Entrepreneurial

Small businesses need cash, not rhetoric

September 16, 2010

– George A. Cloutier, a graduate of Harvard Business School, is the founder and CEO of American Management Services, one of the Nation’s largest turnaround and management services firms specializing in small and mid-size companies. He is also the author of the bestselling book, “Profits Aren’t Everything, They’re the Only Thing”. The opinions expressed are his own. –

The lack of serious small business aid proposals, empty rhetoric, and general intransigence by the Republicans has anointed the Democrats by default as “The Party of Small Business.”

The Obama bill to inject $30 billion into community banks with the primary focus of expanding small business lending, is hardly a panacea. But Republican attempts to block the bill, for a variety of political (although not practical) reasons, amounts to more stumbling and bumbling by the opposition that has produced no worthwhile alternative.

Choosing not to increase taxes is not a stimulus, but an overused bandaid designed to gain votes. Republican candidate Carly Fiorina’s proposal to have a two-year tax holiday may create jobs for her and additional money in the system, but it’s not going to induce any small business owner to add new jobs that weren’t already planned.

Proponents say this bill could produce up to $300 billion dollars in expanded lending to starving small businesses. It will likely produce substantially less, but something is always better then nothing. Before Republican senators George Voinovich and George LeMieux recently announced they would vote for the bill, this revenue-neutral bill was astonishingly blocked by the party of “no.” So far proposals to help small business, from both parties, have lacked the fundamental understanding that small businesses need working capital (aka cash). This lack of cash is the biggest blockage to expansion in the small business sector.

The proposals to expand and speed up depreciation rules, increase R&D write-offs, payroll tax reductions or holidays, and other tax reduction programs are helpful to overall demand, but are far wide of the mark of immediately helping small businesses. The majority of small businesses barely have enough cash for the next two weeks, so programs that offer some help over the next two years are laughable.

Most small businesses are not be able to take advantage of accelerated depreciation because they barely pay any taxes anyway and these proposed tax savings would not be available until the 2011 tax year ends at the earliest. In early 2012 real tax benefits would be achieved, but precious few small businesses would gain. If a business buys a new computer system now for $5,000 and could depreciate it fully in 2011, it would not receive the benefit until 2012 assuming the company is making a strong profit. If not making a profit there is no benefit. Increased R&D expense write-offs are equally unhelpful for most small businesses. If an owner wants to buy new cars or hire more workers there is simply no benefit. A payroll tax holiday for a $40,000-a-year new hire would produce $3,000 in payroll tax savings (based on a payroll tax of 8 percent). Why would a small business owner invest $40,000 in a new employee to get $3,000 back?

Eliminating or reducing the capital gains taxes would help venture capitalists currently flushed with money, but most small businesses are bootstrapped and very few receive outside funding of any significance. The current fight over paperwork reduction is helpful, but will not really produce any cash for most capital-starved small businesses. Business don’t need less paperwork, they need more cash now.

Most experts and economists who propose these marginal fixes have never faced a 50-percent decline in revenue, empty stores, or backlogs that have diminished by 20-80 percent. They have no idea what it’s like to be a contractor or excavator whose business has dried up. Perhaps the economists and politicians who have proposed these marginal aid programs should try to meet a payroll this week with nonexistent or reduced credit lines.

The current fight over tax breaks to the very top tier of small business owners is mostly irrelevant since it represents only 1-2 percent of small businesses. Frankly, although painful to some well-off owners, it’s not going to affect 99 percent of small businesses. These businesses pay almost no taxes, have little or no net worth and right now are faced with failing expectations and sales. Banks are not loaning to them since they aren’t credit worthy.

The Obama Administration issued a $1-trillion stimulus with less than one percent earmarked for small business. Unfortunately that looks good compared to the do-nothing-except-talk attitude of the Republican opposition.

The message from small business to Washington: Stop worrying about paperwork reductions, tax breaks for the few, and get some real money into the system.

Comments
One comment so far | RSS Comments RSS

All true. If Congress really wants to help small business, it needs to think a lot smaller. Tax credits/deductions are worthless without profit. Real tax reform for small business must recognize the essential differences between big and small. One thought…allow all small businesses with gross receipts of $10M or less, retain, without any tax, (at either the corporate or ownership level) earnings of up to $50,000, provided it is re-invested in the business.

Posted by bizsmall | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •