The View is Much Better From Afar

Crain’s New York Business reports that City Hall is taking steps to make doing business less painful for smaller businesses in New York City. City Council Speaker Christine Quinn is introducing legislation to waive penalties for small businesses with outstanding fines owed to certain, but not all, city agencies. She is also pursuing a measure that would require the City to assess the impact of any new regulations on small businesses prior to their adoption. This seems a small step given that in the past, small business owners have proved to the local newspapers that city inspectors smashed lights on their premises and then fined those businesses for not meeting lighting regulations. Presumably this was done to meet quota requirements for city inspectors. It was a shrewd calculus; the cost of appearing to protest such abuse exceeds the cost of paying the fine to make it go away. But it was a Pyrrhic victory for New York City government. The City has issued over $200 million in fines and penalties that it appears unable to collect. But more significantly, small businesses are fleeing the City and new start-ups don’t offset the attrition. Ms. Quinn has proposed convening a panel of legislators to review regulations, one by one, to find those that impede business operations while doing little or nothing to improve the quality of life in the City. I think that is a good first step, but it is too little, too late for New York City which has an extremely hostile small business climate. I suspect that this realization, that small businesses are good for the economy, was likely motivated by the troubles facing Wall Street. With Lehman Brothers, Bear Stearns and Merrill Lynch gone, and other institutions downsizing, who else will hire employees? If the City is really serious, it needs to move beyond the small potato, but extremely irritating issues, of fines and regulations and start looking at the tax structure.

This Way to the Remote Spots

The Pew Research Center found that 63% of Americans have broadband Internet connections in their homes, up from 55% the year before. They are paying on average $39 monthly from this service, up from $34.50 the prior year. The fact that they are paying more suggests the value that they attach to this service. In this difficult economic environment, consumers reported that they were more likely to cut back on cable television or cell phone service to budget for Internet access. However, the news was not all good, as 37% of Americans remain without access to broadband. Income was the largest barrier to access; 82% of those who don’t use the Internet earn less than $40,000 annually. Almost half earn less than $20,000 annually. Only 25% of those without Internet access live in rural areas, where low population density is often a disincentive to building broadband systems. The question is: does lack of broadband access hinder economic development? The Organization for Economic Cooperation and Development reports that the U.S. ranks 15th in per capital broadband deployment, well behind faster-growing Asian economies, such as South Korea.  Certain of the $7.2 billion in economic stimulus funding is targeted for expanding broadband access, which may help those in rural areas, where it is not economically efficient for private providers to expand access. But this may result in low returns for the investment, given the survey findings.  However, for rural areas in the Gulf Coast, expanded broadband access would almost certainly be welcome, as they need fast Internet access for remote operations, particularly during the hurricane season.

It Is Inevitable

Virgin Atlantic Founder Richard Branson had a creative way of describing the phenomenon of creative destruction, the memorable phrase of economist Joseph Schumpeter. He empathized with the pain of employees of British Airways who are forfeiting one month without pay in order to preserve employment at this difficult time. However, he noted that in the forest, old shoots are allowed to die such that new saplings may grow. Absent a compelling threat of systemic risk, such as a legitimate banking crisis, Branson sees government intervention as counter-productive. It simply delays the inevitable, at tremendous cost to the taxpayers, for which our as-yet-unborn great-grandchildren will be paying. And it suppresses or raises the cost of innovation which could provide better services and new jobs. Branson’s interview was thoughtful and we can only hope that policymakers listen to this very articulate and successful entrepreneur.

Regulatory reform often has unintended consequences; the current debate over health insurance reform is no exception. With proposed government subsidies, as many as ten million low-wage employees may choose to drop their employer-provided health insurance and purchase coverage on the open market. With such attrition rates, small businesses may find their group purchasing power reduced, making it more expensive to insure the remaining employees. This could draw another ten million employees into the individual market, if small businesses are forced to drop their coverage plans due to the crowding out effect of the government exchange. According to a survey of the National Small Business Association, nearly 10% of small business owners are contemplating dropping their medical insurance coverage next year. The uncertainty around health care reform makes a lengthy debate expensive, with the cost falling disproportionately on small businesses.

There Should Have Been a Better Way

The website for Advanta Corp. identifies the tagline of that company on the upper left hand corner as “Credit cards for small businesses”. In the center of the home page the company announces “Account closures: We deeply regret that all Advanta Business Credit Card accounts are closed, effective May 30, 2009.” Advanta stopped lending against open credit card accounts last month due to funding problems. On May 11, Advanta announced that it would allow its securitization facility to unwind.

