BizBox Blog on Slate

A Tale of Community Banking

2009-11-04T18:03:58Z

MSNBC runs a fantastic little story on the small businesses of Westwood, N.J. and how they have come to rely on the local, publicly owned community bank to get them through the months and years. (The community bank in question, it should be noted, was wise enough to stay away from the junk real estate loans that have helped cause the failure of 100 banks in 2009.) It's especially fascinating to hear all this stuff from the businesses' perspectives, straight from their owners' mouths. When times are tough, the consensus advice--and we ourselves have given it--is: first, slash payroll. But small business owners don't particularly want to lay anyone off, since their employees are, in the words of the restaurant owner interviewed, "family". Fortunately, it seems these owners' relationship to their employees is similar to the community banks' relationship to these businesses.

Visit msnbc.com for Breaking News, World News, and News about the Economy

New Bill Would Mandate Sick Days

2009-11-04T14:54:47Z

We have a prophet in our midst! Or perhaps a real mover and shaker. Yesterday, the New York Times's crack labor reporter, Steven Greenhouse, made the case for mandatory paid sick days based on the public-health risk presented by millions of workers coming into their offices on days when they should be at home, both nursing themselves back to health and, what's more, minimizing the chances that one of their co-workers catches what they have. Needless to say, the current H1N1 issue only amplifies the wisdom of this. Despite the fact that federal employees have paid sick leave, and that the Centers for Disease Control strongly advocate, roughly 40% of private-sector workers do not receive it. (In case you were wondering Wal-Mart contains a combination of paid sick leave and surprisingly punitive sticks for missing work.)

We don't know if Rep. George Miller (D-Ca.), the powerful chair of the House of Representatives Education and Labor Committee, read Greenhouse's article, but yesterday (as reported today by--who else?--Greenhouse), Miller introduced a bill that would guarantee five paid sick days in for workers who are sent home by their employees due to illness. The bill actually appears geared toward meeting the specific swine flu threat rather than the broader problem--it is called the Emergency Influenza Containment Act. It would also not required paid sick leave for employees who decide on their own that they are too ill to attend to work. Still, better than nothing?

A final note. The bill would also not apply to those businesses with under 15 employees--that is, the smallest of small businesses. We hope that most of those businesses, while appreciating the legislation's acknowledgement of their special circumstances, nonetheless makes the right move and, for the good of their employees, their businesses, and themselves, makes sure that workers who may have something to spread don't feel that they need to risk spreading it.

Helping the Economy By Improving Hiring

2009-11-03T23:07:04Z

The New York Times Op-Ed page lends its prominent space to an argument that broader policy should be geared toward enabling small businesses to start hiring again. The author, a Moody's economist, enters the small-business-jobs debate decidedly on the side of the notion that, in his words, "Small businesses are especially vital to job growth." He further argues that increased hiring will be the most efficient marker toward righting the economy as a whole (which makes sense, when you consider that the employed tend to be more apt to spend money than the un- or partially employed). So what does he favor to do this?

For one, he seems to agree with President Obama that the ceiling on Small Business Administration loans should be raised (he also advocates increasing the portion of these loans that the SBA guarantees to, in some cases, as high as 97.5%). He also wants the stimulus program's special carry back provision to be extended. We're glad these issues are now grabbing space in the Times. From its pages to legislators' eyes!

Community Banks Ready for Primetime

2009-11-03T17:19:35Z

Two articles make it clear that--especially in the wake of President Obama's new small business lending plan, which involves them prominently--the community banks, those locally-focused institutions with under $1 billion in assets, are feeling newly empowered. The Washington Post reports that the community banks marshaled their numbers in order to influence the course of banking regulatory reform in their favor. And the New York Times reports that the banks have seen a marketing and advertising opening now that the big banks have discredited themselves in the public eye so. The real-life slogan "Real Texans Bank Locally" perhaps says it all.

It's worth noting that the community banks' fortunes tend to be closely tied to that of small businesses generally. For one thing, in many cases community banks are themselves small businesses. But more importantly, they are frequently more inclined to lend to small businesses, particularly smaller ones with objective numbers that may not indicate that they are fabulous loan opportunities. Small businesses should be pulling for the community banks. And it seems that, finally, they have something to celebrate.

The IRS's New Agenda

2009-11-03T15:19:17Z

It’s back! Actually, it never went away. It’s the issue of worker classification, or rather, misclassification. I’ve written about this matter before. (On employment-tax penalties, on independent contractors, and, again, on independent contractors. Hey, it's an important issue!) And now it’s a high priority item for the Internal Revenue Service, which just announced an audit initiative to study compliance with payroll taxes.

Why now? The IRS initiative comes on the heels of renewed Congressional interest in worker misclassification, and an August 2009 report issued by the Government Accountability Office.

