The Entrepreneurial Mind

Small businesses - usually a major factor in helping recovery from past recessions - still aren't hiring. Job seekers seen here fill out applications while attending a job fair in Detroit. (Paul Sancya/AP)

Small businesses still not hiring. Tax credits won’t help.

By Dr. Jeff R. Cornwall, Guest blogger / 03.11.10

In almost every previous recession it has been small businesses that created the job growth that pulled us out of high unemployment.

According to the latest poll of small business owners taken by the NFIB, small businesses are not yet moving into job creation mode.

Over the next three months, 8 percent of small business owners surveyed plan to reduce employment (down 2 points), and 13 percent plan to create new jobs (up 3 points), yielding a seasonally adjusted net negative 1 percent of owners planning to create new jobs, unchanged and still more firms planning to cut jobs than planning to add.

"Net job creation will appear in the coming months, but the gains will be painfully slow with timid consumer spending, especially in the service sector," said William Dunkelberg, NFIB's chief economist.

Owners complained that poor sales are their top problem, and there is no need to hire with no new customers. In this sales environment, it is hard for workers to earn their pay. Owners cannot pay workers more than the value they add to the firm. This is why a jobs tax credit will do little to increase employment. No one can pay $40,000 for a worker to get a $5,000 tax credit unless that worker can add at least $35,000 in revenue to cover the cost of hiring. And as long as the tax credit issue is alive in Congress and not passed, employers that were ready to hire (13 percent plan to hire) will wait until they can qualify for the credit, delaying much needed gains in employment.

More evidence that those shaping our current economic policy are completely out of touch with the realities of owning a growing a small business.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

A young entrepreneur in Columbus, Ga., advertised his product last November. A new report says that entrepreneur training in almost every country is inadequate. (Newscom/File)

Teach kids to be entrepreneurs? Nations aren't up to the task.

By Jeff Cornwall, Guest blogger / 03.09.10

Education and training for entrepreneurs worldwide is inadequate, according to the Global Entrepreneurship Monitor (GEM) Special Report: A Global Perspective on Entrepreneurship Education and Training, released today at Babson College, lead sponsor and co-founder of the GEM project.

Entrepreneurship education is one of several key factors, along with access to finance, government policies, infrastructure, and others, that influence attitudes about entrepreneurship and people's willingness to start businesses, according to GEM. Interviews with experts in 31 countries around the world found that in almost every country entrepreneurship education and training was inadequate, especially in primary and secondary schools.

In surveys with more than 100,000 individuals, GEM found that 80% of entrepreneurship education and training is provided through formal channels such as primary and secondary level schooling, and through university degree programs. This is significant because most formal training is at the primary and secondary school levels.

"Training at a young age cultivates an entrepreneurial spirit early on, but college-level training is important too, because it validates entrepreneurship as a potential career path," says report author and Babson Professor Donna Kelley, "Besides skill-building, training increases an individual's awareness of entrepreneurship and their intent to start a business, and improves perceptions about their ability to do so," says Kelley.

Sixty percent of individuals engaged in entrepreneurship training acquire it from informal sources, which GEM defines as non credit-bearing courses at a university, local business organization, or government agency, or self-study using books and Internet courses. "Access to informal programs is a good thing too, because entrepreneurs can obtain the specific skill sets they need to achieve their immediate goals," says Alicia Coduras, from IE Business School in Spain and lead author of the report.

GEM also learned that entrepreneurship training is of most benefit to individuals in wealthier countries where the entrepreneurial environment is rich in conditions that allow new businesses to thrive. "For entrepreneurship training to be productive in low-income countries, it needs to be complemented by beneficial government policies, infrastructure, and other basic requirements," says Kristie Seawright, GEM Executive Director.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Pilot Travel Centers has launched a major new initiative to promote the coffee and tea available at its travel centers nationwide, among them using high-tech means like Facebook. A new study suggests Facebook can boost sales for stores. (Pilot Travel Centers LLC/PRNewsFoto/Newscom/File)

Can Facebook boost sales? New study says yes.

By Jeff Cornwall, Guest blogger / 03.02.10

While we hear about the power of social media as marketing tools, especially for those trying to bootstrap their businesses, but just how effective is it?

New research from Utpal Dholakia and Emily Durham of Rice University takes a look at this question. The study is featured in the March issue of the Harvard Business Review.

According to this study, companies that use Facebook and its fan page module to market themselves to customers can increase sales, word-of-mouth marketing, and customer loyalty.

Dholakia and Durham surveyed customers of Dessert Gallery (DG), a popular Houston-based café chain. Prior to the study, DG did not have a Facebook presence.

