2012 was the political year of small business. The election was a big reason for that. An even bigger reason is the fact that small business accounts for 60% of jobs in this country.

However, economic uncertainty and a lack of capital are currently discouraging hiring. As long as small business owners lack the cash flow for growth, the economy will remain stagnant. Fortunately, Washington is finally starting to catch on.

President Obama recently revealed his $3.8 trillion 2014 budget proposal and it contains several provisions that are designed to support small business owners. But it also contains other stipulations that could potentially hurt small business. Below are the main things that small business owners need to know about the Obama budget:

What the Obama Budget Means For Small Business Owners

Taxes

The budget proposes a tax credit for small business owners who hired new employees and gave raises to current employees in 2012. The one-time credit would apply to companies that paid less than $20 million in wages in 2012 and would be equivalent to 10% of the amount paid to new workers and/or the raises given to current employees. The credit would cap at $5 million.

Would you benefit from the proposed credit?

President Obama has also proposed a minimum tax rate of 30% for households earning $1 million or more annually. Small business interest groups are protesting this proposal on the grounds that many small business owners pay pass-through taxes on their business income.This would place them in the proposed 30% tax bracket – higher than is appropriate for their actual personal income.

Minimum Wage

President Obama’s State of the Union proposal to raise the minimum wage to $9/hour from the current $7.25/hour made it into the budget. Expect Republicans and small business owners alike to rally against this one.

Entitlements

In an effort to compromise with conservatives in Congress, Obama has proposed cuts to some entitlement programs including Social Security and Medicare. The cuts would trim $1.2 billion from spending on these programs over the next ten years. Many former small business owners rely heavily on these programs during their retirements and are opposed to the cuts.

They are joined in their criticism by members of the President’s own party.

The SBA

Perhaps the most significant of the proposed budget changes are related to the Small Business Administration (SBA). The plan will chop 12% or $109 million from the SBA budget, bringing the total budget down to $810 million.

But the SBA would get an additional $4 million to hire 32 government contract specialists to work towards facilitating more small business government contracts. The proposal also includes measures to streamline the application process for SBA loans and to increase the number of lenders working with the SBA. Fees for small business loans under $150,000 would be waived, which will help maintain cash flow for the smaller businesses who typically apply for loans of that size.

What are your thoughts on President Obama’s proposed budget? Do you think these changes would help or hurt small business?

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SBA Lending

SBA lending volume increased to its second highest level in history. The agency backed $30 billion in loans nationwide. Big banks and smaller, regional banks increased their activity in SBA lending.

Use of Technology in Small Business Lending

Throughout 2012, increasing numbers of entrepreneurs applied for business loans through Biz2Credit and other online platforms specializing in small business finance. Technology eliminates the need to walk into a bank or other lender and fill out paperwork during regular business hours. Entrepreneurs can now apply for funding late at night or on weekends.

Meanwhile, banks and other lenders get pre-qualified leads at no cost, and the whole funding process becomes faster and more efficient. Further, small banks are able to make loans to small businesses outside their local area. Borrowers and lenders both benefit from the use of technology.

Crowdsourcing

“Crowdsourcing” became a fundraising phenomenon during 2012. Young, tech-savvy entrepreneurs used this form of capital raising from friends and acquaintances through social media. It proved effective for artists, filmmakers and other creative types, non-profits, and startup businesses requiring smaller sums of money. However, companies looking for more than $50,000 likely should go a more traditional route for the funding they need.

The Rise of Alternative Lenders

Although large banks increased the percentage of small business loans they approved this year, they still typically grant less than one out of five applications on average. Credit unions were a reliable source of small business funding during the first half of the year before slowing down. Meanwhile, merchant cash advance companies, accounts receivable financers, factors, and micro lenders all have increased their lending significantly. They offer flexible, increasingly affordable terms, and most importantly, quick decision-making.

During the Presidential Election, Democrats and Republicans repeatedly focused on small business growth. As President Obama begins his second term, small business owners are examining the impact of Obamacare regulations and the potential of tax increases for people who earn greater than $250,000 annually.

Additionally, the “Fiscal Cliff” has caused uncertainty in the credit markets.

Despite these concerns, there are numerous signs that the economy is improving, and lenders appear increasingly willing to provide capital to small businesses in 2013.

