New bank regulations designed to strengthen bank capital requirements will be good for the economy in the long run because a strong economy cannot function without a healthy banking system. But as beneficial as this is for the economy in the long run, it is going to place even more pressure on small businesses. The regulations are going to fade in gradually, but knowing that it is coming is almost certain to make some banks start to curtail lending to more risky borrowers, and one of the most risky for banks is small business. So lack of credit (read lack of funding for growth, new hiring, etc.) is going to continue hinder small businesses well into the future.
The new rules mandate that by 2013, a bank’s strongest capital, known as Tier 1 capital, would increase from 4 to 4.5% of assets. Added to this would be an emergency reserve of 2.5%. So by 2013 – three years from now – a lot of smaller banks that may be short of this number now are probably going to be curtailing their lending somewhat as they build up their Tier 1 capital. Plenty of banks, including most of the large ones, meet these requirements already. But more smaller and community banks may not, and this is where the bulk of small business lending comes from.
A second consequence of these new regulations is that they are going to have a negative effect on bank profits, which will then make loans more expensive. Loans are the main income-producing assets for a bank. How much a bank can lend is based on their capital. So for example, if a bank can lend $5 for every $1 of capital, every dollar taken out of the loan pool is $5 that can’t be put out in income (and profit) producing assets. So the options for a bank are to either curtail lending because they don’t have sufficient capital, in which case their profits will suffer, or to charge more for what they can lend to maintain their profits. Either way, it is either going to mean less money available or more expensive money if it is available.
Because of the recession, most of the normal lending dynamics are already working against many small businesses. Sales and profits may have declined, and banks usually will not lend to companies with declining sales and profits. Yet this is becoming more and more the scenario that banks are going to be seeing even if the business owner has done a brilliant job of keeping the business going. So even aside from the new banking regulations, the economy has already made it more difficult for small businesses to find financing, and adding this new level of bank regulations will just make it harder
It is becoming readily apparent to me that this current administration just doesn’t understand what drives jobs in our economy. Hint: it isn’t government, it is small business. You see, if the Obama Administration, or even the US Congress for that matter understood this, and also cared, then they’d not be so hasty in adding new regulations, and removing the tax credits and deductions which have actually helped from the government side of things. Okay so let’s talk shall we?
There was a rather troubling article in the LA Times recently on December 27, 2011 titled; “New year will bring new laws and regulations for small business,” By Cyndia Zwahlen, which stated in the headline; “Nationwide, tax deductions for equipment purchases will be sharply reduced.” The article went on to advise the readers that;
“As of January, there will be a major decrease in how much of the total cost of new equipment – including items such as computers, machinery and vehicles – a business can deduct upfront on its tax return. That deduction, which had been boosted by federal stimulus bills, will drop to $125,000 from $500,000. And unless there is a change in the law, the deduction will drop further to $25,000 in 2013.”
Now then, taking away incentives to get businesses to expand their operations surely will not cause small businesses to grow and hire any more folks. It also means that new equipment will not be bought, therefore not be sold, made, and the company that makes it, well, they won’t be hiring anyone either now will they? Hint: Answer is NO.
Okay so, maybe you see the problem here, and it’s not my sole intention to bash the Obama Administration, as much as I truly believe they deserve it at this point for the mismanagement of our economy – but why they are shooting themselves in the foot in an election year is beyond me. Even if maybe that’s a good thing judging by their previous performance.
As a former franchisor, I can tell you that those sorts of deductions and tax credits greatly helped our new franchisees, just as they have always helped business start-ups and expanding businesses. Next, I’d say that the “occupy protests” are far too quick to throw anyone who has become wealthy in business under the bus, as the evil 1%. In doing so, it shows greed of the “occupy the parks” crowd in their demand for re-distribution, and a complete misunderstanding of where the majority of the jobs come from in this great nation; and yes it is a great nation.
Beginning in 2010
Eligible small business employers will receive a 35% tax credit on the contribution to their employees health insurance premiums from 2010 to 2013.
Providing health care coverage – A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
Firm size – A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
Average annual wage – A qualifying employer must pay average annual wages below $50,000.
Both taxable (for profit) and tax-exempt firms qualify.
Amount of Credit:
Maximum Amount – The credit is worth up to 35 percent of a small business’ premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
Phase-out – The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
Last week the IRS mailed postcards to 4 million small businesses with information about this credit which is called the Small Business Health Care Tax Credit.
Under their tax qualified employer-provided health plans, parents can now cover their adult children up to 26 years of age.
Beginning in 2011
States will receive funding to establish web-based state insurance exchanges, which will be called Small Business Health Options Program (SHOP) in 2011. These exchanges will allow small businesses to form alliances and purchase insurance policies together at reduced rates.
Small businesses will be eligible to receive federal funding if they provide their employees with wellness programs from 2011 to 2015.
The definition of qualified medical expenses from Health Spending Accounts (HSA’s), Archer Medical Savings Accounts (MSA’s) and reimbursements through Health Flexible Spending Arrangements (HFSA’s) and Health Reimbursement Arrangements (HRA’s) has been modified to exclude over the counter medicines.
A $2,500 cap will be applied to flexible spending accounts.
In 2011, a simplified cafeteria plan will allow self employed individuals and employees to choose specific benefits that meet their needs.
A $250 rebate to Medicare beneficiaries who are affected by the donut hole.
A temporary high risk pool for individuals who are uninsured because of a pre-existing condition