From the July 2001 issue of Startups

For the past six months, the nation has been on a financial roller coaster that has sent destructive tremors rolling throughout the economy. Consequently, small businesses have found it almost impossible to secure risky venture capital, and even bank loans have plummeted. Business bankruptcies are inching up, and unemployment is seesawing. In manufacturing alone, the Bureau of Labor Statistics reported a monthly loss of 124,000 jobs in May and a total of 675,000 positions gone since July 2000. And that's just one industry.

In the past, laid-off workers in a tight job market have turned to entrepreneurship, but according to the "Challenger Job Market Index," a quarterly survey released by Challenger Gray & Christmas Inc. in April 2000, only 8 percent of discharged managers and executives started their own businesses in the first quarter of 2001. This is in sharp contrast to past downturns, when start-up activity thrived. In the first quarter of 1991, for example, 18 percent of discharged managers and executives started businesses.

Can the new administration pump up this lackluster start-up activity? That remains to be seen. So far, the Bush Administration's small-business agenda has primarily clung to tax cuts as the cure-all for entrepreneurial firms. "The tax relief plan will increase cash flow of small businesses, giving folks more resources to buy more equipment and hire more workers," said George W. Bush during a speech at the White House to small-business owners in March.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, which took effect July 1, the top tax brackets (28, 31, 36 and 39.6 percent) will be reduced 1 percentage point annually until 2006; the top level will also decrease an additional 1.6 percent. At that point, the rates will be 25, 28, 33 and 35 percent.

But beyond cutting taxes, entrepreneurs are still waiting for a definitive small-business agenda from the Bush administration. "We don't necessarily see the same level of support for micro and very small businesses under Bush that we saw with Clinton," says Bill Edwards, executive director of the Association for Enterprise Opportunity (AEO), a nationwide umbrella organization for microlending agencies. "However, I will say we're working very hard with the administration. There are a lot of signs that have been quite positive. I believe part of it is an education process, and we're involved in that with members of the administration."

"We don't necessarily see the same level of support for micro and very small businesses under Bush that we saw with Clinton."

Edwards points to the implementation of the PRIME (Program for Investment in Microentrepreneurs) Act as an example of how the AEO's educational efforts are making headway. Although initially signed into law in November 1999, PRIME wasn't funded until late 2000, says Edwards-and when the new administration took office, a freeze was placed on disbursement of the $15 million allocation. But with the help of the AEO, that money is now seeing the light of day: "We worked very hard to reach out to the Democrats and Republicans in Congress who had supported the legislation and [we] got the money released," says Edwards.

And that funding means training and technical assistance for disadvantaged microentrepreneurs as well as strengthening of the organizations serving these budding business owners. The net result of the additional funding is that the agencies that win the grants will be able to increase the number of people served and the areas they serve, says the SBA.

It's Just Business

Another focal point of late is SBA-sponsored Small Business Development Centers, where new entrepreneurs can obtain individualized counseling and training. The counseling services are currently free, but if the Bush fiscal year 2002 budget for the program is funded at the $88 million level requested-$12 million short of the amount thought needed to fully fund the program's operations-entrepreneurs may have to begin paying hourly counseling fees.

Ellen Thrasher, deputy associate administrator for the SBDC program, doesn't see the proposed fees as problematic: "We estimate the typical entrepreneur will pay less than $40 a year," she says, basing her estimate on the average 5.3 hours of counseling an entrepreneur receives in one year.

But while financially needy entrepreneurs may be able to access scholarships to help pay counseling fees, Donald Wilson, president and CEO of the Association of Small Business Development Centers, believes imposition of any fee, no matter how nominal, will be detrimental: "We think a fee will deter a number of pre-venture clients and even some existing clients from using the SBDCs. I think many will view it as a tax on small business."

"We think a fee will deter a number of pre-venture clients and even some existing clients from using the SBDCs. I think many will view it as a tax on small business."

There's also the matter of matching funds. According to Thrasher, centers must secure one-to-one matching funding for the centers; at least 50 percent of that has to be cash. She says most centers get their additional funding from state government coffers and universities.

Wilson points out that a fee may also impact centers' ability to raise the required matching funds: "What happens is that when matching partners see that the federal government isn't willing to ante up, they say, 'Why should we?'"-and that, in turn, could force 24 of the 58 state programs to make drastic service reductions.

Where's the Money, Honey?

Undoubtedly, one of the biggest concerns for the majority of new entrepreneurs is where to get money to start up. Venture capital is not the answer for most start-ups, and even those who can tap into this source will find the spigot dripping instead of gushing these days.

To make matters worse, those who typically relied on bank loans are also finding the going just as tough. This fact was recently acknowledged in a hearing held on access to capital by Rep. Don Manzullo (R-IL), chairman of the House Committee on Small Business. "While stricter standards do not necessarily mean credit is unavailable, the data suggests that firms once barely qualifying for a bank loan will now seek other sources, such as SBA-guaranteed loans," said Manzullo in his opening statement.

Several new pieces of legislation coming down the pipeline could alleviate some of the strain on the lending environment. The first, H.R. 1923, has already been introduced in the House and referred to the Ways and Means Committee. Sponsored by Reps. Jim DeMint (R-SC) and Brian Baird (D-WA), the Start-Up Success Accounts Act (SUSA) of 2001 would allow small businesses with gross receipts of up to $2 million to deduct and place up to 20 percent of tax-deductible income in a SUSA account for each of the first five years of operation. Small businesses could then utilize those funds for growth over a five-year period.

Rep. DeMint has another proposal on the agenda as well: The BRIDGE Act (Business Retained Income During Growth and Expansion), which will target emerging-growth companies, would allow firms that have experienced sales growth of at least 10 percent above the average gross receipts for the prior two taxable years to temporarily defer a portion of federal income tax liability. The deferral would be limited to $250,000 of tax and would have to be repaid over a four-year period with interest. The deferred amount would be deposited in a separate trust account at a bank or other approved intermediary, and the firm could borrow against the deferred amount for business purposes. Businesses with up to $10 million in gross receipts and using the accrual accounting system would be eligible for the deferral.

Predicting the success of any of these efforts to help new businesses is like trying to predict which of the thousands of businesses that launch every year will be successful. But the issues must be dealt with decisively and soon if the American economy is to regain its vitality.