Now irate small business cardholders are seeking class-action status in litigation against Advanta filed in Superior Court in Santa Clara, California on June 16. They allege that Advanta “unilaterally, unfairly and illegally” changed the terms of credit card agreements, “increasing their effective interest rates…in an attempt to unfairly accelerate repayment of outstanding balances and to increase immediate revenues”. Consumer complaints against Advanta rose dramatically last year when the company responded to the spike in charge-offs by re-pricing accounts, sometimes by as much as 30 percentage points. The legal documents filed in court state that last year “Advanta imposed new APRs on plaintiffs’ credit cards…increasing the promised fixed rate to as high as 29.99%….These new terms were not previously disclosed in any form to Advanta’s customers and were not the result of any breach of the contract by the consumer”. The plaintiffs are Advanta cardholders who believe that they and other customers have been harmed by “having to pay interest and finance charges with interest accrued at higher rates than Advanta promised”. The lawsuit is seeking $75,000 per cardholder plus interests and costs.

Given that Advanta has terminated all of its small business accounts, what do the plaintiffs hope to gain, besides compensation which, even if awarded by the court, may not justify the time and effort invested in the process of litigation? According to American Banker, Arthur D. Levy, the attorney for the plaintiff, wrote that “Advanta’s lending moratorium does not affect this case. This is to make customers whole for past illegal rate increases. We are monitoring Advanta’s financial situation and so far….they appear to have sufficient capital to repay their customers in our case.” In effect, they are litigating over past abuses that credit card reform legislation was meant to correct. However, as I wrote in an earlier blog posting, the legislation Congress passed aids individual consumers and is of no benefit to small businesses. In choosing inaction, Congress likely left small business owners to pursue justice in the courts, at expense to all taxpayers.

Alexander Doll Company in Harlem

On June 17, Chairman of the Board of Governors of the Federal Reserve Bank System Ben Bernanke addressed the Global Financial Literacy Summit in Washington, D.C. He spoke about the challenges and opportunities facing community development financial institutions (“CDFIs”). Such organizations reach consumers in traditionally underserved markets, helping them to manage credit, buy homes and start small businesses. There are more than 1,000 CDFIs holding about $25 billion in assets and like everyone else, they are affected by the economic downturn. Philanthropic funding to these institutions has declined as foundation endowments and investment earnings have declined in value. At the same time, support for CDFIs from state and local governments and more traditional institutions are also declining. In particular, banks that sought to avail themselves of Low-Income Housing Tax Credits saw the value of those credits decline as tax credits declined in value commensurate with their deposits.

I read Chairman Bernanke’s speech in its entirety and my reaction to his remarks is mixed. On the one hand, I am always glad to see the issue of financial access on the radar screens of regulators. But at the same time, I am troubled by the philosophy implicit in the Chairman’s remarks and in the Obama Administration’s financial regulation white paper. Their view appears to be that banks have to be bribed and cajoled by tax credits or regulatory fiat into doing business in low-income areas. In fact, low-income areas are often vibrant entrepreneurial communities, creating opportunities for themselves after larger corporations have moved employment elsewhere.  As long as banks perceive the stick as the inducement to enter these markets, they will not stay for long, when the stick becomes less menacing, as it does in an economic recession. However, when banks see the carrot, the profit opportunity for reaching under-served markets, their commitment will be sincere and longer-lasting.

For a more forward-looking perspective on the purchasing power, due to income density, of under-served urban areas, check out the Initiative for a Competitive Inner City (“ICIC”). When I was in business school, I received an award from the ICIC for a case study I had written on the Alexander Doll Company. The award provided for my participation in ICIC’s annual program for MBA students. The Alexander Doll Company is based in Harlem and manufactures the Madame Alexander line of dolls that I was given as gifts as a little girl. No one who would tour the doll company (and I encourage you to do so!) would see under-served communities as economic basket cases. I think that the future belongs to institutions like CheckSpring Bank in the South Bronx and the Alexander Doll Company that act on opportunities to build their workforces in very motivated communities.

Not Yet Back to Normal

The Associated Press reports that “one year after Iowa floods, many still wait for help”. By my calculations, they have another five years to go and the help will be far less than they had anticipated. The AP reports of the inadequacies of FEMA (Federal Emergency Management Agency) programs and that long-term assistance has been slow to materialize. HUD (Housing and Urban Development) Secretary Shaun Donovan, visited Cedar Rapids, Iowa to announce new disaster relief grants at which time he acknowledged that there is a problem with the long gap between immediate relief and long-term rebuilding assistance. He attributed this, in part, to the fact that for every single disaster Congress has created a new law and a new allocation system that delays agency response. I am impressed by his candor. This is why  you cannot rely on government assistance if you want to keep your small business running.

