From Denverpost.com...

The redlining of small businesses
Owners feeling starved of debt and equity capital, and tired of being at the bottom of the priority list.

By Henry Dubroff and John Huggins

Politicians trying to figure out why the electorate is so angry and frustrated will find answers in a simple chat with shopkeepers and small-business owners on Main Street.

When it comes to small business, the disconnect between reality on the ground and what policymakers are talking about is enormous. Even worse, the aspirations of small-business owners are being eroded not only by economic jitters but also by massive uncertainty about deficits and future government policies.

Many small-business owners feel they've been financially and politically redlined — starved of debt and equity capital, shut out of the political conversation and put at the bottom of the priority list while big companies and unions get huge financial and tax breaks.

What's at stake in this redlining of small business is enormous. Although there are only about 5.5 million small businesses in the U.S., they account for half the jobs in America and the lion's share of job growth. The "jobless recovery" is due in large part to the fact that small businesses have yet to see any advantage at all — and see much risk — in adding to payrolls.

This is a far cry from the situation less than a decade ago, when consistent small-business job growth made the American economy the world's exemplar.

This near-perfect environment for small-business job growth was put into place in the late 1980s and lasted for more than a decade. It included infrastructure in the form of cheap technology, readily available access to basic services at Kinko's and Staples, plentiful capital and a tax environment that favored entrepreneurship. Even the tight job markets of the late 1990s didn't stop the steady stream of entrepreneurial wealth creation.

However, around 2003, small-business formation and job growth began to be taken for granted as policymakers took their eye off the ball. Rising health care costs and uncertainty about individual coverage for people who struck out on their own added to the personal risks of starting new companies. Sarbanes-Oxley reforms, intended to reign in excesses at big companies, reached far into small concerns, touching closely held businesses, adding to costs, paperwork burdens and, most of all, risk.

Failure to permanently fix thorny tax problems — including the alternative minimum tax and the estate tax — added to the uncertainty. The easy money of the housing bubble era had the effect of creating a debt trap for folks starting new businesses. Once the housing market softened, those home equity loans became an albatross that could sink a fledgling company.

As we have seen, the financial sector became the dominant growth engine for the American economy. Too much of our nation's intellectual capital was devoted to trading systems, debt securitization and the creation of toxic derivatives that brought the global financial system to the edge of collapse. Comparatively little capital was spent on building small-business resources.

Once the recession hit and the financial crisis worsened, resources went right to the head of the economy (the financial sector), leaving the heart of the economy (small businesses) with no blood and no oxygen supply.

While the government provided up to $700 billion to big banks and big companies through TARP, SBA guaranteed lending fell nationally by 27 percent from nearly $18 billion to $13.1 billion. In Colorado, the results were worse: SBA-guaranteed lending plunged 41 percent, from $556 million in fiscal year 2008 to $330 million in fiscal year 2009.

The National Federation of Independent Business Small Business Optimism index, which had hovered pretty steadily around the 100 range since the end of the 1993 recession, plunged to the low 80s, well below earlier recessions. The December NFIB index remained stuck at 88, not nearly high enough to trigger job growth. Hiring plans "remain in negative territory," according to Wells Fargo Economics, which reported on the NFIB index in its January 15 economic roundup.

At a recent small-business summit hosted by Sen. Michael Bennet, business owners described the perception gap between small businesses and the financial sector. In an example of how the spiral of redlining has gotten out of control, business owners said they were interested in getting loans but perceived the banks as unwilling to lend. Lenders said they were willing to make loans but perceived borrowers were shy about taking on new risks.

Uncertainties about the true impact of health care reform, cap-and-trade legislation, estate and alternative minimum taxes and even capital gains taxes loom. The perception exists that small-business lending remains shut down. These challenges and news of gigantic bank bonuses strongly reinforce the idea that neither the financial system nor the political system are working for Main Street, especially the thousands of small-business owners who have dipped into or even exhausted their savings in order to keep their employees on the payroll.

Unless government policy begins to tilt back in favor of existing small-business owners and entrepreneurs with dreams of striking out on their own, the political and financial redlining of small business will exact a heavy toll on the economy — and on elected officials in every state.