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Economy

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Issues facing entrepreneurs in 2013 creating uncertainty

Arensmeyer
Kaplan
Schrager
McCracken

– In 2013, small-business owners will contend with many of the same issues that made it hard to run their companies over the last 12 months.

They’re also heading into the new year with a lot of uncertainty.

“Uncertainty is the bane of every small business,” says Scott Shane, a professor of entrepreneurship at Case Western Reserve University’s Weatherhead School of Management in Cleveland. “Their only rational response is to pull in their horns and slow down.”

Small businesses aren’t likely to get much encouragement from the economy. It’s expected to grow by no more than 3 percent in 2013, according to the Federal Reserve. That’s a moderate pace, better than the 1.7 percent that the economy grew during the first three quarters of 2012. But it’s also far from robust.

Here’s a look at some of the issues facing small businesses in the coming year:

Taxes

Lawmakers this weekend were still haggling over the fiscal cliff, the combination of billions of dollars in tax increases and budget cuts. Even if Congress reaches an agreement, small-business owners won’t have the certainty they need, according to Todd McCracken, president of the National Small Business Association, a group that lobbies on behalf of small companies.

“It almost surely won’t be comprehensive enough that we won’t be revisiting it next year,” McCracken says. He’s concerned that there’ll be another fiscal cliff in six months – which would mean more negotiations and more uncertainty.

Many small-business owners are worried about their personal tax rates. Sole proprietors, partners and owners of what are called S corporations, all report the income from their businesses on their individual Form 1040 returns. That means their companies are in effect taxed at personal rates, which can be higher than corporate rates.

One of the most important tax provisions for small businesses, what’s known as the Section 179 deduction, will shrink to $25,000 next year from $125,000 in 2012. The deduction, which applies to equipment purchases, was $500,000 in 2011. Congress can increase the deduction at any time, even after 2013 has begun. But for the time being, business owners can’t count on getting a big break.

“It’s a huge change for companies planning on making investments,” McCracken says.

Health care

Health care has been another source of uncertainty for small-business owners. The new year will bring some, but probably not all, of the answers to questions about how the new health care law will affect them. Many will have to devote some time to understanding the law – or hire someone to help them do it.

“They’ll have to get their arms around the law, look at their options, learn more about the exchanges,” says John Arensmeyer, CEO of Small Business Majority, a lobbying group.

Under the law, companies with 50 or more employees will be required to provide affordable health care insurance for their employees starting Jan. 1, 2014. During 2013, federal and state health insurance exchanges will be set up, and owners will be able to see how much it will cost them to buy insurance. As the year begins, however, many small-business owners don’t know whether their states will be creating exchanges, or whether they’ll have to go into the national system – and they don’t know what that will mean for their costs.

Lending

Don’t look for the small-business-lending climate to get easier in 2013. Owners who are uneasy about the economy, taxes and health care aren’t expected to significantly increase their borrowing, especially as many have been paying down debt since the recession. But even those who are ready to borrow are expected to find it’s still hard to get a loan. Bankers are unlikely to be more liberal in their lending policies.

Depressed lending levels may be with us well beyond 2013, says James Schrager, a professor of entrepreneurship at the University of Chicago Booth School of Business.

The problem isn’t just that banks are cautious about small-business loans. Schrager notes that home equity loans, a traditional source of money for people starting or expanding a business, remain difficult to get, the result of the collapse in the mortgage market in 2008.

Onshoring

A trend that’s expected to gain speed in 2013 is what’s calling onshoring. That’s the term for manufacturing that had been done overseas, and that’s now taking place back in U.S. factories. Apple Inc. this month said it would move production of some of its Mac computers to the U.S. from China next year – but many small businesses have already been making the switch. While Apple is an example of a big company moving in this direction, the majority of U.S. manufacturers are small businesses.

There are several reasons behind the trend. As China becomes more of a middle-class country, wages for its workers are rising, and that is lessening some of the appeal of manufacturing there for U.S. companies, says Steven Kaplan, a professor of entrepreneurship and finance at Chicago’s Booth School. “Manufacturing in the U.S. is relatively more attractive than it has been in 20 years,” Kaplan says.

Skill shortage

While companies’ caution has weighed on the job market, many company owners who actually want to hire say it’s hard to find workers to fill some positions.

It’s becoming more difficult to find people who have the skills they need, these owners say. Many new manufacturing jobs require high-tech skills. They include positions at factories where computers are used to create products like airplane parts and machinery. And some require several years of training, says Shane, the Case Western Reserve professor. For example: A company that makes metal molds that are in turn used to create automobile dashboards. That takes a machinist who knows cutting-edge processes to make the molds.

“You cannot take someone off the street to do it,” Shane says.

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