Tag Archives: Washington D.C.

Inflation and Small Business.

Inflation. Congress and government analysts tell us repeatedly that there is no inflation. The Fed is keeping interest rates really low to make sure we have no inflation. Well, guess what?

We’ve had an 8 percent increase in the cost of eggs over the past year. What do you think that is doing to restaurants and bakeries? Cotton’s up 14 percent in the last year. How do you think that impacts clothing manufacturers and retailers? And any business that sends somebody on a sales trip is bearing the brunt of an 18 percent increase in jet fuel or a 27 percent rise in in the price of gasoline.

Under “normal” circumstances, small businesses simply pass these costs along to consumers. You might not have noticed, but we have not had “normal” circumstances since 2007. Consumers want to pay less, not more for stuff, and small businesses are left with few if any options.

Most small businesses have seen travel costs rise 30 percent in the past year, after a 20 percent gain the year before. Rising fares, baggage fees and higher hotel bills are to blame. Large companies have leveraged travel budgets and deals with airlines, hotels and rental car agencies to help with the increased fees, while small business does not. It is almost as if the travel and hospitality industries have had a private peek at a coming Armageddon, and have jacked their prices so that they can get it all in now.

Many small businesses are doing sales training and company meetings through online seminars rather than in person.

The kind of numbers that small business deals with may surprise anyone who believes that the government’s Consumer Price Index tells the story of inflation. In the 12 months that ended in March 2012, the CPI rose 2.7 percent. Subtract food and gas as some economists do, and what’s left is called “core” inflation. It rose 2.3 percent. That’s close to the target of 2 percent set by the Federal Reserve, which sets monetary policy so inflation doesn’t get out of hand.

But prices that businesses pay for energy, raw materials, supplies and services have gone up much more sharply. And they’re expected to keep rising because demand for many goods and services is soaring in countries like China and India. That offsets slower demand in the U.S. and Europe and sends prices higher worldwide.

Raymond Keating, chief economist with the Small Business & Entrepreneurship Council, an advocacy group, expects inflation to keep rising as the economy improves and the Fed eventually lets short-term interest rates rise from their current levels near zero. He says of small-business owners, “a lot of people are worried about how high it (inflation) will go in the future.”

The impact of rising energy prices may not always be obvious. Regalia noted that airlines’ baggage fees, typically $25 per bag per flight, are the result of rising fuel prices. And energy costs factor into the prices of all goods and services.

Chad Moutray, chief economist with the National Association of Manufacturers, says small businesses are at a disadvantage because they can’t buy in bulk like larger companies can. That means a small cosmetics manufacturer can’t negotiate the lower prices that a company like Revlon can. And, he said, “They’re less likely to be able to pass along their higher prices to customers.”

Lorne Campbell, president of Occasionally Cake, two upscale bake shops outside of Washington, D.C., has refrained from raising prices since his company was launched in 2009. “A small business is about personal relationships. It’s about trust,” he says. “A large faceless corporation doesn’t have to look at their customers and say, Mrs. Smith, you and your daughter are going to have to pay extra for a cupcake today.”

Campbell estimates that he’s paying 10 percent to 12 percent more for ingredients and other supplies than he did a year ago. His fuel costs have doubled, although some of that increase is due to the fact he’s making more deliveries. Occasionally Cake has kept other costs down by holding back on hiring, and asking current staffers to take on more responsibilities and work longer hours. Sound familiar?

Other businesses can’t raise prices because they’re under contract to deliver goods or services at a set price. Campus Cooks, which provides dining services for fraternity and sorority houses in the Midwest, Florida and Texas, signs agreements that cover the entire school year. When wholesale food prices rise sharply when school’s in session, it’s time to get creative. “If chicken’s higher, you change the menu to more fish, pork and beef,” says Bill Reeder, president of the Glenview, Ill.-based Company. Campus Cooks will also buy in bulk. And if it has to serve, say, more pork, it will vary how the meat is prepared.

Reeder already expects his prices to rise 2 percent to 3 percent for the next academic year. But he’s not passing all the costs along. “We’re taking some of a hit on the profit end of it,” he says. He’s hoping to get another 10 to 12 customers signed for the next year, and the additional sales volume would help his profits.

Clothing stores are contending with higher prices — and consumers’ tendency to be frugal when they’re paying more for gas, food and other items. Jimmy Au’s, a Beverly Hills, Calif., men’s store, has paid on average 5 percent more for the clothes it stocked during the past year.

Alan Au, the store’s client relations manager, says prices for cotton, wool and silk have soared. Top-grade cotton has gone up as much as 14 percent over the past year. Au says the store laid off a sales person as demand fell, and that allowed it to keep most of its prices unchanged. It has raised prices on some high-end suits and on jeans that sell for $200. But for the most part, the store is telling customers, “We’ll bite the bullet for you because we appreciate your sticking with us.”

And there are thousands of other similar stories all across the US, but Martin Regalia, chief economist with the U.S. Chamber of Commerce, has only this response: “While overall inflation is not a real problem, the components of inflation that matter the most to small businesses — such as energy — are troubling.” Not a real problem? The “components” of inflation? Troubling? 


Legislation To Help Startups Raise Funds.

It seems a bit odd that a background in lobbying could be a key strategy in launching a technology startup.

Former lobbyist and current start-up founder Candace Klein is garnering political support for a newly-proposed U.S. House of Representatives bill (HR2930) that would allow any business in the United States to use crowdfunding to raise funds. The Republican-sponsored bill, called the Entrepreneur Access to Capital Act, passed the House 407-17 a few weeks ago. It also has the endorsement of President Barack Obama.

If passed in the Senate and signed into law by President Obama, the bill would help Klein take her new startup company, SoMoLend, and several others, including iSellerFINANCE.com, nationwide.

