Four Predictions for Small Business Finance in 2013
Small business owners face a New Year filled with uncertainty as 2013 begins. The Federal Reserve predicts the economy to grow at a rate somewhere between 2.1 and 3 percent in 2013. That's better than the GDP growth rate we experienced in the first half of 2012, but not what we need to turn the economy around.
Startups and growing businesses create most of the country's private sector jobs and continue to play an important role in the American economy. Securing financing became easier in the past 12 months, but companies must still be diligent in preparing to obtain capital.
We avoided going over the Fiscal Cliff with a New Year's Day deal. President Obama got his way in raising taxes on individuals who make more $400,000 and households earning more than $450,000 annually. However, the new legislation -- combined with the end of the payroll tax cut and the implementation of the Affordable Care Act -- produces a triple whammy on many small business owners.
Here are my financial predictions for small business in 2013.
Tax Increases Impact Small Business Decisions
If you are a small business owner earning more than $400,000, you will see a hike in your rates, thanks to the last minute deal to avoid the Fiscal Cliff. We saw this coming.
Surprisingly, no one seems to be talking about the fact that Congress did not extend the payroll tax cut. Thus, the tax rates on earners' first $100,000 in income will climb to 6.2% from 4.2%, and employers pay a portion of these taxes on behalf of their employees. Thus, the change will impact every small business owner who pays the taxes -- payroll, unemployment, and others -- associated with having workers. Ultimately, these increased costs could negatively impact hiring.
Congress and the President reached a deal on taxation, but there is still debate over the spending cuts needed to reduce the federal deficit. Some people call for a reduction in military spending, and it seems like an easy answer. But what happens if an army base closes? Small businesses in the local economy will suffer. The service men and women will no longer be in the area to buy lunch, rent apartments and purchase gas and groceries. Consumer spending will drop. This negatively impacts small business owners. Obamacare Hinders Hiring
Many questions remain about the impact of the Affordable Care Act ("Obamacare") on small companies. Numerous business owners that I have spoken to during the past few months say that they have refrained from hiring until it is clear what the cost implications will be.
Obamacare requires companies with more than 50 employees to offer health insurance by Jan. 1, 2014. Businesses that employ just under 50 workers, will think long and hard about adding new staff. For those who must comply with the law, national and state "health exchanges" will be established. Through them, small business owners will figure out their rates insurance plans and pricing. The costs are yet to be determined. Some small company owners may opt to instead to pay a $2,000-per-employee fine imposed for not offering coverage rather than pay for health insurance, which will be much more costly than the Obamacare penalty.
Alternative Lenders Continue to Impact Small Business Lending
The small business lending climate improved overall in 2012, but uncertainty in the economy continues to curtail the flow of capital. When there is uncertainty, small business owners and budding entrepreneurs are more reluctant to borrow money for fear of not being able to repay it.
According to the monthly Biz2Credit Small Business Lending Index, big banks (defined as having $10 billion+ in assets) are approving a little more than 10 percent of small business loan requests. That's much better than in the dark days of 2008-09, but still far off from times prior. Smaller banks are granting about half of the requests for capital that they receive and are increasing the number of SBA-backed loans they make. Meanwhile, credit unions approve slightly more than that.
It is still far from easy to get a loan, particularly if the business is a startup. Alternative lenders, which grant almost two-thirds of funding requests, will continue to grow during the foreseeable future. Crowdsourcing still strikes me as something of a fad.
Use of Smart Phone Technology Will Increase in Small Business
Entrepreneurs, many of them young and entrepreneurial, are conducting more and more transactions via their smart phones. I expect that small business owners will increasingly apply for business loans online and via their phones instead of walking into their banks or credit unions. Technology streamlines the process and enables quicker approvals of funding requests -- a reality that benefits both borrowers and lenders.
Small companies are the engine of the economy, and they are being hit three ways in 2013: increased payroll taxes, higher personal taxes (for those making $400K or more), and healthcare costs and fees associated with Obamacare. With these disincentives for entrepreneurs, some people may feel they are better off having a corporate job than starting a business.
My hope for 2013 is that the new laws and regulations do not hinder small business growth and that technological advances will continue to streamline access to capital. Being fiscally responsible is important, but we must also remember that this country's entrepreneurial spirit makes it great. Our decisions should be ones that help keep the American Dream alive.
This opinion column was written by Rohit Arora, co-founder and CEO of Biz2Credit, an online resource that connects small business owners with 1,100+ lenders, credit rating agencies, and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured more than $600 million in funding for thousands of small businesses across the U.S.