Diagram on financial report Photo via Shutterstock

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The bipartisan Credit Union Small Business Jobs Bill, S. 2231, introduced by Senator Mark Udall (D-CO), and retiring Senator Olympia Snowe (R-ME), would increase the MBL cap from 12.25 percent of assets to 27.5 percent for eligible credit unions.

When Congress passed the Credit Union Membership Access Act in 1998, it created restrictions on the ability of credit unions to offer member business loans by a credit union’s member business lending to 12.25 percent of total assets. Research has proven that the cap hinders credit union lending to small business and does little, if any, harm to banks and other institutions.

In January 2001, the Treasury Department released a study, “Credit Union Member Business Lending” which found that ‘Business lending is a niche market for credit unions. Overall, credit unions are not a threat to the viability and profitability of other insured depository institutions.’

Last year, the SBA’s Office of Advocacy also found that bank lending was largely unaffected by changes in credit union business lending, and that credit unions have the ability to offset declines in bank business lending during a recession (James A. Wilcox, The Increasing Importance of Credit Unions in Small Business Lending, Small Business Research Summary, SBA Office of Advocacy, No. 387. Sept. 2011).

Becker suggests raising the MBL ceiling in combination with legislation to extend full coverage of noninterest-bearing transaction accounts. Banking trades are seeking extension of the “transaction account guarantee” program that was implemented under the Dodd-Frank Act. NAFCU advocated parity for credit unions, which was included in the final Dodd-Frank bill. Currently, $1.4 trillion in noninterest-bearing account balances covered under Dodd-Frank are in line to lose their federal coverage. The 100 percent deposit and share insurance coverage for these accounts is set to expire on Dec. 31 at midnight.

In a letter to Senate Majority Leader Harry Reid (D-NV), and Minority Leader Mitch McConnell (R-KY), Becker wrote:

“This would certainly have unintended consequences on smaller financial institutions and could very well lead to businesses shifting funds away from their community-based financial institutions.”

NAFCU believes that combining the two measures into one:

“. . .would not be a win-win proposition for the American people and our economy.”

I agree.  Credit unions have the capital to help America’s small businesses thrive. The outdated MBL cap limits their ability to help stimulate the economy by providing credit to startups and expanding small businesses.

Unlock Money Photo via Shutterstock

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If your small business has been impacted by hurricane Sandy, there are steps that you can take to quickly get up and running again:

Assess the Damage, Take Pictures and Videos

Use your mobile devices and begin digitally recording the damage in videos and still images and be sure to write down all of your losses. This data will be vital when making your insurance claims.

Re-read Your Insurance Policy, Contact Your Agent ASAP

It is likely that you will have some disputes with your insurance company over what is covered and what is not. Be sure you have read the policy over and know what it states and do not delay in placing a claim. There will be thousands of small business owners filing claims, time is of the essence.

Utilize the Small Business Administration (SBA) Resources

The agency’s website has a page dedicated to helping small businesses recover from natural disasters.  Use your mobile devices to access the information.

Apply for an SBA Disaster Loan

The SBA Disaster Loan decision-making process should be quick because the agency’s mission is to help small business owners get up and running again.  Apply for one if you qualify.

Meet With Your Accountant

If you are looking for a SBA Disaster Loan or other type of small business loan, having accurate accounting is essential.  Get your books in order and meet with your accountant if possible.

Secure a Line of Credit

While you might be among the lucky small business owners who safely rode the storm out, others may not have been so fortunate. Those to whom you have extended credit may take longer than usual to pay their bills or, worse yet, they may go out of business altogether. That leaves you with expected income that you may never receive.

Additionally, if you had to close for a few days, you will have lost revenue. Having a line of credit available for such instances is vital to make sure that you have working capital and the ability to meet payroll.

Every entrepreneur has invested a great deal of time, energy and financial resources toward growing his or her business. Before the next storm hits, some things to keep in mind are:

• Determine if you are satisfied with the insurance company’s resolution. If not, look for a new insurer.
• Continuously backup all your records on your computers. This is a good practice not only in times of disaster, but also throughout the year.
• If you lost revenue because you did not invest in a generator, don’t make the same mistake twice. Buy one so that you have it before the next storm hits.