The IRS is planning to use 200 to 300 of experienced and specially trained agents to conduct these audits of approximately 6,000 companies over the next three years. The companies selected at random will represent a broad cross-section of sizes and industries.

But this new IRS initiative is not just about worker classification. In addition, the IRS says, the audits will also focus on:

* Fringe Benefits: whether taxable benefits are misclassified as non-taxable, such as an employee using a company car to commute to and from work.

* Reimbursed Expenses: whether payments made by employers to reimburse employees for qualified business expenses made pursuant to an “accountable plan” that meets certain requirements, including proper accounting and reasonableness, are not actually taxable compensation.

* Officer Compensation: whether compensation paid to an owner/employee of an S corporation is “reasonable” and not improperly classified as a distribution of profits on which no payroll taxes are paid.

* Non-filers: Always!

Tax experts say that the focus of the initiative is to close the “tax gap," or the difference between taxes owed and taxes collected. Unemployment taxes are the second largest contributor to the tax gap, with underreporting of income by individuals being first.

If you’re at all concerned, maybe it’s time to conduct an internal compliance review and to talk to your tax advisor. There’s still time to prepare.

Jerry Kalish is founder and President of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm that serves private-held companies, publicly traded companies, and public sector employers. He blogs at The Retirement Plan Blog and can be reached at jerry@nationalbenefit.com.

SBA Head Mills Talks to the Times

2009-11-02T20:42:07Z

A lot of non-answer answers in the New York Times interview with Karen G. Mills, the head of the Small Business Administration. "But when the market collapsed, so did S.B.A. lending. Is there a better way to do it?" the Times asks, and while the real answer to that question would involve acknowledging that focusing on supplying credit when demand for credit was historically weak, Mills instead gives some boilerplate about the SBA working with banks. The Times questioner pressed on--generally, the paper did a bang-up job with this--and Mills changed the subject to the 23% federal-contract quota--which is important, but the fact is that the SBA as currently constituted (and, especially, as currently funded!) has really little power to do much to get each of the individual federal agencies to meet their procurement quotas.

In fact, much of the problem is with the way the SBA is established rather than its specific players. It is jerry-rigged to help banks lend to small businesses, and to help small businesses borrow from banks. That's a pretty narrow mandate, and it's one that happens not to be ideal to recessions. The one thing the SBA can that doesn't require too much extra funding or new legislation is to use its clout to advocate for federal policies in other areas that are likely to help small businesses. Mills does a great job with that here, advocating for the sort of insurance exchanges envisioned by the health-care reform bills. In that sense, then, the interview was a success.

CIT: Habemus Bankruptcy!

2009-11-02T15:06:04Z

Well, small-business lender CIT's game of chicken with its lenders--in which it has been trying to coax more loans out of them by threatening a prepackaged bankruptcy filing--appears over, with a CIT victory, of sorts: the company filed one of the largest Chapter 11s in history, and expects to emerge from bankruptcy protection, this time in the ownership mainly of its current creditors, before the end of the year. (That $4.5 billion loan it secured last week remains operative. Indeed, the company also accepted a $1 billion loan from famed financier Carl Icahn over the weekend, which should serve to neutralize him as a threat to the company's plans.) The lender's creditors expressed support for the plan late last night.

The big losers in this are CIT's current stakeholders, which includes, well, you: the federal government invested $2.3 billion in the company as part of last fall's bailout; most if not all of that stake will be wiped out by the end of the Chapter 11 process.

But among the big winners might surprise you: none other than those small businesses that in the past looked to CIT as its lender. In the short run, while a few businesses that rely on CIT for factoring may find themselves in deep trouble, most will actually be saved by CIT's ability to continue to operate through its bankruptcy. And all of these companies, needless to say, are better off than if CIT faced outright insolvency, including a Chapter 7.

More importantly, in the long run, the New York Times hypothesizes, "It also means the end of CIT’s efforts to transcend its roots as a sleepy financier of retailers, restaurants and manufacturers." This is great! We never wanted CIT to transcend itself! We want it to be a "sleepy financier"! If the credit boom of this past decade found the banks--and, microcosmically, CIT--ignoring small business for the big ones, then perhaps the post-recession economy will witness a refocusing on those "sleepy" businesses and the relatively safe borrowing they do.

Definition of 'Small Business' Greatly Expanded

2009-10-30T19:32:22Z

We frankly don't know enough about the retail and hospitality industries to pass sure judgment on the Small Business Administration's decision to change its standards so as to allow more, bigger businesses in those industries to claim to be small businesses, and therefore to be eligible for various federal small-business programs (so the Washington Business Journal reports). Maybe office supplies are priced in such a way that stores with $30 million in annual revenue are still small businesses? (Seriously, we really don't know: if you do, please tell us in the comments.)

