Archive for the ‘Financial Liquidity’ Category

Planning Tax Payments

Wednesday, April 6th, 2016
It Doesn't Add Up

It Doesn’t Add Up

As April 15 approaches (well, for 2016, April 18 is the relevant date), many people will pay their federal taxes with their credit cards in order to accumulate the points for frequent flyer awards. But did you know that the IRS charges the merchant credit card fees back to the taxpayer? An accountant quoted in the morning news presented a convincing argument that in most cases, the cost of the payment fees exceeds the value of the rewards points. Of course, if you need to conserve your cash, paying the taxes on your credit card may be your only option. But if you can send in a check, it might be less expensive. I was not aware that the charge-back was the practice of the IRS, so I thought I’d pass this on.

And speaking of charges incurred without your knowledge, you might consider the tradeoff with automating your utility payments by storing your credit card information online. The benefit of that practice, of course, is that you don’t have to think about making your monthly payments and you can easily record your expenses with your credit card or bank statement. The disadvantage, and one I had not previously considered, is that your account may be charged without your consent. I happened to meet a lady who lost her condominium in a fire. As her cable television and Internet provider had her credit card information for billing purposes, they billed her for the month of service following the fire, even though she clearly did not benefit from that service as her home and its contents had been completely destroyed. Contesting the charge (and she had called the cable immediately after the fire to suspend her service) is a hassle she did not need right after losing her home. So consider the risks associated with automated payments.

And the Really Big Threat Has Yet to Surface

Saturday, June 23rd, 2012

There is More Below the Surface

I chose this image from stock photography to accompany this blog post both for the refreshing effect as we experience scorching heat, and for the symbolism. Icebergs are more dangerous for what they conceal as for what they reveal. The depth of an iceberg can exceed the height of a Manhattan skyscraper, making it very risky to the unsuspecting sailor. So it is with public finances, as our long-term liabilities remain obscured but what is above the surface is scary enough.  And one community has taken desperate measures that may become increasingly common as the economy struggles.

North Las Vegas, the fourth largest city in Nevada, has declared a state of emergency. The city invoked a rarely used law to mobilize resources to respond to unforeseen disasters and invoke emergency powers. But it wasn’t an earthquake or other extreme weather event that caused the city’s crisis. North Las Vegas is responding to a fiscal emergency. Years of declining tax revenues, growing expenses and rising joblessness led city officials to apparently conclude that they had exhausted their options.

North Las Vegas is among the most distressed cities in a troubled state. Nevada has the highest unemployment rate in the country and a crisis in the rate of home foreclosures and personal bankruptcies. But while the financial pressures are severe, the disaster declaration may be over-reaching.  Two cities in neighboring California, Stockton and Los Angeles, attempted similar emergency declarations that could not survive legal challenges.  Officials in Buffalo, NY were more successful when a court upheld a freeze on public employee wages, allowing the city time to address its deficit. North Las Vegas officials concede that they are not experiencing a Hurricane Katrina-like event in their city. But the disaster declaration will allow them to suspend scheduled increases in the salaries of city workers and suspend other contracts. The question remains – these short-term measures only buy time. What are the unseen, longer-term costs? And what happens when a real (i.e., not contrived) disaster strikes?

Beware of Online Stimulus Offers

Saturday, March 28th, 2009
Don't Be a Pawn

Don't Be a Pawn

As administrator of this blog, I spend some time deleting spam comments to this site (although I am grateful that WordPress makes this task much easier for me).  I have noticed a recent trend of spammers offering help in securing federal government stimulus money for small businesses. Apparently my blog site is not the only one they are targeting. A recent report in the Los Angeles Times quoted Better Business Bureau spokeswoman Alison Southwick as saying “we started seeing these ads pop up online, promising people could get $10,000, even before the stimulus package was passed”. According to the LA Times article, a paid Google search ad leading to “Jessica’s Money Blog” advertised, “Obama approved $12k stimulus checks and I already received my grant”. Unfortunately, this is not a new scam. After major disasters (the current one being an economic, rather than a natural, disaster), scammers appear offering help in securing government grants – for a fee. However the severity of the current recession suggests that people may be more desperate to suspend disbelief for a vague promise of assistance and scammers are more aggressive in taking full advantage. recently reported a scam in which an online company sells a CD with advice on procuring grants for a $1.98 fee, collecting a bank account or credit-card number to process the fee. Days or weeks later, the consumers, or small business owners, start seeing recurring charges hit their banks accounts in the amounts of $30 to $70. The Wall Street Journal wrote about a small Texas toy store that lost $600 after a supposed government grant expert the owner found online claimed the business qualified for a $125,000 minority-owned business grant.