Stay safe!

Hurricane Sandy, Brooklyn, NY Photo via Shutterstock

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In a statement signed by more than 80 corporate leaders, the executives said that regardless of who wins control of Congress and the White House in November, the Federal government must include:

“Comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

Heads of companies including AT&T, Bank of America, and Microsoft, among others, put their names to the “manifesto” that attests tax increases are inevitable — no matter which party wins on Election Day.

The CEOs believe recommendations of the bipartisan Simpson-Bowles Commission offer an effective framework for a fiscal plan. Those proposals outlined several options, including cutting tax rates for people at all income levels, eliminating some popular tax deductions, and adding them back selectively, as needed.

Among the signatures on the letter urging deficit reduction are:

AT&T – Randall Stephenson, Chairman & CEO
Bank of America – Brian T. Moynihan, President & CEO
Boeing – W. James McNerney, Jr., Chairman, President & CEO
Cisco – John Chambers, Chairman, President & CEO
General Electric – Jeffrey Immelt, Chairman & CEO
Goldman, Sachs – Lloyd Blankfein, Chairman & CEO
JPMorgan Chase – Jamie Dimon, Chairman & CEO
Microsoft – Steve Ballmer, CEO
Nasdaq OMX Group – Robert Greifeld, CEO
NYSE Euronext – Duncan L. Niederauer, CEO
Partnership for New York City – Kathy Wylde, President & CEO
Qualcomm – Dr. Paul Jacobs, Chairman & CEO
Sirius XM Radio – Mel Karmazin, CEO
Verizon – Lowell McAdam, Chairman & CEO
Walgreen – Gregory Wasson, President & CEO

President Obama believes tax increases on high income earners are necessary and fair to reduce the deficit. Mitt Romney backs a tax overhaul that closes loopholes and spurs economic growth, but he is against raising taxes. The CEOs are calling for an overhaul of the tax code to reduce deductions and loopholes and thus generate more revenue than the current tax code.

A balance approach is needed, and these CEOs are making a lot of sense. The deficit cannot be reduced without cutting spending and increasing tax revenues.

Deficit reduction is not just a Washington political issue or something for the leaders of large corporations to worry about. Interest rates are historically low for borrowers seeking startup loans, infusions of working capital, and business lines of credit.

However, the further the U.S. government gets into debt, the higher interest rates for small business borrowing will go. This will be a hindrance to business growth in the future.

I agree with the CEOs, we need politicians in Washington to stop grandstanding and take rational and equitable steps to cut the deficit.

Letter Photo via Shutterstock

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The Index found that 14.2%.of funding requests were approved by big banks ($10B+ in assets) in September — a 30% jump from 10.9% in August 2012. The figure represents the highest approval rating percentage for big banks since the Index began in 2011.

Lenders including Citibank, Sovereign and Citizens Bank are jumping head-first back into small business lending. The economy seems to be improving slowly, and the improvement has been a factor in their willingness to lend to small businesses.

This is a good sign for the economy. Combined with surprisingly good September jobs report, the positive economic news comes just as President Obama tries to recover from his poor debate performance against Mitt Romney.

Meanwhile, small bank lending approvals dipped slightly from 47.8% in August to 47.6% in September. The loan approval rate of credit unions dropped for a fourth consecutive month in September down to 52.4% from 52.9% in August.

The September figure represented the lowest credit union approval rate since June 2011.

Alternative lenders – accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others – continue to make an impact on small business lending. In September, alternative lenders approval rates rose slightly to 64.6%, up from 64.5% in August. The 64.6% approval rate was the highest recorded since the Index began.

Alternative lenders offer greater flexibility, quicker approvals, and competitive lending rates than they ever have before. This type of financing is very helpful for small and mid-size businesses that encounter short-term cash flow issues. Restaurants and retailers, in particular, find this type of financing attractive as they look to the fourth quarter to be profitable than other parts of the year.

Many businesses are seeking short-term working capital to prepare for the upcoming holiday season.

