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My daughter is getting married in August. Sunday she had her bridal shower and while she and the ladies were doing whatever women do at such events, her soon to be Father-in-Law and I had lunch. Rob is a small businessman. He has a company in Denver that has been doing commercial and residential skylights for over 30 years. He employs about 15 people. Rob is the owner of one of the estimated 30 million small businesses in the United States. By definition a “small business” is any business in the private sector that employs less than 500 people. My wife and I are also in that number as owners of the newspaper. We have not been in business for even a year yet, so I enjoy visiting with Rob. He is intelligent and has lots of business savvy and is just an all around good guy.
Rob has beaten the odds. One in two new small businesses do not last past the fifth year. In 2008 for example, 627,200 new businesses opened, and 595,600 closed. And even though small business represents 99.7% of all employer firms, they only have half of the country’s private sector work force. Rob’s company has a pretty normal business cycle. The warm months provide a disproportionate amount of top line sales. In the past he has always used the summer months to pay down debt, and create a gap for the working capital he needs for the slower months.
Many small business people do this and are finding out that banks are gladly accepting the payments, but then reducing the line of credit they are going to give the business in the bleak months. That could affect Rob and his peers greatly in the winter. Without working capital for the slow months what do you do? Lay people off? Close the business? Reduce goods or services? None of those are very good possibilities. But the reality for Rob is that for the first time in 30 years of business he may be forced to lay people off this winter.
In a recent speech, William Dudley, the President of the Federal Reserve Bank of New York, identified financial constraints for small businesses as a restraint on the pace of economic recovery. Specifically, he said:
"For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector.
During periods when national employment levels were expanding since 1992 (when this data series began), firms with less than 50 employees have made up approximately one-third of the nation's employment growth. During the employment declines associated with the 2001 recession, these firms made up only 9 percent of job losses. In the current recession, though, these very small firms have made up 45 percent of the nation's job losses.”
I had a friend who owned an engraving business in Eugene, Oregon. He used to keep a bucket where all of the mistakes got thrown. Then, once a month he would have a meeting and cost out the discarded materials in time and material and share with the employees what the mistakes for the month cost. Some months the mistakes almost ate up the profit.
Rob and I could both point to examples in our respective business models that mirror my friend’s experiences.
What does any of this mean to you and I? The small business man doesn’t have the political clout of the big businessman so it’s easier to tax a small business and get away with it. As taxes grow, credit shrinks and profit margins get smaller more and more small business people close their doors. When they close their doors those 500 or fewer employees join the unemployment lines. Those unemployed now spend less, and they, their families, and other business, large and small, begin to suffer. Right now the official unemployment rate is nearly 10% but the real rate is estimated at much higher because so many have just given up.
So what is the answer? One immediate answer would be to cut employer taxes. With one stroke of the pen a system that is already in place could collect less, allowing business to have more cash flow. Less tax means more cash flow which can be used for increasing inventory, hiring more people, or reducing prices to consumers.
Almost every week the View has a story about a new business opening in the Valley. This week is no exception. Let’s lobby our state and federal legislators and let them know how important small business is to all of us.
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