Financing Community Business the Importance of Small Essay

Financing Community Business

The Importance of Small Business in the Economy

Canadian Federal Support for SMEs

Tackling SME Tax and Fiscal Priorities

Rebalancing Canada's EI System

Assist Small Business Owners with Succession Plans

Growing Small Firms into Larger Firms

Federal Support for SMEs

Depleted Communities in Canada

Distressed Communities in United States

Community Economic Development Investment Funds

Community Economic Development Funds in U.S.

Non-Bank Financing

Community-based financial organizations have been developed in many countries to serve the critical needs of small to medium size enterprises (SME), especially in depleted or distressed areas. Most of these organizations exist to serve a public good and are quasi-governmental in form and behavior. Both Canada and the United States have supported these organizations at the Federal and Provincial/State levels. SMEs are highly visible political targets because they provide employment for over half of the population in North America. A variety of programs has been established to provide needed support including tax breaks, education, and access to capital. Community Economic Development Funds have been sponsored in both countries with special provisions established to make sure the funds are raised and invested locally.

Financing Community Business

Introduction

Leaders from around the world have long recognized the critical importance of small and medium size business enterprises (SME) in the economic development of nations. This consensus persists over time and in developing as well as developed countries. No politician need worry about the wisdom of including a small business plank in his/her platform for reform or change. Citizens of Canada and the United States have grown accustomed to a steady parade of Prime Ministers, Presidents, Governors and Mayors espousing the virtues of providing support for small businesses in their jurisdictions.

Entrepreneurs are everybody's darlings. Legislation to implement this grand love fest has tended to be hierarchical in nature. National support, by its very nature, skims the cream off the top of the list of entrepreneurial candidates, followed by the Provinces and States finding their more or less promising niches in the middle, leaving the unqualified, unprofitable and desperate applicants to the machinations of the local communities in which they reside. Societal support at the junior levels would be meaningless without the fiscal framework provided by national policy. This paper documents the observed critical nature of SME in modern economic society and explores various mechanisms that have been introduced to resolve the many practical barriers that exist to improving the success rate of these fragile enterprises in the North American context.

The Importance of Small Businesses in the Economy

The current state of the economy, above and below the long Canada-U.S. border, serves to remind citizens of both countries how fragile the comfortable North American way of life really is. Recent painful events have shown that long-lasting businesses or large corporations are not immune to the challenges of this kind of recession. Oh, how the mighty have fallen. It is perhaps not as surprising that individual families have had to deal with the financial meltdown in their own ways, and with widely varying outcomes. However, in the pursuit of economic recovery, many people may fail to realize the critical importance that small businesses play in keeping the economy's nose above the water line. From the many diverse job opportunities they offer, to an increase in the multitude of various goods and services they provide, small businesses play a vital role in the ongoing health of the economy. (Finance Exchange, 2011)

Unhappily, the first wave of casualties in a failing economy is the very small businesses that are so important to economic vitality. This is owed mainly to the fact that small businesses typically do not possess sufficient capital to keep the doors open over an extended period of time of slow activity. Therefore, when customers slow down on their purchasing, the SME begins to feel the ripple effect almost immediately, and must look for novel ways to relieve the pressure before the whole kettle blows its top. What generally follows is the vicious circle of laying off employees, businesses failing, and consumers not purchasing products and services after losing their jobs. This cycle results in the Dickensian nightmare of small business owners plunging into the abyss of bad credit, bankruptcy and unemployment during harsh economic times. (Finance Exchange, 2011)

Small Business Notes has compiled a report card for small firms in the United States. They:

Represent 99.7% of all employer firms.

Employ half of all private sector employees.

Pay 45% of total U.S. private payroll.

Have generated 60 to 80% of net new jobs annually over the last decade.

Create more than 50% of nonfarm private gross domestic product (GDP).

Produce 13 to 14 times more patents per employee than large patenting firms.

Are employers of 41% of all high tech workers

Are 53% home-based and three percent franchises.

Make up 97% of all exporters and produce 26% of export value. (Small Business Notes, 2011)

Canadian Federal Support for SMEs

Small and medium-sized enterprises are the backbone of the Canadian

economy and their impact on Canada's job creation over the last 25 years has been significant. There is ample evidence that the tremendous expansion of Canada's economy in recent years has been driven by SMEs and they continue to be the major source of wealth and economic growth underlying Canada's current economic success. It only makes sense that any plans to enhance Canada's competitiveness and productivity have a major focus on encouraging the birth and growth of Canada's SMEs. (CFIB, 2006)

In 2006, the Canadian Federation of Independent Business made numerous recommendations to support its assertion that, "growing small firms into larger firms, and improving productivity, are essential to building a more competitive Canada & #8230;ultimately positioning Canada as a highly desirable place to live, work and do business in an increasingly competitive world." (CFIB, 2006)

In summary, CFIB recommended:

Tackling SMEs Taxation and Fiscal Priorities

• Reduce personal income taxes

• Reduce fuel taxes

• Speed up the implementation of promised corporate tax

• Increase the $500,000 Lifetime Capital Gains Exemption

• Allow businesses to expense the first $75,000 in annual business capital costs

• Allow businesses to expense up to $100,000 in technology costs in year of purchase

• Reduce the General Sales Tax and simplify compliance process

• Curb federal payroll taxes (CFIB, 2006)

Rebalance Canada's EI System

(Employment Insurance (EI) provides temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills.)

• Lower EI premiums

• Freeze expansion of non-regular benefits

• Review cost-effectiveness of existing EI programs

• Make EI fairer for employers

• Reimburse employers for EI over-contributions (CFIB, 2006)

It should be noted that during a campaign stop in Regina on Tuesday March 29, 2011, Prime Minister Stephen Harper announced a plan to establish a one-year EI tax break for small businesses to hire new employees. Harper said that the plan would spur job growth and finalize Canada's economic recovery. The Hiring Credit for Small Business would deliver a one-time credit of up to $1,000 against the resulting increase in a small employer's EI premiums in 2011. The hiring incentive credit would reach approximately 525,000 employers, reducing their 2011 payroll costs by about $165 million. (Harper, 2011)

Assist Small Business Owners with Succession Plans

• Defer taxes on capital gains from the transfer of the business to the owner's children

• Defer tax on capital gains when proceeds reinvested within six months

• Allow business owners to borrow from RRSPs for use as business equity (CFIB, 2006)

Growing Small Firms into Larger Firms

CFIB believes that in today's increasingly competitive global environment, Canadian firms have a more difficult time growing from small to medium-sized firms. When comparing the proportion of medium size firms in Canada to the United States, CFIB found that U.S. firms are more successful at growing and expanding their establishments. In the U.S., medium size firms represent five percent of total establishments in the economy, which is more than double the percentage of firms in Canada, where only two percent of total establishments are medium size. CFIB also found that U.S. firms strike a healthier balance between the number of micro size establishments (1-4 employees) and small establishments (5-99 employees). Micro size firms in the U.S. represent 42% of total establishments, while small firms represent 37% of U.S. establishments. Canada has a much higher concentration of micro size firms, which represent 58% of total establishments, as well as small firms, which are 40% of total establishments. (CFIB, 2006)

Another challenge facing Canadian firms (according to CFIB) is lower levels of productivity compared to their U.S. counterparts. CFIB opines that this is linked to levels of investment in research and development and/or machinery and equipment. Economists blame Canada's productivity lag on the dominance of SMEs in its economy, suggesting that SMEs do not invest enough. However, CFIB research has found evidence to the contrary with many SMEs willing and eager to grow and invest in human and productive capital. In fact, survey results reveal that…