All that said, color us skeptical of this move. At a time when SBA loan programs are only expanding, and especially at a time when the federal government continues to fail to meet its legally-mandated quota of small-business contracts, now does not strike us as the ideal time to institute radical expansions of the ranks of small businesses.

A Don't-Do List

2009-10-30T15:25:07Z

Generally, we're big on to-do lists. Short and simple (and easy to read!), they can be very helpful, offering direct bullet-points of instructions worth following. So we're taking a risk here in linking to You're The Boss's ... well, you might call it a don't-do list. In other words, if you do do these things, you're putting your company at risk. So, you know, don't do them.

What we most like about the list is its mix of the big and small, and, for lack of better terms, highbrow and the lowbrow. So, don't understate your vaule when it comes to insurance; and, don't allow your employees who are using company vehicles, or vehicles on company time, to text while driving. Make sure your accountant fills all your needs; and also, use only three-pronged electric cords. Part of being a small business owner is prioritizing. But another part of it is knowing that even the smallest things matter!

How Health Insurance Discriminates Against Female-Heavy Business

2009-10-29T19:38:01Z

We've written about this problem--actually, "scandal" is probably a better word--before. But now Kaiser Health News has a new article detailing how woman-owned or -dominated small businesses tend to get hit particularly hard by high health care premiums. The reason is simple: women, particularly under 55, tend to require more health care than men of the same age, primarily due to maternal and infant care. If you think that means it's okay for women to have to pay more, then we suppose you're entitled. But we don't think that makes it okay, and we suspect more people agree with us than with you.

But even if you feel that way, there is simply no good argument for why so-called "gender rating" should apply to small businesses and not to large ones. You see, under current law, insurance companies are banned from gender rating among large-group markets. So if you have 51 employees, you're okay; if you have 50, you're out of luck. Of course, most of the legislation currently circulating on Capitol Hill would change that, and would establish that the small-group market be treated essentially the same as the large-group one. One more reason to hope for reform's success.

The Banks Don't Like Obama's New Plan

2009-10-29T16:04:14Z

Though the main target of President Obama's plan to increase small business lending is, naturally, small businesses--particularly those in need of credit--it appears to be something that would help the community banks, too. After all, they would be permitted to borrow money from the government to make small-business loans more cheaply than before (paying a 3% dividend instead of 5%), which sounds like a pretty good business proposition to us. Yet, Reuters reports (via Inc.), the banks are not biting.

It's not that they feel it's a bum deal on paper (it isn't). Their problems are, one, implied association with the bailout, and the negative publicity that could bring, should they benefit from the program (which is being funded, after all, with money from that original TARP fund). And, two, an old refrain: they simply do not see enough demand for small business credit to justify expanding their activities in the area. (A further complaint is that improving Small Business Administration-backed loans is all well and good, but the extensive paperwork remains a deterrent to applying for them.)

But clearly the main point here is the demand issue. The whole thing is just giving us one more opportunity to question why the administration is so focused on credit when other factors--primarily consumer spending, which can be tinkered with by wise stimulus--seem to be more important to the nation's small businesses.

CIT Accepts $4.5B Loan, Avoids Bankruptcy

2009-10-28T22:40:16Z

Looks like prominent small-business lender CIT--last seen in the throes of a likely imminent bankruptcy filing--will live to fight another day! And not in one of the ways we would have thought. It had been offering its bondholders, whose bonds come due at the end of this month, a debt-for-equity swap, while threatening a prepackaged bankruptcy filing (which, by wiping creditors out to some degree, is not favorable for bondholders). Meanwhile, famed financier Carl Icahn, himself a big CIT bondholder (he says he owns $2 billion worth), was itching to make a $6 billion emergency loan to head off bankruptcy; he said he was also willing to pay CIT's bondholders 60 cents on the dollar to vote down the company's bankruptcy plan, should it have come to that.

But, instead, a different group of CIT's bondholders got together and offered CIT a $4.5 billion emergency loan--presumably to complement the $3 billion one it got a few months ago. CIT accepted it, after having already rejected Icahn's offer, thus staving off a Chapter 11. For now. Will the saga ever end?

Turn the Page to Chapter 11

2009-10-28T17:57:24Z

Two separate posts--one from Henry Blodget at OPEN Forum (published by our sponsor, American Express OPEN) and one from John Tozzi at The New Entrepreneur--tackle the same phenomenon: the rise in small business bankruptcies. The graph at the bottom of this post (from the OPEN Forum post--the shading indicates where the recession began) shows a clear, and sharp, rise in bankruptcies over the past year. Last month was not the high; May was, and they have fallen off slightly since then. Still, Tozzi warns, it's not uncommon for firms to hold off on filing in the second half of the year, in the hopes of the fourth quarter saving them--so January could well bring new carnage.