You should be skeptical of any solicitation offering you free money. Someone who has access to free money sources is unlikely to have identified and contacted you; such a party likely has another agenda. And you should never give your credit card, debit card or other banking information to such parties. This is an invitation to fraud. Information about government programs is free to all and you can find out whatever you need to know directly from government agencies without paying an intermediary.

If You Are Gasping for Air, This May Not Help

Monday, March 23rd, 2009
Gasping for Air

Gasping for Air

The Small Business Administration continues to work on guidelines for its forthcoming emergency credit facility, tentatively named “America’s Recovery Capital (ARC) Loan Program”.  The legislation enabling this program requires the SBA to create a new “business stabilization” program to back loans of up to $35,000 to small businesses “experiencing immediate financial hardship”. The proceeds of these loans are to make up to six months of interest and principal payments on a “qualifying small business loans”. This program was conceived as a stopgap measure to assist small businesses struggling to service existing debt. Congress allocated $255 million in the stimulus to fund the ARC program, paying for the program’s loan guarantees and interest subsidies, thereby levering up the amount available to lend. As the SBA is still developing the ARC loan guidelines, it does not yet know when the funds will be available.  While this may appear to be welcome news to small businesses that have thus far not benefited from the government bailouts, hold your applause. There are several issues to consider:

  • Defining “viable businesses” to mitigate moral hazard risk. For the first time in its history, the SBA will offer issuing banks a 100% guarantee on ARC loans that they extend to small business owners. If the business owner defaults, the SBA will repay the bank for the full value of the loan. The SBA will also fully subsidize the interest on the loans, making them effectively free of cost to the small business borrower. No payments on the loans will be due for a year and businesses will have up to five years to repay the loans. However, the full guarantee of the taxpayer to the SBA program raises the moral hazard risk: the risk that banks will lend to borrowers that are not creditworthy because the government will pay the loan losses. This is particularly troubling, as the SBA has already reported soaring default rates on its traditional loan programs. To mitigate this risk, the SBA stipulates that ARC loans are to be extended only to “viable” small businesses, which it defines as those that have “demonstrated an earnings history and a proven record for success that may just need a little extra help to get through a short-term downturn”. (Shouldn’t all loans be limited to “viable” businesses? And how did the SBA determine that the current economic downturn will exist only for the “short-term”?)

We dealt with this issue in the aftermath of 9-11 as disaster aid programs were defined as corporate welfare for the Fortune 500 and loans (with personal guarantees) for the small businesses. However, in order to qualify for the subsidized loans, you had to prove that yours was a “viable” small business. My business, which was newly incorporated and had a short history prior to 9-11-01, did not qualify, nor did other start-ups. (Although eight years later, we are still in business, which is not true for certain of the financial services corporations in the Fortune 500 that received 9/11 handouts.) In other words, in order to qualify for the loan, you had to prove that you didn’t need it.

  • Limited qualifications for the use of the loan proceeds. You won’t be able to use the new ARC loans to cover payments on existing SBA-guaranteed debt. The stimulus bill, the American Recovery and Reinvestment Act, contains a provision written into the bill by Congress that explicitly prevents the use of ARC loans to pay down existing SBA debt incurred before the bill’s passage. CNN quoted a staffer with the House Small Business Committee who explained that the provision was mandated by the Congressional Budget Office to comply with pay-as-you-go restrictions against increasing the federal deficit through new direct-spending legislation. He added “it is one of the most complicated things I’ve heard in a long time”. Businesses with existing SBA-loans can still apply for the new ARC loans, but they cannot use the latter to pay down the former.
  • Rewarding debtors. The House Committee staffer added, “private loans made for any legitimate business purpose — including credit card debts, bank loans and real-estate loans — would be eligible for the program”.  So if you managed your small business prudently and avoided taking on debt of any kind, this program is of no help to you.  If you did take on debt, you should probably be negotiating new terms and forbearance with your creditors, even if you think you won’t need it. Take the breathing room while you can.

And of course, like all government programs, this one is complicated. I would prefer to invest my time in growing my revenues than attempting to decipher the requirements of another government program.