The online platform, launched this week, allows any small business to use social media sites like Twitter, Facebook and Linked In to raise small amounts of money for their business. Those could range from restaurants and jewelry stores to landscapers and accountancies.

But current laws require that borrowers be licensed with the U.S. Securities and Exchange Commission (a $20,000 filing fee per state, aka $1,000,000) in order to accept funds from sources other than traditional banks, accredited lenders or friends and family. That adds significant cost to any of  the P2P lending site borrowers who’d like to accept funds from strangers.

“The law was meant for businesses raising millions in capital, and for wealthy investment banks like Goldman-Sachs” says Klein, also founder of Bad Girl Ventures. “It doesn’t make sense if the business is raising $1,000 or $50,000.”

For Klein, the bill’s passage is the difference between SoMoLend completing 10,000 loans in a year and a million.

“We could still operate, but it would be so cumbersome and expensive that very few people will ever utilize the technology,” she says.

Klein met with Ohio Congresswoman Jean Schmidt in recent weeks and asked her to sponsor the bill. Next week, Klein visits Washington D.C. to appear before the U.S. Senate’s banking and finance committee, where the bill lands next. Ohio Congressman Sherrod Brown is a member. She’s also scheduled meetings with Ohio Congressman Rob Portman and Congressman Patrick McHenry of North Carolina, who introduced the House bill.

“For one Cincinnati business, this is the difference between success and failure,” Klein says.

Working Poor: Almost Half Of U.S. Households Live One Crisis From The Bread Line.

What does it mean to be poor? Existing poverty formula, dating from the 1960s, doesn’t capture modern expenses such as child care and healthcare. That may be part of why you feel so weird earning $50,000 yet can’t afford gas.

If it means living at or below the poverty line, then 15 percent of Americans — some 46 million people — qualify. But if it means living with a decent income and hardly any savings — so that one piece of bad luck, one major financial blow, could land you in serious, lasting trouble — then it’s a much larger number. In fact, it’s almost half the country.

“The resources that people have — they are using up those resources,” said Jennifer Brooks, director of state and local policy at the Corporation for Enterprise Development, a Washington, D.C., advocacy group. “They’re living off their savings. They’re at the end of their rope.”

The group issued a report today examining so-called liquid asset poverty households — the people who aren’t living below the poverty line, but don’t have enough money saved to weather a significant emergency.

According to the report, 43 percent of households in America — some 127.5 million people — are liquid-asset poor. If one of these households experiences a sudden loss of income, caused, for example, by a layoff or a medical emergency, it will fall below the poverty line within three months. People in these households simply don’t have enough cash to make it for very long in a crisis.

The findings underscore the struggles of many Americans during what has often seemed like an economic recovery in name only. While the Great Recession officially ended more than two years ago, unemployment remains high and wages have barely budged for most workers. For more people, whether they draw a paycheck or not, a life free of deprivation and financial anxiety seems perpetually out of reach.

That’s not to say that everyone who is liquid-asset poor spends all their time fretting. On the contrary, because many have regular paychecks coming in, they may not grasp the precariousness of their situation.

“They don’t necessarily realize how close people can be to one interruption to income or one interruption to health benefits,” said David Rothstein, the project director for asset building at the non-profit Policy Matters Ohio. “They’re one paycheck away from being in debt.”

Rothstein, who also serves on a steering committee at the Corporation for Enterprise Development, said that payday lenders who loan money to desperate borrowers at high interest rates, drawing people into hard-to-escape cycles of debt — are “a huge problem” in Ohio, as in many other states. People often turn to payday lenders to cover one-time, unexpected expenses, but can end up in a long and costly relationship. Wait until they find out about ZestCash – how about paying $291. in interest and fees for a $500. loan?

“People say things like, it’s just one mechanical problem with their car,” said Rothstein. Before they know it, he said, “every other week, they’re back at the payday lending shop.” Those are called rollovers and they add interest to the already huge nut, sort of like the vig the gangsters and  loan sharks charged in the 1920’s and 30’s.

The Corporation for Enterprise Development findings echo other recent studies showing that many Americans are ill-prepared for financial emergencies. Analysts said the reasons include flat wages, the high cost of medical treatment and the nationwide drop in housing values leaving homeowners with less wealth than they believed they had.

Andrea Levere, the president of Corporation for Enterprise Development, says that greater financial literacy might have helped prevent the current situation.

People can “graduate high school and not know how to write a check,” Levere said, adding that an increased emphasis on personal responsibility for budgeting and spending should be an important part of any step forward. Yeah, I am sure the public schools having eliminated art, music and PE from their curriculum would just love to add personal finance. Come-on, Man.

At the same time, Corporation for Enterprise Development officials were quick to argue that public policy needs to address the scope of the problem. Levere cited the example of asset limits in public benefit programs, which restrict services like food assistance and public health insurance to households with few or no assets — a policy that critics say denies help to many people in need (how cold can you get?).

“In some cases,” said Levere, “it means they can’t even own a car that is in good enough shape to get them to work.”

Brooks agreed. “A family that loses its job, that was maybe solidly middle class, in a state where they have restrictive asset tests, is going to have to liquidate all their assets, all their savings for the future” in order to qualify for benefits.

The report maintains that there are a number of measures that could alleviate liquid asset poverty, from strengthening consumer protections against payday lenders to making greater assistance available to first-time homebuyers. Levere said even minor policy adjustments could have “revolutionary implications.”

“There’s a lot of ways forward. It doesn’t mean it’s not tough,” Levere said. “I’m a great believer in one step at a time.” Tell that to the guy who just got laid off due to productivity increases or overseas sourcing or medical emergencies or reductions in force because no one is buying his former employer’s products. This is just wrong on so many levels. Is this really America?