Blodget points to the credit crunch and lower consumer spending as the main culprits in this unfortunate trend. And he predicts a continued high rate of filings even as the economy as a whole begins to recover. So Merry Christmas, and Happy Easter too.

Women Owners Not Getting Their Due

2009-10-28T14:28:06Z

We've already noted that while contracts stemming from February's stimulus act have gone to a solid number of small businesses generally, woman-owned small businesses in particular are doing less well by it. Now comes this article, from MSNBC.com, detailing how women entrepreneurs continue to feel disheartened about the prospect of landing those federal contracts--5% of which they are legally required to receive--particularly those in the green industry.

Basically, the general problem, of woman-owned businesses not getting their due, is compounded in the green industry because a higher-than-normal percentage of the relevant businesses there are owned by men to begin with. On top of all that, some have not been afraid to mention the d-word: discrimination. What we find bizarre is that it should be so hard to accomplish something that should be (and probably is) so uncontroversial.

Our Anonymous Banker Takes On Obama

2009-10-27T17:35:13Z

President Obama’s small business lending plan calls for increasing the maximum size of SBA 7(a) and 504 loans to $5 million. It also would increase the limits on micro-loans. The plan would lower rates (the bank’s cost of funds) for small community banks and give them greater ability to access capital--presumably so they can lend money in the communities in which they do business. I won’t criticize the plan as mere rhetoric; not just yet. But I think a look at the relevant precedent gives one cause for the opposite of hope. More profoundly, I think there is a fundamental problem that is damning all of the Obama administration's attempts to help small business: a failure to properly define "small business" in such a way that truly small businesses--the ones most capable of helping the economy at large--are effectively aided.

It is possible that the administration's reduction of fees and increase of guarantees for Small Business Administration loans did improve those loans' position. However, other than that, previous plans to stimulate small business lending were unsuccessful. To wit:

* Early on in its tenure, the administration reduced SBA fees and increased government guarantees to 90%. It also said that the Treasury would buy $15 billion in SBA loans. But the $15 billion came from TARP money, and they couldn’t find that many intermediaries to involve themselves in the transaction for fear that they would then be subject to the government’s new restrictions on salaries and bonuses.

* The America's Recovery Capital microlending program has been an unmitigated failure. While it certainly would help many of the smallest “small businesses” weather this economic crisis, it is hard to find a bank that is actually participating in the program. They can taketh, but they find it hard to giveth some back.

* The TALF program, designed to jump-start the securitization market that is the engine behind bank lending, provided financing to buy credit card, auto loans, student loans, commercial real estate loans, equipment loans, and finally SBA loans off the banks' balance sheets. The actual figures? $21 billion were credit-card loans, $10 billion were auto loans, and a mere $580 million were SBA loans.

As I said before, though I believe that the real problem lies in how small business is defined. The SBA Office of Advocacy has some interesting stats that pertain to the matter, though they do not include the 21 million non-employer firms. Here's my summary:

5.3 million firms employ under 20 people each, and in total they employ 21 million people. Annual payroll for this group was $726 billion.

406,464 firms employ between 20 and 49 people each, and in total they emply 12 million people. Annual payroll for this group was $420 billion.

129,401 firms employ 50 to 99 people each, and in total they employ 9 million people. Annual payroll for this group was $321 billion.

99,534 firms employ 100-999 people each, and in total they employ 24 million people. This segment had annual payroll of $906 billion.

9097 firms employ over 1000 people, and in total they employ over 53 milion people, with annual payroll of $2.4 trillion dollars. More than half of that is from companies that employ over 5,000 people.

From where I am sitting, our government needs to decide where this country and our economy will get the best bang for our bucsk. It is the truly small business owner, the one that employs fewer than 20 people, that will make a difference. There are over five million of these firms across America. If only one quarter of them are each able to employ one additional employee, that would create 1.3 million new jobs, with an average salary of $34,000.

Conversely, the 9097 firms that employ over 1000 people would each need to hire an additional 142 people to have the same impact on employment across America! And it is this size company that seems to be producing the greatest number of across-the-board job losses so devastating to our economic recovery.

I’m not a statistician. But when I hear President Obama speak about increasing the size of SBA 7(a) and 504 loans from $2 million to $5 million, it makes me wonder exactly how HE defines small business, and if there is any hope for economic recovery.

Anonymous Banker is a 35-year veteran of the banking industry who has spent much time as small-business banker and credit underwriter. He blogs at anonymousbanker.com.

This post was cross-posted, in slightly different form, here.