Featured White Papers
- PCI DSS therapy for the smaller retailer (McAfee)
- Oct. 14th: Simplified IT with Software-as-a-Service (SaaS) (ZDNet)
- The rise of Web commuting (Citrix Online)
Content provided in partnership with
Why it's too hard to start a new business - small business capital
Washington Monthly, March, 1994 by Jon Meacham
That means government must unleash the private market's resources. Now making its way through Congress is a tiny $50 million authorization to federalize a Michigan pilot called the Capital Access Program (CAP). This is the most promising proposal in the country. Under it, instead of regulators weighing each bank loan by itself, they would consider a portfolio of loans. That is, rather than a First National having to judge a Herman Simpson in isolation, riskier loans would be part of a package on which the bank would be examined. So a stronger loan--say $100,000 to expand an up-and-running business--would make it easier to take marginal risks. To cover the risk, the bank, the borrower, and the government pay a small percentage---between 1.5 to 3.5 percent---of the loan amount into a reserve fund. This way, the bank avoids individual classifications.
In Michigan (13 other states have followed), 21 percent of the CAP loans have gone to startups---compared, remember, to less than 5 percent of private venture capital. The failure rate has run about five times a normal bank loss rate--which is to be expected, considering the higher risk. The kneejerk conservative response to this is to conclude government simply cannot work and should stay out of the market altogether. But that's the wrong way to look at the problem. The possibility of losing even a few billion dollars, at a time when so many people are out of work means anything we can do to responsibly increase the flow of capital makes sense.
And the CAP is hardly a giveaway program. The reserve funds cover the losses and banks must still be shrewd since they are responsible for losses above the 14 percent the reserve fund covers. Because existing regulators would oversee the federal program, bureaucratic costs would be minimal. In Michigan, the state government added just a single person to its payroll for the CAP. And why not, in addition, keep track of a bank's payup rate and ease back on regulatory second-guessing in proportion to how well customers pay back the loans? That way, banks making smart loans--based on whatever criteria, including character--that are paid back are rewarded with more leeway to keep making such loans. This would replace the current rigidity with the more familiar, Jimmy Stewart kinds of lending decisions. Because bankers who either abuse this or are unlucky would be punished by having to continue to live under obsessive regulatory scrutiny, bank security would be protected.
According to a 1993 study by the Tax Foundation, reported by The New York Times in January, complying with federal tax law--filing the 1120 and 11205 corporate returns, quarterly reports, and legions of other documents---costs small businesses $390 for every $100 they pay in taxes. Looked at another way, Washington got $4.1 billion from these businesses in 1990, but the businesses spent $15.9 billion filling out the forms. That's crazy. The IRS has already simplified tax returns and requirements for individuals who make little or no money; it should do the same for businesses that are losing money or barely breaking even. Most small businesses turn very little profit; the government should think about having a business owner, under penalty of perjury, certify whether his year was profitable and, if it wasn't, shelter him from most of the blizzard of forms now required. Random audits could ensure compliance, because locking up a few lying owners would scare the rest into honesty.
Find Research Guides for:
Find Featured Titles for: Health
- AAACN Viewpoint
- ABNF Journal, The
- AIDS Treatment News
- AMAA Journal
- Aboriginal Nurse, The
- Adolescence
- Adolescent Psychiatry
- Advances in Skin & Wound Care
- Age and Ageing
- Alabama Nurse
- Alberta RN
- Alcohol Research & Health
- Alternative Medicine Review
- American Family Physician
- American Fitness
- Men's Fitness
- Psychology Today
- Shape