The study, based on surveys of more than 1,700 respondents over a three-month period, found that compared with typical Dessert Gallery customers, the company's Facebook fans:

• Made 36 percent more visits to DG's stores each month.
• Spent 45 percent more of their eating-out dollars at DG.
• Spent 33 percent more at DG's stores.
• Had 14 percent higher emotional attachment to the DG brand.
• Had 41 percent greater psychological loyalty toward DG.

According to Dholakia, the results indicate that Facebook fan pages offer an effective and low-cost way of social-media marketing.

"We must be cautious in interpreting the study's results," Dholakia said. "The fact that only about 5 percent of the firm's 13,000 customers became Facebook fans within three months indicates that Facebook fan pages may work best as niche marketing programs targeted to customers who regularly use Facebook. Social-media marketing must be employed judiciously with other types of marketing programs."

Dholakia said Facebook marketing programs may be especially effective for iconic brands, which appear to attract a higher percentage of their customer base as Facebook fans.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

President Obama announces a package of lending initiatives to increase the availability of loans to small businesses at a document archiving company in suburban Maryland in this Oct. 2009 photo. (OwenBlack Star/Newscom/file)

Small business credit in a deep recession

By Jeff Cornwall, Guest blogger / 02.25.10

Denny Dennis, senior fellow with the NFIB Research Foundation, let me know a while back that he was working on a new small business survey looking at the impact of the recession on credit.  The NFIB released the report "Small Business Credit in a Deep Recession" today. Here are a few highlights of the report:

• Fifty-five (55) percent of small employers attempted to borrow in 2009; 45 percent did not, although five percent of owners, so-called discouraged borrowers, did not try because they did not think they could obtain credit.
• Forty (40) percent of small business owners attempting to borrow in 2009 had all of their credit needs met; 10 percent had most of their needs met; 21 percent had some of their needs met; and, 23 percent had none of their credit needs met. The current level of borrowing success is significantly lower than in the mid-2000s when up to 90 percent had their most recent credit request approved.
• The financial institution extending a line of credit changed the terms/conditions of the line(s) during 2009 for 29 percent of small employers having at least one. About 10 percent with a business loan had the same experience as did 22 percent with a business credit card. The most frequent change was increased interest rates.
• The best predictors of success in meeting credit needs were higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.
• Overwhelmingly, the most common planned purpose of credit rejected was to fill cash flow needs.
• Broad and deep real estate ownership is a major reason why small businesses have not yet begun to recover, why larger businesses have been able to recover more quickly than small businesses, and why this recession is different, at least for small business owners, from recent ones.

Dennis puts the findings in a clear context.  "The findings show that while obtaining credit has become more difficult, declining sales and/or depressed real estate values typically lie at the base of credit problems," said Dennis.  "That means current small business problems will not be solved by simply focusing on lending issues.  Policymakers need to tackle weak demand and real estate."

Tackling weak demand requires growth in the economy, not more liquidity in financial markets.  Weak demand will also not be cured by Keynesian government spending initiatives.

This is an important study that I plan to go through carefully.  I am sure it will inform future posts on small business credit.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Google cofounder Sergey Brin participated in a panel discussion in Mountain View, Calif., earlier this month. With a sour economy, the next generation of American entrepreneurs could be even more motivated to start their own businesses. (Robert Galbraith/Reuters/File)

The next generation of American entrepreneurs is rising

By Jeff Cornwall, Guest blogger / 02.23.10

"So are you seeing more students interested in entrepreneurship given the depths of this recession?"

I get this question a lot. And it is a good question because historically we saw a small upswing in student interest in entrepreneurship when the economy and job market softens.

But this is a much deeper recession and more worrisome long-term economic climate.

How are student reacting this time?

When the bottom fell out of the economy the initial reaction among my students was shock. This generation is one that has been protected from failure and insulating from risk. I tend to have graduating seniors in the class I teach, so those not already in business did not know what to do next.

But over the coming months, I saw a transformation. My students began to accept the new state of the world and adjusted their expectations. I began to think that this generation is ready to show their entrepreneurial spirit is for real. Maybe they are willing to step forward and help rebuild our economy one business at a time.

Then, as interest in business majors began to decline overall -- some theorized due in part to disillusion with corporate America -- the number of students in our major held steady.

Finally, the other day I received a piece of data about our program that affirmed my theory.

Each year we usually see about 15-20 new businesses started by our undergraduate students. Mind you, they do this in the midst of taking classes and often while also working part-time.

This year we have seen a tripling of new practicing student entrepreneurs. We went from 18 last year to 54 this year. Keep in mind that these students are not just our majors. They are coming from all across our campus from many different majors.

So it seems at least among the young people I work with, the entrepreneurial generation is willing. This news has certainly raised my spirits about our economic future.

