FINANCE: Business Owners Caught in Economic Reform
Column by Pat Kummer, CFP
The extremely slow recovery and new financial regulation has put handcuffs on small businesses.
Normally the recovery years that follow a significant recession would be a time for companies to grow. However, this year with the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks are queasy about lending, much less to business owners.
Low interest rates are designed to fuel growth. It is a good thing when businesses are able to borrow in order to expand or improve. However, the current low interest rates may be going to waste as many companies are caught in new banking legislation and a stagnate economic outlook.
Typically, high unemployment rates can also be a good thing for businesses wanting to expand. In this phase of recovery, finding good talent at reasonable wages is another plus for industry growth. However, due to the uncertainty in how companies will be taxed and when consumer spending will return, business owners have hunkered down instead.
The focus may be just to stay open or try to maintain the current staff and supply lines. This in turn could actually create more drag on the economy hence creating the endless game of dominos. If the economy were better, businesses would be growing, and if businesses were growing, the economy would be better.
Rep. Sam Graves, chairman of the House Committee on Small Business, stated in a recent interview, "I am particularly concerned about the impact these flaws [in the Dodd-Frank bill] will have on small firms across America. Small companies are the cornerstone of the American economy and are our most effective job creators. On average, seven of every ten new jobs are created by small businesses."
Rep. Graves is concerned that in the last few years, lending to small firms has declined to record lows and access to capital is critical for business success and crucial to our economic recovery.
Another concern of Graves is that small financial institutions are disproportionately affected by Dodd-Frank. Many small businesses rely on small financial institutions, like credit unions and community banks, to meet their capital requirements. Without them, these small businesses would have to close their doors. Small lending institutions lack the capability of larger banks to hire the additional staff to deal with the additional regulations created by Dodd-Frank. Therefore, this financial reform may actually decrease revenue in small banks, further reducing their ability to lend.
I recently visited a CPA firm that specializes in professional corporations such as doctors and dentists. Their clients are concerned about how to borrow for equipment and how to set aside enough funds to save for retirement when the company is limping from one month to the next.
It seems like the state of Colorado in particular attracts a high number of entrepreneurs, and I believe that the community business is the backbone of America. I hope the recovery continues, and we can get past the limbo that is keeping the economy stagnant. Many of us would like to be as productive as possible and add value to our community. It would be nice if legislation supported that entrepreneurial spirit instead of extinguishing it.