Small Businesses Weigh Recovery Act

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The Wall Street Journal
By: Emily Maltby
February 24, 2011

In the two years since President Barack Obama signed the $787 billion Recovery and Reinvestment Act into law, some small-business owners attribute their companies' survival to the stimulus package--yet many say the provisions in the 1,100-page law have fallen short of their expectations.

To be sure, the Recovery Act's impact is hard to quantify. It is unknown what would have happened to the economy without it, the Congressional Budget Office notes in a November 2010 report. And complicating matters is the longevity issue--the stimulus was intended to give the economy a boost over several years and many initiatives that expired or ran out of Recovery Act funding have been renewed in subsequent legislation.

At least four stimulus tax provisions targeting small companies have been extended under new laws and one popular lending program was revived five times. Government contracts under the stimulus were issued through the end of September. But many of those projects will roll out in years to come and then spur the need for follow-up projects.

Here, a look at three major stimulus initiatives, and how business owners are faring.

Access to Credit

The stimulus allowed the SBA to eliminate fees on government-backed loans, while raising the guarantee level to 90% from 75% to entice lenders. Between February 2009 and August 2010, the SBA approved $22 billion in small-business stimulus loans.

Thanks to the stimulus, Andrew Schuman says he secured an SBA-backed loan from AmFirst Bank for $2.1 million last March, which he used to hire workers and expand his company, Hammond's Candies LLC, in Denver.

Getting the loan was a huge relief--during the recession, Mr. Schuman, Hammond's president and chief executive, saw his credit lines cut and his lending fees soar. Today, he is paying 6% interest on the loan each month--less than half of what he was paying previously.

The SBA has touted the program as a success. While banks' conventional lending continued to fall, SBA loans bounced back to pre-recession levels.

Pinchfield's Mr. Moutray says that the program was successful, but that it was too small to have any significant impact in the overall credit environment.

"A very small percentage of businesses take advantage of SBA lending," he says. "There are access-to-credit issues that resonate today."

Indeed, overall credit to small business dropped 6.2% from 2009 to 2010, according to a study released earlier this month by the SBA's Office of Advocacy.

As for Mr. Schuman, he says that Hammond's was lucky to get an SBA loan because the process wasn't easy. The lending provision that helped him save $40,000 in processing fees, he says, was attached to burdensome paperwork and he had to seek assistance from a business development center that specializes in packaging SBA loans.

"I really do feel that it was a well-intended program that just didn't make it because the execution for an average business owner was too hard," he says. "It wasn't easy, even working with people who knew how to do it."

Tax Breaks

The stimulus created several tax breaks for business owners, such as a carry-back provision that allows companies to apply current losses to the taxes they had paid on profits as far back as five years ago, potentially giving them a refund.

The stimulus also increased an equipment expensing deduction and gave a tax credit for hiring unemployed military veterans and high-school dropouts.

But a common complaint among small businesses is that tax breaks, particularly those that applied to purchases and hiring in 2009, didn't offer immediate relief. Owners had to wait until they filed their returns--more than a year after the Recovery Act passed--in order to get many of the benefits.

"The president's stimulus package did nothing for us because [the provisions] only helped when you went to pay your taxes," says Patricia Orzano, who owns a 7-Eleven franchise in Massapequa, N.Y., with her husband, Richard Orzano. "You don't see that till the following year. What good is that?"

Ms. Orzano says her business's finances haven't improved since the stimulus was enacted. Due to weak sales, she hasn't been able to hire anyone in three years and can't afford to upgrade her business equipment, making her ineligible for key tax breaks.

The National Federation of Independent Business, of which Ms. Orzano is a member, had lobbied for the stimulus to create a payroll-tax holiday for owners and employees, and believes it would have been more effective than the stimulus programs that passed.

"That would have put a big increase in everyone's take-home pay right away," says Bill Dunkelberg, NFIB's chief economist. "Consumers weren't going to borrow more money to spend but they would have spent it in their take-home pay."

Ms. Mills, of the SBA, has a different take. She says that the Recovery Act tax breaks not only helped "countless small businesses keep their doors open, but also put them in a position to drive local economic activity and, in turn, save and create jobs all across the country."

Government Contracts

About 32% of stimulus contracts, or $35 billion as of earlier this month, have gone to small companies, based on data available from the Federal Procurement Data System, exceeding a mandate that 23% of government contracts go to small businesses.

One reason for the popularity boost is that "the mix of what is being procured lent itself to small businesses," says Joe Jordan, associate administrator of government contracting and business development at the SBA. "There were no large weapons systems or vaccines or things where small businesses have a hard time being a prime contractor."

Two stimulus contracts totaling $278,873 went to Rosene Ruschman, owner of Rosene Creative Services LLC, a Jasper, Ga.-based company that designs exhibits and signage for parks and nature centers.

"Before the stimulus money, there were projects out there, but you had to hunt," says Ms. Ruschman, who saw her sales double in 2009 with the influx of Recovery Act work, and remain steady since. "They were available enough to keep you going, but you couldn't really grow."

Ms. Ruschman who has done government work for 12 years, was ready to apply for contracts when the stimulus rolled out. Many owners, however, weren't in the same position. The average business owner has found that it takes nearly two years of trying to get government contracts, according to a 2010 American Express survey. Some who entered the procurement system in 2009 are just getting the required certifications today.

For Ms. Ruschman, who plans to hire two employees, the Recovery Act contracts allowed her business to survive. "If the stimulus didn't pass, I'd really be in trouble right now," she says.

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This page contains a single entry by CFED published on February 25, 2011 5:08 PM.

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