I am also confident that our students will be able -- the success rates among alumni are solid.

Now it is time to turn them loose. It is time for policy makers to give them the capital they need by cutting income taxes and the freedom they need by cutting regulations so they can help build a better future for all of us.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Every indication is that we will be facing a prolonged period of high unemployment with a possibility of a double-dip downturn and significant inflation. (Jake Turcotte/staff (AP photo))

Another view of small business owners' thinking

By Jeff Cornwall, Guest blogger / 02.18.10

Forbes has just released a survey of small business owners that offers some interesting insights. "Small Business Outlook 2010" is a study issued by Forbes Insights, in association with CIT (the full study is available free online, but you do need to register to see it).
Here are highlights of this study with my comments:

• "Declining revenues brought on by the 2009 recession have put additional pressure on small business cash flow, forcing many firms to make tough decisions around cutbacks."

Those entrepreneurs who have been able to make the hard decisions and get back to their bootstrapping roots have survived the first phase of the recession. While Wall Street seems to be trying to convince themselves that a recovery is around the corner, every indication is that we will be facing a prolonged period of high unemployment with a possibility of a double-dip downturn and significant inflation.

• "Small business owners are feeling the impact of this economic pressure, working harder and longer than ever before. Still, there could be a payoff: many feel they are now smarter about running their businesses and are better leaders."

Good! They will need these skills to navigate the next several years, which will test them with many new challenges.

• "While cautious about the general economy, most small business owners expect their 2010 revenues to grow. But coming out of the recession, they see the world changing and they will have to do business in new ways to succeed in a more competitive marketplace."

As I mentioned in my comments on the American Express OPEN survey released earlier this week, we need the optimism of entrepreneurs more than ever. We need them to have the confidence to put their collective heads down and forge ahead to rebuild our economy.

• "Small business owners know the importance of planning and want to spend more time doing it, but they appear to have trouble putting those intentions into action. Many also seem to be unclear about how to focus their marketing and employee retention efforts."

This finding rings home with something I have been working on. I have become increasingly convinced that we have been focusing too much on the minutia of business plans and moved away from the critical art and science of business modeling. We need to focus more on how all the moving parts of our business fit together and how the dynamic nature of the marketplace in today's economy demand an ever evolving business model. I will be writing more on this in coming weeks, but want to thank my colleague and friend John Wark for challenging my thinking on all of this.

• "Economic stimuli enacted by Washington have had little to no effect on small businesses, but they remain hopeful that recent proposals to raise SBA loan limits will provide some benefit in the coming year."

No kidding! Entrepreneurs understand that it is their efforts that stimulate economies, not massive government pork and waste.
Regarding more available debt? Be careful what you pray for ... this is not the time to be leveraging your business.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Entrepreneurs worried about the economy

By Jeff Cornwall, Guest blogger / 02.18.10

American Express OPEN just released their latest Economic Pulse survey of small business owners. This survey was conducted 1/28/10 to 2/1/10.

Overall, 68% of small business owners surveyed say the economy stresses them out (on par with January 2009 results). 38% say their greatest concern is a prolonged recession/"double dip" and 32% list high unemployment.

They are right worry about both of these problems, but they also better start paying attention additional problems that are likely to raise their ugly heads very soon. I have been beating the drum about inflation and interest rate spikes for some time. Now I am beginning to hear bankers start to quietly warn their clients about a sharp increase in prime rates. I have heard estimates of between 3 to 8 basis point increases by the end of 2011.

The good news is that small business owners have not taken on more debt, which will make them vulnerable to any interest rate spike should it happen anytime soon. Almost 60% of small business owners have not pursued credit in the last 6 months. Of that group, 22% worry about default or bankruptcy and 30% say there isn't enough demand for their products or services to warrant taking on new debt.

What is keeping them from expanding their workforces and helping to turn things around in the economy? Customer demand is by far the greatest single incentive to hire (42%), compared to tax credits (11%) or access to financing (5%).

Overall, small business owners are more optimistic about the economy than they were one year ago (43% think it will improve over the next 12 to 18 months versus 30% in January 2009). But then again, they are entrepreneurs so by their nature they are going to try and see the positive whenever they can.

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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Should you fund a start-up with retirement money?

By Jeff Cornwall, Guest blogger / 02.18.10

With the growing ranks of unemployed, there is an increase in people looking to finance new businesses using 401(k) retirement funds.

Many of these accidental entrepreneurs have not built up much savings beyond their retirement accounts, or if they did, may have depleted them once any severance ran out. And if they try to get bank financing they soon find out that without a job, they are not bankable.

There are two ways to tap into 401k's for funding for a new business: a traditional 401k loan or a Rollover as Business Start-up loan. Hardship 401k distributions should not be used to fund a new business.