One of the most heartbreaking, but not surprising, cases cited in the AP report was that of a family that is paying its mortgage on a home too damaged to inhabit while paying rent for their immediate living needs. As bad as that is, if you own a small business, you get the double-payment twice, for your home and your office. Homeowner’s and tenant’s insurance should cover the cost of your housing when a disaster displaces you. In my case, when I was evacuated from my home after 9-11, my homeowner’s insurance was responsible for the costs incurred should I have chosen to stay in a hotel. It sounds like this family did not have adequate insurance. At a time when financial regulatory reform is focused on consumer protection, we should place equal emphasis, if not more, on financial literacy. And we should give generously to private disaster relief charities, whose reserves have been exhausted in the recession. I was very happy to see American Airlines call attention to this need in the current edition of its inflight magazine.

Rainbow Over Geneva, Not New York

Everyday disasters are taking their toll on small businesses in New York City where 21 of the 26 days of the month to date have been rainy and unseasonably cold. Businesses that cater to outdoor pursuits, such as street vendors, outdoor cafés, sports entertainers, beach vendors, Central Park carriage rides, amusement parks and others have seen dramatic declines in seasonally-adjusted revenues for the month of June.
Cumulative rainfall in New York City for the month of June is close to nine inches. I suppose the bright side is that umbrella vendors may be faring well this month. The economic impact of the rainfall is unlikely to make the news; news media prefer more dramatic, and less frequent disasters, such as major hurricanes. But this certainly illustrates how the everyday disasters are often ruinous to small businesses. I photographed this rainbow appearing over Lake Geneva when I lived in Switzerland. Unfortunately, for New York City small business owners, the rainbow has not yet appeared.

Looking for Direction?

For those thinking of making a change towards more meaningful work in the time of economic stress, perhaps my experience may be helpful. The essence of entrepreneurship is bootstrapping. I described in an earlier posting how I leveraged the only resource I had, my time and enthusiasm, to build websites for my business. I did the same to obtain technology resources.My first small business, Childs Capital LLC, was selected as the grand-prize winner in the sales and marketing category of the 2006 Cisco Growing With Technology Awards. This prize included $25,000 worth of Cisco equipment of our choice and we opted for a complete Voice Over Internet Telephony system.  We were the grand-prize winner of the Visa Business Breakthrough for Small Businesses, which provided a $10,000 grant for small business services. We won second prize in the Microsoft Technology makeover award, which offered a $25,000 package through CompUSA and a $25,000 package through Microsoft. We won the Web-preneur award from IBM and American Express, the SAP Small Business of the Year Award and the technology grant of the Amber Foundation.  Winning the Professional Development Grant of the Web Foundation allowed us to take a fully paid course on DVD authoring at the Sony Training Institute in San Jose.  Taking the time to write the essays in support of the applications provided the small business with much needed resources. Incidentally, the photograph here appears on our Intranet as a navigation aid. After putting all of this technology in place, I put it to use and developed a style guide for our Internet and Intranet. I took this photograph of the country manager for Land O’Lakes in Guinea as we pulled our jeep over en route to Labé from Conakry. Reading the sign was difficult; heavy rains caused the metal sign to rust. Why would you have metal signs in a rainy climate? Good question. The signpost was twisted 90 degrees at the bottom, so it would hard to tell the original directional intent. This photo was completely unposed and illustrates the challenges of working in that part of the world. And a great image to capture the meaning of looking for directions or navigational aids. That is what I love about bootstrapping – it really opens your creativity!

A Better Future

One of the most memorable projects of my first business was working in Guinea for Land O’Lakes. You likely recognize that company as a brand of butter, cream and other dairy products. What is less well known is that Land O’Lakes consists of more than 1,000 member-cooperatives serving more than 300,000 agricultural producers. Land O’Lakes members assist international development by sharing their expertise in farm-to-market agribusinesses. The farmer-to-farmer model is critical to providing technical assistance to small-scale farmers in developing countries, including Guinea, a French-speaking country in sub-Saharan Africa. Its fertile soil and sunny climate notwithstanding, the country imports about 80% of its food. Improving the productivity of the agricultural sector, which consists almost entirely of small family farms, is critical to the country’s efforts to lift itself out of poverty. I worked on a project with Land O’Lakes in Guinea to assist in technical training and human resource development. Although Guinea is one of the most desperately poor places on earth, the experience was very uplifting. This is one of my favorite images; a photograph I took in Conakry, the country’s capital. The juxtaposition of the dirt road and poor sanitation with a glamorous marble mosque that would look at home in Beverly Hills captures the country’s dilemma. This little girl is smiling because she is on her way to school, a rare treat for girls in her part of the world, where illiteracy rates are about 80%. The smiling optimism of the child captures the look of a better future, which is why this is one of my favorite photographs.