Clouds on the Horizon

Wednesday, March 11th, 2009
Clouds on the Horizon

Clouds on the Horizon

Crain’s New York Business reports that Lower Manhattan is “on the edge”, citing the following grim statistics:

  • 48,000 fewer workers downtown than before Sept. 11
  • 2.7 million fewer tourists downtown than before Sept. 11
  • 13% of downtown real estate is occupied by AIG, Merrill Lynch and Goldman Sachs
  • 12 million square feet expected to come on the market, excluding financial services consolidation
  • 57,000 residents in lower Manhattan
  • 1/3 of all downtown jobs are tied to financial services, insurance and real estate

The Lower Manhattan community has not fully recovered from the losses caused by the events of September 11 and now faces a much greater threat from the collapse of the financial sector, the leading employer in New York City. Local restaurants report that business is down as much as 40% as compared with this time last year and other small businesses that serve the financial sector, such as car services, law firms, accounting firms, print shops, etc., report comparable declines. Given the lack of diversification of the economy, the mood in the community is grim. The consequences to our local economy here in New York are not likely appreciated elsewhere across the United States, given the entirely appropriate focus on the consequences of the credit crisis for all of us. But for many of us here, the financial crisis is a small business disaster. What has not yet been reported, and I hope will attract the attention of journalists, is that many of the same institutions currently receiving bailouts in the form of TARP funds also received federal government aid in the aftermath of 9-11 – aid which was championed for the benefit of firefighters and emergency rescue workers with urgent medical needs, small businesses and other less powerful constituencies.

Online Banking, Offline Contingency

Thursday, March 5th, 2009
Anywhere, Anytime

Anywhere, Anytime

An excellent posting on Forbes highlights the benefits of online banking: ease of business recordkeeping and, for one entrepreneur, a time savings of one work day each month in writing checks and reconciling statements. The service can help you to reduce late fees by scheduling advance and recurring payments, while managing your cash flow. There is another benefit, however, not mentioned in this post: the ability to conduct your financial affairs from a remote location. This can be helpful to you in a more pleasant circumstance, such as a scheduled vacation away from the office, or a more stressful one, such as a disaster that temporarily displaces you. You can collect electronic payments from your customers while meeting your obligations, such as payroll, online. The latter is critically important, not only to minimize the stress on your employees, but to protect your business. Laws vary from state to state, but typically you must pay employees within two weeks of the time period when they performed their work. Failure to do so is one of the few offenses in which a corporate shield, protecting you from personal liability, can be pierced. Online banking is not only a great convenience, it can save your business.

Sharp Increase in Default Rate on SBA Loans

Thursday, February 26th, 2009
Maybe not the right solution

Not always the best solution

The Coleman Report, which provides lenders with small business data and Small Business Administration news, found that 11.9% of the SBA’s loans in the 2008 fiscal year went into default. The failure rate was determined by dividing the number of loans liquidated or charged off last year by the total number of loans made through the SBA lending programs. This is a different methodology than that used by the SBA, which measures only the dollar volume of loans charged off or liquidated, resulting in the appearance of a lower default rate at 5%. Both methods of computing failure rates show sharp increases over the previous year. In the 2008 fiscal year ended September 30, the SBA’s 7(a) and 504 programs approved 78,324 loans, totaling $18.2 billion. The performance for small business loans in the franchising industry deteriorated with franchisee defaults on SBA-guaranteed loans increasing 52% in the fiscal year 2008 as compared with 2007, according to the Wall Street Journal. The franchise industry attributed this poor performance to resales of franchises in which small business owners paid goodwill over and above the franchise fee to acquire a franchise from an existing operator rather than purchasing the a new franchise at cost directly from the company.

While this report did not specifically address the SBA’s disaster loans, the default rates suggest an interesting parallel. I generally recommend that small business owners carefully consider the alternatives before taking on an SBA disaster loan. While the interest rates and payment terms may be attractive, the small business owner has to pledge collateral and provide personal guarantees. Disaster recovery is typically a much longer process than one imagines and the recovery does not always follow a linear path. I would be reluctant to take on debt given the uncertainty about cash flows, the timely payment of insurance claims, the disbursement of disaster aid or the resumption of normal commercial activity in the aftermath of a major disaster. What the Coleman Report alludes to is an economic disaster in which small business owners assumed comparable risks. Unfortunately, the soaring default rates justify the caution lenders have in extending more credit to their small business loan portfolios, thereby making it more difficult for healthy, viable businesses to access the capital they need.