Lending Up Photo via Shutterstock

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There are a host of developments in Washington, DC, of importance to credit unions. Most importantly, Senate Majority Leader Harry Reid (D-NV) has stated his intentions to hold a vote on the credit union Member Business Lending legislation (S.2231/H.R. 1418). Passage of this bill, introduced by Senator Mark Udall (D-CO), would raise the lending cap — currently of 12.25% of a credit union’s assets — to 27.5%.

According to National Association of Federal Credit Unions (NAFCU), more than 1,100 credit unions are actively lending to small businesses. A number of them are offering the popular SBA loans and other financial products to entrepreneurs seeking to launch or expand their businesses.

However, a significant portion of these credit unions are approaching their law-mandated cap. Once a credit union reaches that limit, it would no longer be able to grant loan approvals.

In the Biz2Credit Small Business Lending Index, the percentage of approved loans by credit unions has dropped for three straight months. During the credit crunch, as small business owners looked for alternative options for capital, credit unions began to play an increasingly important role in small business finance.

However, the most recent analysis finds that credit union approval percentages this year have dropped from a high of 57.9% in March 2012 to 52.9% in August. Thus, small business owners are exploring opportunities from non-traditional lenders, such as accounts receivable financiers, who often charge higher percentage rates than credit unions do.

By having a wider variety of funders that are able to provide working capital, expansion loans, equipment loans, lines of credit, etc., small business owners can borrow money at more attractive rates. Limiting the options hinders the ability of entrepreneurs to shop around for the best deals.

It’s a simple but important law of economics, and it is not just theory. I speak to hundreds of small business owners each month who want to grow their companies and create jobs. They tell me first-hand about the opportunities they lose out on when they have a short supply of funding options.

A vote on this issue could take place shortly after Congress reconvenes after Election Day. If they want a better competitive landscape, credit unions must work hard to distinguish themselves from banks and remind elected officials that increased member business lending by credit unions will translate into local job creation.

This is critical for any politician who wants to be elected in November.

U.s Flag and Dollar Bill Photo via Shutterstock

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Big banks ($10B+ in assets) granted 10.9% of funding requests last month — a drop from 11.3% in July. This is a setback, as big banks had experienced an upswing in approvals during both June and July.

The issue with big banks is a combination of global credit issues and regulatory pressure to keep their underwriting standards tight so that they can meet their underlying capital ratios. It’s no wonder why small business owners are frustrated.

In fact, according to a recent Wall Street Journal story, ”Footnote to Financial Crisis: More People Shun the Bank” by Gary Fields and Maya Jackson-Randall, middle class Americans are avoiding banks in the aftermath of the financial crisis.

However, small bank lending approvals jumped to 47.8% in August, up from 47.4% in July. The figure represents the highest approval rating percentage for small banks since we began the Index in 2011. The SBA lending program being pushed by small banks has increased their approval rates.

The loan approvals by credit unions dipped for a third consecutive month in August to 52.9%, the lowest percentage since June 2011. The slowdown in loan approval is partially caused by the 12.25% MBL ceiling, as well as sluggishness in credit unions’ willingness to book new business.

Meanwhile, alternative lenders – accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others – rose. In August 2012, alternative lenders approved 64.5% of loan requests, up from 64.1% in July and 6.5% higher than August 2011 approvals.

Alternative lenders recorded their highest approval rates since we began measuring the category. They are offering new products at cheaper pricing, which has helped to increase lending.

Month            Big Bank %      Small Bank %      Credit Union %        Alternative Lender %

Aug. 2011:         9.4%                43.8%                  54.2%                           58.0%
Sept. 2011         9.2%                45.1%                  55.5%                           61.5%
Oct. 2011:          9.3%                46.3%                  56.6%                           61.8%
Nov. 2011:        10.0%               47.0%                  57.0%                           62.0%
Dec. 2011:         9.7%                47.1%                  57.4%                           62.2%

Jan. 2012:         11.7%               47.5%                  57.6%                           62.4%
Feb. 2012:         11.7%               47.6%                  57.8%                          62.5%
Mar. 2012:        10.9%                47.6%                  57.9%                          63.0%
Apr. 2012:         10.6%               45.9%                  57.4%                           63.0%
May 2012:         10.2%               45.5%                  57.6%                           63.2%
Jun. 2012:         11.1%               47.5%                  55.8%                           62.9%
Jul. 2012:          11.3%               47.4%                  54.6%                           64.1%
Aug. 2012:        10.9%               47.8%                  52.9%                           64.5%

* Banks with more than $10 billion in assets are classified as “big banks.”
* Banks with less than $10 billion in assets are classified as “small banks.”
* Credit Unions are considered a category in the Biz2Credit Small Biz Lending Index.
* “Alternative lenders” include accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others.

