But Will It Enhance Entrepreneurial Confidence?
by Dana Kilborne
Statistics don’t lie. American small business represents the backbone of the U.S. economy. It produces roughly half of the private Gross Domestic Product and creates, on average, about two-thirds of net new jobs annually. It’s the world’s second largest economy, trailing only the United States as a whole. Nearly 16 million people operate a small business as their primary occupation in any given year, and they represent 99.7 percent of all employers. If anyone is going to stimulate the economy, it’s the small business owner, who exemplifies the entrepreneurial spirit that built this nation.
The Small Business Jobs Act, signed by President Obama on September 27, 2010, will provide critical resources to help small businesses continue to drive economic recovery and create jobs. The passing of this legislation is certainly good news for entrepreneurs, but the level of its success will depend on whether or not business owners are willing to take on more debt in an uncertain economy with increasing regulatory burdens.
Full of Incentives
The Small Business Jobs Act extends the successful SBA Recovery Act loans through the end of 2010 while offering billions more in incentives to help encourage the lending process. In an effort to help small businesses invest in their firms and create jobs, the legislation provides $12 billion in tax relief alone. The extension or expansion of tax cuts include:
• The highest small business expensing limit ever – $500,000
• Carry-back provisions on net operation losses of up to 5 years
• Accelerated/bonus depreciation
• Zero capital gains taxes for those who invest in small businesses
• Increased deductions for start-ups
• Deductions for employer-provided cell phones
• Deductions for health insurance costs for the self-employed
• Limitations on penalties for errors in tax reporting that disproportionately affect small business
The bill also has created a $30 billion Small Business Lending Fund, which provides smaller community banks with low cost capital (as low as 1 percent) if they go above and beyond 2009 small business lending levels. Additionally, it established a State Small Business Credit Initiative that will provide up to $1.5 billion to states that support small business lending programs.
These incentives are critical in an uncertain economy. If small business owners don’t initiate the lending process, and without the support of community banks and the states in which they conduct business, the law simply won’t be effective.
A Confidence Issue
For banks, having the opportunity to offer clients SBA-guaranteed loans with expanded revenue size limits and a waiver of SBA fees helps to mitigate risk. These loans, however, don’t eliminate risk and they don’t make a bad loan good. A banker’s job is to identify whether or not debt or equity is the right solution and if debt, how much and on what terms are the best fit for the client’s needs. Quality, quantity and durability of cash flow are all necessary ingredients in the underwriting process. The underlying question will continue to be whether income and cash flow from core operations is sufficient for repayment.
For example, taking out a loan to buy new equipment is only appropriate if it will generate incremental income or create sufficient operational efficiencies to make the expenditure a good investment. If consumer confidence is low, will the enhancements offered under the Bill be sufficient to move small business owners to purchase new equipment? Or to bring on additional employees in an expansion? What are entrepreneurs waiting for? And can the government really provide it? Consequently, can prosperity occur without small business growth and job creation?
The good news is that, by nature, entrepreneurs are always finding ways to make lemonade out of lemons. And, as difficult as times are now for many, for others it is an ideal time to seize opportunities that present themselves. Significant transfers of wealth will occur for those in a position to move on these opportunities. Private sector capital, combined with the enhanced lending capability this Bill provides within the existing SBA framework, can be the combination needed to create sustainable long-term job growth by small business – the sector that can make a real difference in our economy.