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Small Business Insight --

From The TNNWC EMERGING ENTERPRISE REPORT:

Small Business and Government Policy in the United States at 03.03.2011.

Important Article Links and Excerpts Courtesy of NFIB SmartBrief.
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There have been numerous reports from various mainstream media sources saying that "small businesses are starting to borrow again," and that "small businesses are planning to do more hiring".

The first reports are actually true, but bear in mind that given the baseline of 2010, when the 1) vast majority of small businesses couldn't access sufficient net revenues to cover fixed costs (reduced consumer and commercial demand, and reduced consumer and commercial credit and liquidity), were 2) cutting expenses down to austerity levels (in order to remain solvent), and were actually 3) letting employees go, a small dollar amount of borrowing represents a large percentage of "growth." Statistics can be misleading.

As for this borrowing, it should be noted that a great deal of it is not coming from banks, or through SBA-sponsored programs, or other traditional means. A great deal of this capital is coming from some very uncharacteristic sources - borrowing against 401K plans and 503B plans; becoming involved in specialized financing arrangements (such as invoice discounting, factoring, leasing and asset-based loans), and getting money from relatives who have the wherewithal to provide for their own modest needs while helping to get family businesses "back on their feet" once again.

The first of these sources of credit is very risky and highly expensive. There are stiff IRS penalties associated with raiding your own retirement account - and if you borrow against these nest egg accounts, you must replenish them (i.e., pay yourself back) with post-tax dollars. That's very, very expensive. This type of financing was once unheard of.

The second of these sources of credit, categorically, is also somewhat expensive and is provided by small, mostly-private firms. Typically, these firms provide capital against business assets (at a relatively low loan-to-value ratio), and the effectives rates that they charge are some multiple -- that's correct -- some multiple of the rates being showcased by banks which have credit underwriting criteria which are virtually impossible for most businesses to meet. Simply stated, I could put up a sign on my butcher shop that says "filet mignon - only $0.99 per pound!," and have customers coming to me in droves, only to have me tell them, wiping my hands on my apron, that, "I'm sorry. We have no more available at that price."

Banks are showcasing rates that are clearly out of sync with the real demand for capital in the real economy. And the real demand for capital in the small business sector far exceeds the supply that banks or government agencies (including the SBA) are willing to make available at any interest rate. The U.S. economy is credit-based and credit-fueled. Sadly for small businesses, the largest sources of capital are not really willing to lend to Main Street borrowers at these showcase rates - most small businesses simply don't qualify.

Small businesses are going to non-bank sources of capital in order to survive or recover from the economic devastation that has been wrought over these last two years. Not too many of these business are growing so much as recapturing some of what they've lost. Those that are actually growing, in terms of increasing revnues or market share are also going to these non-bank sources.

The third source of credit, going to relatives, has many obvious drawbacks. Money from family sources seldom comes without terms and conditions, written or "understood," that would nauseate a street corner loan shark. Some emotional and social costs just can't be readily quantified or translated in terms of interest rates.

There's a limited supply of expensive money that is available at present to small businesses. That is reality.

As for small business owners planning to hire more employees, that is largely anecdotal. While some small businesses are hiring to replace employees that had been sacrificed previously, some of these new hires are not nearly as well-paid as the people they are replacing. In addition, many of the health care insurance and other benefits historically provided to employees, perquisites that were taken for granted, are no longer part of the compensation package.

The outlook for small business, the engine of any robust economy, remains unclear. Most of them are not getting the fiscal fuel that they need in order to survive, let alone thrive.

Much more needs to be done for the benefit of small businesses in general, and especially those businesses that are not cranking out sophisticated intellectual property or revolutionary technology.

More follows from the NFIB (National Federation of Independent Businesses) SmartBrief Report.

- Douglas Castle
http://www.tnnwc.com/
http://aboutdouglascastle.blogspot.com/
http://www.LinkedIn.com/in/douglascastle

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Obama proposals won't help most small businesses, Danner writes
President Barack Obama's proposals will help only a small fraction of small businesses, most of them high-growth and technology-oriented, NFIB President Dan Danner writes. "President Obama has started down the right path by highlighting small businesses as saviors of the economy, but he would gain greater insight into their true needs just by listening carefully to them," he wrote, advocating a simpler tax code and fewer government regulations. WisBusiness.com (Wisconsin) (3/1)

Report finds 52 redundant government programs for entrepreneurs
A report by the Government Accountability Office found overlap in 52 small-business programs that receive $6.5 billion in funding and are run by four government agencies. The report urges the agencies to collaborate more to reduce waste. The Wall Street Journal/In Charge blog (3/1)