As the Presidential election draws near, both parties will be looking at unemployment figures and small business growth as key issues. Mitt Romney and President Obama both want to be seen as the best person to help small businesses expand.

Many businesses have begun seeking short-term working capital to prepare for the upcoming holiday season. Of late, the best places to get it were small banks and alternative lenders.

Down Up Photo via Shutterstock

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The July 2012 Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications on my company’s platform, revealed that approvals by big banks improved for the second consecutive month to 11.3% from 11.1% in June 2012.  This figure represents the highest approval rate by big banks since March 2012; a positive indication that small business lending is gaining momentum among large and mid-sized banks.

Conversely, small bank lending dropped slightly to 47.4% in July 2012 from 47.5% in June 2012.   However, this number is still up two and a half percentage points from 44.9% last July.

We are continuing to see more mid-sized banks, such as Sovereign, reemerge in the market. Big banks, which have been under pressure to increase small business lending, are continuing to close more deals.

Meanwhile, the July 2012 loan approval rate of credit unions dipped to 54.6%, down from 55.8% in June.  The figure represents the lowest approval rate for credit unions since August 2011, when the figure stood at 54.2%. Some credit unions have reported that they had reached their lending limit, which currently is 12.25% of total assets.

The slowdown is due, in part, because some credit unions reportedly ‘capped out’, while others are being more cautious in their lending because of greater scrutiny by the SBA.  The Credit Union Small Business Jobs Bill proposed by Senator Mark Udall (D-CO) seeks to raise the credit union business lending cap to 27.5% of total assets from the current figure of 12.25%.

Although credit union lending dropped, alternative lenders — accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others — are picking up the slack.  In July, alternative lenders approved 64.1% of loan requests, up from 62.9% in June and nearly 12 percentage points higher than a year ago.  The 64.1% approval rate was the highest figure since the Biz2Credit Small Business Lending Index began in 2011.

While credit union approvals slowed, alternative lenders picked up the slack with their highest approval rating since we began measuring the category.  Alternative lenders should continue to reap the benefits of capped out credit unions.

Although it is not yet time to pronounce that the credit crunch is over, things have certainly improved for entrepreneurs in search of capital this year.

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Advances in technology and the accessibility of big data enabled underwriters to:

• Spread risk more widely across geography and industries.
• Lower acquisition costs while expanding geographic footprints.
• Reduce the need to open new bank branches.
• Offer paperless loan applications, refine underwriting, and speed up the lending process.
• Develop targeted financial products geared for startup businesses, which have experienced difficulty in securing capital from big banks.
• Lower significantly the cost of capital, particularly from alternative lending sources.

Since the credit crunch began, small companies — particularly businesses that have been operating for less than two years — have often been denied loans by traditional banks. Use of technology provides lenders with more robust information about borrowers and enables them to offer products specifically targeted to the needs of startups.

Because of this, people with credit scores as low as 535 can secure funding, in part because lenders are able to access robust information about their credit history, industry, and even the economic status of the area in which they live.

Today, financial institutions can analyze primary data, such as loan application documents, and information from credit ratings agencies such as Equifax and D&B. Since financial data is so detailed today, lenders can develop financial products especially for startups.

I am seeing this more and more among non-bank lenders, which have become increasingly important in small business finance since 2008 when credit markets tightened.

The so-called “alternative lenders” approve more than 60 percent of funding requests, according to the most recent Biz2Credit Small Business Lending Index.  Perhaps the most encouraging aspect of the integration of technology in small business lending is that it has made it easier for women-owned and minority-owned companies in economically disadvantaged areas to secure capital.

As financial institutions streamline the credit decision-making process, they save entrepreneurs time and frustration that they otherwise might encounter in seeking funding to start and expand their operations. Technology truly is revolutionizing small business finance in the same way that online shopping forever changed retail.

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