch, of Deloitte Tax LLP, said the president’s tax incentives would address the “cashflow issues” facing small businesses and added the tax credit on the purchase of new equipment is especially significant for companies looking to expand as the economy recovers. “If you’re looking at a recovery, you’re going to want to start updating your equipment or start bringing in new equipment in as you hire workers back. The quicker they can write it off for tax, the quicker Uncle Sam is picking up the bill.”
Stretch said Obama is on the right track by combining tax breaks with a program to increase small business lending.”At the end of the day if I’m going to go out and buy $250,000 worth of equipment for my little factory, the fact that the government is going to allow me to write most of that off so that I’m going to save 35 cents on the dollar, I’ve still got to finance the other piece.”
The tax incentives were welcomed by Duluth, Minnesota entrepreneur Dave Benson, who witnessed Obama’s speech in person as the guest of Democratic senator Amy Klobuchar, who has championed the bill to use TARP repayments to help small businesses.
“The less taxes we pay, that money can help continue to grow and build our business,” said Benson, who is back to 40 employees after laying off nearly half his staff a year ago. “We saw our numbers drop and things have certainly picked back up.”
Benson co-owns two manufacturing companies – Epicurean, which makes cutting boards, and Loll, which produces recycled outdoor furniture – and sells his products in more than 40 countries around the world. He said the strength of his export business- 8-10 percent growth over the last five years – is what allowed him to hire back his workers and was pleased by Obama’s promise to double exports over the next five years, which the president anticipated would create up to 2 million jobs.
The president has mostly tried to help Main Street through Recovery Act funds administered by the Small Business Administration, by waiving fees, increasing guarantees and boosting lending amounts, but so far the results have been disappointing. SBA loan volumes, while up over this time last year, are still half of what they were prior to the financial collapse. No matter how attractive Obama makes SBA loans, the banks continue to sit on their money. And after being rejected time and again, shell-shocked small businesses have stopped asking and are simply laying off workers and paring down costs in other ways to try to stay afloat.
Jeff Fagnan, a partner at Boston-based venture firm Atlas Venture, said access to credit is extremely challenging for startups and early-stage companies.
“Getting a working capital line for a small business is next to impossible,” said Fagnan, who added it was unfortunate that the lion’s share of federal stimulus dollars were used to help large companies. “I wish some of that money would trickle down to startups and small businesses that could use that money.”
Throw in a weak U.S. dollar, increasing healthcare costs, depressed housing and commercial real estate markets and stagnant consumer spending and Obama’s challenge gets even more formidable. Even before the global recession it was a tough go for small businesses; with half of all startups ultimately failing, according to a recent Kauffman Foundation study.
Kauffman president Carl Schramm, in his own “State of Entrepreneurship” address last week, said 70 percent of entrepreneurs do note expect to add new jobs in 2010 and nearly two thirds of them have seen their sales volume and profitability decrease.
Klobuchar said there needs to be an “economic call to action” that makes America more competitive internationally. The Minnesota politician said the government needs to do a better job at helping small- and medium-sized businesses export their goods, especially while the U.S. dollar is weak compared to the Euro.
“Ninety-five percent of the world’s customers are outside of our borders,” said Klobuchar, who added the U.S. economy needs to undergo a drastic identity change, from “a consuming, debt-ridden, importing nation, to a producing, exporting nation that has its financial house in order.”
Klobuchar was happy to see the president shift the financial focus from big banks to small business. “I think the whole idea was a rising tide lifts all boats,” she said, explaining the reasoning behind the broad support of Obama’s bank bailout. “What I think they didn’t realize was that when Wall Street gets a cold, Main Street gets pneumonia. That’s why there wasn’t an immediate focus, because people were so scared of the whole financial system falling apart and for good reason. So there was very little focus on small business and there needs to be more .”