From National Review Online comes an interesting story about a perfect-storm that is brewing and will have serious negative consequences for small business formation, small business growth, and small business hiring. Not a pretty picture.
The two sledgehammers about to fall on small business are these;
1. Higher taxes---the Bush tax cuts expire at the end of the year, representing the largest tax increase ever. Included are increases in capital gains taxes, which will decrease the risk taking incentives to invest in new equipment and business capability. In everyday plainspeak, who wants to risk a new venture if you know the Government takes over 50% of your profits!
2. Shrinking credit---small businesses often need revolving credit accounts to meet payrolls and more importantly to finance the acquisition of raw materials to service sales, particularly increasing sales. This is because the timing of expenses (to buy raw materials) is not tied to the timing of revenues (when you actually get paid for what you sold). With historic lows in interest rates two terrible impacts on credit are hurting credit supply: the low rates create an incentive to borrow, but the low rates also create a disincentive for anyone to save. Hence, a shortage of credit which means that credit is going to be rationed.
The bottom line: a tough environment to start a new business, a tough environment to expand a new business, and a tough environment to run a small business. All indicators that small business hiring is not going to be a strong engine for economic growth.
2 comments:
Warren:
I agree with your premise - to a point. As a small business owner, I see it differently. The taxation issue is not one of ours directly. The government taxing our operations more is simply a cost passed onto customers. The worry here is customers having less disposable income to spend on our services.
As to credit, the issue here isn't availability, but uncertainty. Banks of late gave been tossing us all sorts of incentives to avail ourselves of this line or that. We do not, for two reasons: First, some of these opprtunities are with government programs, with the predictable government strings and regulations. We are uncertian about what those regulations could morph into. (Think TARP and government telling banks what to do. No thanks.) We don't want to be the government's bitch. Second, we are very uncertian about the future. Why expand or add staff if government health care may almost double our non-salary employee costs, and cap-n-trade will suck up even more private capital?
Absolutely everyone has a context to deal in: if you can pass on the tax to your customer, great! But in my business (the chemical business) the market is competitive and essentially I eat it.
If banks are offering you credit incentives at least they are judging you a good risk. A problem comes with "start up" entities where they don't have enough of a track record or their industry is judged marginal so that credit is either not extended or at such a cost as to be prohibitive. One company I was directly connected with had to give away a lot of equity to get the funding they needed for raw materials to go after new sales opportunities.
Either way, it's not a healthy environment!
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