By Georgette Mosbacher
April 16, 2009
Anxiety pervades the small-business community of America. Owners are struggling to make payroll, to build inventory, to keep the doors open another day.
Over the past year, the mortality rate has accelerated, and you can see evidence of that on Main Street of any city or town across the country, where there are “For Rent” signs and empty windows.
Despite the much-publicized bailouts of giant firms with staggering economic stimulus plans, there has been little financial assistance from the federal government for small business. Now, however, President Barack Obama has unveiled a $15 billion recovery plan that leaves many small-business owners wondering whether it’s a classic case of too little too late.
By comparison, hundreds of billions of dollars - no strings attached - are being doled out to financial institutions like Citigroup Inc., JPMorgan Chase and Bank of America. The juxtaposition of small-business assistance with the federal largesse going to companies like AIG paints a stark picture of exactly what’s wrong in America today. Our values are misguided. Our priorities are disoriented.
Even beyond those misgivings, there’s the looming fear among small-business people that any aid they may receive will be neutralized by tax increases that are central to the Obama budget proposal - tax increases that threaten the life support small businesses need now.
There are 27 million small businesses in the United States, employing half of the U.S. workforce. More than 70 percent of all new jobs come from small business, typically defined as a company with fewer than 500 employees.
The central component of the Obama initiative is the government’s commitment to spend $15 billion to buy back small-business loans that are hurting community banks. This, in turn, will let the banks resume credit to small companies that need to invest and pay bills.
The plan will increase Small Business Administration lending and eliminate fees for borrowers and lenders for a period of time. The package also includes a number of tax breaks for small businesses and would increase government guarantees on SBA loans up to 90 percent.
To help free up credit, the government has created new reporting requirements for financial institutions to ensure that “every bank in the country do everything in their power to provide the credit that small businesses need to operate, expand and add jobs,” Treasury Secretary Timothy Geithner said.
The 21 largest banks that get government assistance will be required to issue monthly reports detailing the extent of lending they’ve done to small businesses.
Access to credit is clearly the biggest need for small businesses nationwide. During the last three months of 2008, banks made almost 60 percent fewer loans through the SBA’s main program than they did the previous year.
My fundamental disagreement with this initiative is that it’s too focused on the SBA, which can be a problematic approach, when you consider the red tape the average small-business person confronts dealing with the government.
Moreover, the plan is not comprehensive. While it attempts to free up capital, it does nothing to reform tax policy in ways that would help small businesses start up and thrive. It fails to offer enough tax credits, and those it provides are short-term, such as allowing owners to write off up to $250,000 in investments and allowing larger depreciation deductions in the first year of property purchases.
A better approach would have been to extend the tax breaks for more than a year and permit the deductions for at least three years. By definition, small businesses must look to the future with the expectation that growth will continue. No one will invest in a business that can foresee only a 12-month window of opportunity, and entrepreneurs are not going to invest in equipment and technology short-term.
Growing a business isn’t a short-term proposition. I know from experience. Just as I was seeing 20 percent growth with my first company, LaPrairie, a prestige beauty company, I needed more capital to keep up the momentum. When your strategy works and your efforts pay off and your business takes off, that’s the time you need more money.
Another important component the Obama plan lacks is tax breaks that would encourage innovation and extend healthcare benefits to employees; however, the real test remains whether the plan will actually motivate banks to make the necessary loans.
These are desperate times for small business, and without a recovery that begins on Main Street, there will be no recovery in America.
As President Obama said, “Small businesses are the heart of the American economy -¦ they’re not only job generators, they’re at the heart of the American Dream.”
It’s time for us to do something serious to preserve that dream before it turns into a worse nightmare.
Georgette Mosbacher is the CEO of Borghese Incorporation, a prestige cosmetics company, and author of two best-selling motivational books.