The traditional loan is fairly simple, but not all 401k plans allow for loans. If they do, IRS rules place restrictions on such loans:

"Generally, if permitted by the plan, a participant may borrow up to 50% of his or her vested account balance up to a maximum of $50,000. The loan must be repaid within 5 years, unless the loan is used to buy the participant's main home. The loan repayments must be made in substantially level payments, at least quarterly, over the life of the loan."

Note that the dollar limit is a total cap on what can be borrowed, not a limit per loan.

Christine Dugas points out at an article at USAToday that there is another type of 401k loan for funding a business called a Rollover for Business Start-ups loan (also known as a "ROBS" loan by the IRS -- is this an editorial comment from the IRS about using your own money for funding a venture?):

"Entrepreneurs using this option typically need help from a firm specializing in such work.

"For a fee, these firms help the new business create its own 401(k) plan and transfer funds from the owner's existing 401(k). The retirement money is then used to purchase company stock that's held in the new 401(k) plan. This provides the entrepreneur's corporation with start-up capital.

"Some experts believe that it is harder for a new small business to meet IRS guidelines for ROBS loans."

Given that IRS regulations on ROBS are rather vague, I would STRONGLY caution against using this approach. Many of the 75,000+ pages of the IRS code come from court cases that were used to interpret other unclear tax legislation.

I usually shy away from any new tax laws that require IRS interpretation -- let others have their names placed on court cases that help sort out what was really meant by the new law. I had a hard time finding much information on the IRS website on this alternative, which is not a good sign.

I was able to track down a memo and a newsletter from the IRS that seems to indicate that ROBS loans are not looked on very favorably by the IRS:

"For these reasons, we intend to scrutinize ROBS arrangements. Our guidelines will serve as instructions to our technical specialists to resolve issues they encounter when evaluating these plans. We believe that ROBS arrangements may endanger the qualified status of otherwise tax-qualified employee plans and may be prohibited transactions, requiring complete undoing of the transaction, and imposition of excise taxes.
"In recent years, the IRS has taken steps to combat transactions that we believe are abusively tax avoidant. At the same time, we have noted an upswing in the number of these transactions that seek to exploit the generous tax benefits enjoyed by qualified retirement plans. While we are not ready to throw ROBS into this category, we are certainly mindful of the old adage that things that appear to be too good to be true usually are."

So even the IRS cautions about the ROBS loan option -- not a good sign!

If an "expert" tries to convince you to use a ROBS loan from your 401k, find another expert. This type of loan is at too much risk for IRS scrutiny -- your start-up will have enough risk without adding IRS problems to the mix.

To career entrepreneurs, using retirement money may not sound that risky. Most have always viewed their businesses as their retirement funding. But, these are folks who have gotten comfortable with that level of risk-taking. Make sure you think through what you will do next if the deal fails and your retirement is badly depleted.

Using a 401k to fund a business may be a reasonable risk. Make sure you have done your homework on the business before you draw down retirement to fund it. Develop a sound business model and develop a business plan. Once you do that, find some experienced people who will poke holes in your plans before you finally pull the trigger.

(Thanks to Ben Cunningham for suggesting this topic).
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Better Late than Never

By Dr. Jeffrey R. Cornwall, Guest Blogger / 02.16.10

A couple of years ago I got into a rather spirited debate with Robert Graboyes, who is the Senior Healthcare Advisor for the NFIB. You can find this discussion here, here and here.

I was advocating holding a firm line on healthcare reform. I believed that the system as it had evolved in the US was fundamentally flawed. What was needed was radical free market reform and not one more round of layering more regulation onto an industry that was already heavily regulated.

Dr. Grayboyes thought that I was being rather naive. Here is what he said in a comment he posted at my blog:

He did go on to state:

In a later post when the healthcare socialization train was pulling out of the station, I pointed out that "pragmatism" and trying to "settle" for as much as they could get was actually leaving small business empty handed. They had been, well, duped through an old social activism trick called cooptation:

My concern with becoming part of the "dialogue" came not from my chair in an ivory tower, but from my days as a healthcare entrepreneur. Many of my views on the role of government in the economy came from my days as an entrepreneur when I watched how the process of lobbying and "settling" on issues of economic and regulatory policy really worked. Rent seeking and political horse-trading does not lead to sound policy for the country, just enrichment for some of those who have enough money and power to sit at the table.

And it always seems to result in an ever expanding role of government in our lives and a loss of liberty.

Trying to have a voice and to find a way to influence the process got nothing. Thankfully, the NFIB now realizes this. Dr. Grayboyes sent out a link to a new video from the NFIB that is sounding the alarm bells about the current plans for healthcare "reform".

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