They’re also heading into the new year with a lot of uncertainty. It’s unlikely that negotiations in Congress will resolve all of lawmakers’ disagreements over tax and budget issues that affect small businesses. And there are still many questions about the implications of the health care law for small companies.
That points to continued caution – and perhaps slow hiring – among the nation’s small companies.
“Uncertainty is the bane of every small business,” says Scott Shane, a professor of entrepreneurship at Case Western Reserve University’s Weatherhead School of Man-agement 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 better than the 1.7 percent rate for the first three quarters of 2012, but it’s far from robust.
Here’s a look at some of the issues facing small businesses in the coming year:
Even though Congress reached an agreement to avoid the fiscal cliff, small-business owners don’t have the certainty they need, according to Todd McCracken, the president of the National Small Business Association, a group that lobbies on behalf of small companies.
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, shrinks to $25,000 this 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, 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 has been another source of uncertainty for small- business owners. The new year will bring some 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, the 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.
For some owners, that information will help them decide whether they will buy insurance, or whether they’ll decide it’s cheaper to not provide coverage and just pay the government a $2,000-per-employee fine. For those who have close to 50 workers, they might decide to not hire more workers in order to remain outside the law’s jurisdiction.
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 might 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.
Arensmeyer is hopeful that a bill introduced in Congress this year to allow credit unions to make more loans to small businesses will get more traction when the new Congress convenes. That bill would more than double the amount of total assets that credit unions can use to lend to small businesses to 27.5 percent.
But he’s also not expecting major changes in lending next year.
“Sadly, I don’t think we’re going to increase our access to capital overnight,” he says.
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. earlier 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. Over the past two decades, it was the cheaper labor in China that prompted businesses of all sizes to have everything from computers to clothes to food ingredients made in China.
The rising cost of fuel, which has made transporting goods more expensive, is another factor in onshoring.
“Manufacturing in the U.S. is relatively more attractive than it has been in 20 years,” Kaplan says.
SKILLED WORKER 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 such as 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 which 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.
Because of changing technology, owners are struggling to find qualified workers in 2013.
“There’s a whole level of work that’s going to require skills that weren’t needed in traditional jobs,” says Arensmeyer. He notes that community colleges around the country are offering courses that will help train workers to fill these jobs. But training takes time, and the demand for jobs may continue to outstrip the supply of qualified workers.