Searching for Capital

A broker assesses the small-business lending market.

This week’s presidential debate disappointed me. We heard a lot of references to small businesses, regulatory relief, health care, deficits and especially tax rates. But neither candidate thought to mention one critical ingredient to economic growth: capital. If small-business owners and entrepreneurs can’t get their hands on capital at affordable prices, their tax rates won’t matter because they won’t be able to produce any profits – or jobs.

I don’t understand why neither party is talking about finding ways to improve the flow of capital to small-business owners. That said, I do believe that the Obama administration has done some important work in this area. Raising the limits of Small Business Administration loans and improving export programs has helped many companies. Many are optimistic that the Jobs Act and supporting crowd-funding legislation will help in the future. And the president’s 15-day pay initiative is starting to ease the working capital crunch to those companies that supply the government.

At the same time, credit at reasonable prices remains as tight as can be for companies without pristine credit, cash flow and collateral. As a result, the merchant cash advance and factoring industries are flourishing, and charging small-business owners exorbitant rates. Here are a few suggestions I would love to see both campaigns work toward:

1. Let’s get a consistent definition of precisely what is a small business, and let’s mandate that all reports from banks and government agencies use it. Otherwise, we will have to continue to guess how much lending is actually going to true small businesses.
2. Let’s find a better alternative to merchant cash advances. If you’re one of the lucky small-business owners who can get a bank loan today, you can expect to pay an interest rate of 4 percent to 6 percent. But if you’re like most owners who need capital, you will find yourself pursuing alternative sources of financing that can charge as much as 70 percent or 80 percent (and no, I’m not talking about money from loan sharks). What if the banks and regulators managed to sit down and find a way for the banks to lend to slightly riskier customers and charge them, say, 8 percent or 9 percent interest? While higher than those of standard loans today, these rates would give owners a chance to survive, flourish and add jobs.
3. Let’s have the government create incentives for big companies to implement the 15-day payment initiative with their small-business suppliers. If that fails, maybe we should publicly shame the big companies that are the slowest payers.
4. Let’s make certain that the auditing and reporting requirements for crowdfunding will not be cost prohibitive for small-business owners. If small-business owners have to pay $20,000 in legal and auditing fees to raise $50,000, they might as well go to the loan shark up the street.
5. Let’s increase financing for Score, which helps mentor small-business owners.

Personally, I think opening up capital for small businesses is far more important than a change in tax policy. What do you think? What policies or recommendations would you make?

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/10/05/the-small-business-issue-the-candidates-are-not-talking-about/?partner=rss&emc=rss