Why Small Businesses Still Can’t Borrow Money
Despite billions of dollars of bailout and stimulus money, the credit squeeze that kicked off our current economic crisis shows few signs of abating. Generally speaking, banks still aren’t lending, and small businesses are still struggling to find ways to finance their operations. To get a better feel for how business owners are coping, Darren Dahl recently spoke with Doug Tatum, co-founder and chairman emeritus of Tatum, an Atlanta-based consulting and executive search firm that specializes in helping growing companies with finance issues. In recent years, Mr. Tatum, the author of “No Man’s Land: What to Do When Your Company Is Too Big to Be Small and Too Small to Be Big” (Portfolio, 2007), has spent considerable time on Capitol Hill pitching a tax-deferral plan of his design that has had the support of two United States senators, John Kerry and Olympia J. Snowe, who have long been active in small-business issues.
Q. What’s your advice for businesses looking to borrow money these days?
A. Quit trying. The credit markets are tougher than I’ve ever seen them, aside from the Carter years.
Q. But it takes money to make money, right?
A. Entrepreneurs have a limited amount of bandwidth, and they have to quit wasting their time chasing the impossible. They need to think about how they can change their business model to become profitable. That’s where the capital to grow will come from. I just spent some time with a health care consulting company that pulls in $6 million in [annual] revenue with plans to grow to $10 million. They are just bobbing, weaving and growing despite how hard it is out there.
Q. Why hasn’t the government been able to open up the credit markets?
A. Banks have become cautious about what they have on their balance sheets. They still don’t know what their portfolios are worth. That means they’re waiting for the next shoe to drop, which could be the commercial markets. I talked to the C.E.O. of a community bank who told me that they have the regulators telling them when and where they can lend money. So while you might have politicians saying, ’Lend, lend, lend,’ the regulators are holding the banks back.
Q. What else should the government be doing?
A. Congress needs to be temporary, targeted and timely — three issues in a piece of legislation I supported called the “Bridge Act,” which stands for Business Retained Income During Growth and Expansion. The idea is to allow entrepreneurs to defer paying up to $250,000 in income taxes so they can reinvest that money in growing their business.
Q. Where does the legislation stand?
A. Good question. Nobody seems to know. We had a lot of support four years ago. But I don’t understand the politics behind it. Now that we’re in a crisis, we need it more than ever.
Q. What would the plan cost taxpayers?
A. Nothing. When the plan was scored when it was in committee, it showed that there would be no cost to the Treasury over 10 years. It would be a net positive to the economy. This would put $4 billion in the hands of entrepreneurs to reinvest in their companies.
Q. Clearly, though, the legislation would cost the government revenue in the early years. Is that why it hasn’t passed?
A. The Bridge Act doesn’t get the support it needs because too much time and effort is spent on the extremes, either on big business or on small businesses like a dry cleaner. But neither is where jobs get created. Dr. Don Walls, an economist at Harvard, has done research that shows that 50 percent of new employment in the country comes from companies with between 20 and 200 employees. Companies with fewer than 20 employees add only 12 percent of new jobs while companies with 2,500 or more employees add only 3 percent. But policy makers don’t talk about that middle majority. You have all the focus on saving large corporate America, the too big to fail, or looking after the kinds of small businesses represented by the N.F.I.B. The businesses in the middle don’t have lobbyists. That’s why I spend so much of my time on Capitol Hill trying to raise awareness of this problem.
Q. Has the Small Business Administration played a useful role in helping companies or banks through the credit crisis?
A. Based on my interactions with companies and the capital markets, I don’t see the S.B.A. as a factor.
Q. Why do you think that is?
A. I don’t have any data, but my instincts tell me it’s because the S.B.A. lends to smaller companies like Laundromats rather than growth companies.
Q. You also advocate on behalf of private equity groups, correct?
A. I’m on the board of the Association for Corporate Growth, which represents about 3,500 middle-market private equity firms. These are the firms that are providing the capital to those growing firms. But there’s a misperception on Capitol Hill about them. When people think about private equity, they think of the big boys like Blackstone and K.K.R. They think that everyone is like Stephen Schwarzman and hires Rod Stewart to show up at their birthday party. The truth is there has been a sea change in the way that companies get funded. Private equity funds far more companies than the public markets these days because the cost of capital is now cheaper through private equity than through an I.P.O. And companies with between 20 and 250 employees are where all the action is. That’s why it’s so important for the government to be wary of any taxes or regulations that could disrupt the ability of these firms to fund growth companies.
Q. Do you expect the economic crisis to produce other sea changes?
A. After the recession that came after the dot-com boom, I came across some additional research done by Dr. Walls at Harvard. He found that there was a spike in the number of start-up companies founded in that time — more than 2.5 times the historical average. I’m betting that there will be a huge number of companies that get started over the next few years. There are far too many talented and educated people out there that don’t want to watch Oprah all day. Innovation happens on the cliff’s edge.
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