Small Businesses and Short term loans

Can a short term loan solve small business cash woes?

The House of Representatives

Short term loans have been used by small businesses for years to overcome debt. Because of the economy, however, the government is looking into alternative ways of jump starting businesses. The House of Representatives dusted off an old bill and suggested using it to help small businesses and low-income employees, but does it offer the solution needed?

The proposed payroll tax holiday

Illinois Republican representative Aaron Schock and Idaho Democratic representative Walt Minnick had an interesting proposal. The two house members suggested a bill that would offer small business owners a break from paying payroll taxes. Under this bill, businesses with 50 or fewer employees would not pay Social Security or Medicare taxes for a six-month period. Employers and employees pay 6.2% Social Security tax and a 1.45% Medicare tax all year long. The hope was that small business and lower-paid employees benefited from suspending these taxes. According to the Joint Committee on Taxation, over 60 million taxpayers had tax returns with payroll taxes that were greater than their income taxes. This bill could potentially affect 5 million small businesses and over 34 million employees according to the National Federation of Independent Business.

If some business owners planned on paying off debt, or catching up on bills with this payroll-Medicare suspension, they would have to think again. The Schock-Minnick bill required owners to reinvest the “saved” money back into the business, whether that meant hiring new workers, investing in expansion, or some combination of the two. For example, if the business saved $80,000 in payroll-Medicare tax suspension, then they could use $50,000 to develop new positions in the firm and $20,000 in new machinery. The remaining $10,000 would be taxed. The goal was to use the money to make the business more productive, thus reinvigorating the economy with new jobs and organizational growth.

There were some arguments against the Schock-Minnick bill. The main concern was how would the government enforce reinvestment? What measures were needed to be sure money was being put back into the business? Some challengers of the bill also argued that any tax savings to the average small business in this economy would most likely be needed to cover payroll and keep the business operating on a day to day basis. Reinvestment is the last thing on business owners’ minds during a recession. They are more focused on financially staying afloat.

What is the answer for small businesses?

Although the government is brainstorming creative options, the short term loan may be the best option for small businesses. One reason is that the amount is negotiated with the lender and satisfies both parties. It isn’t dependent on how the small business is currently performing, or on how many employees it currently has. Another reason is because if the business is approved for a short term loan, they can use the funds anywhere they want. A lender is not dictating what or how much they can apportion to various sectors of the company and they won’t be penalized for using the money “incorrectly.”

Careful spending of the short term loan

If you are approved for a quick short term loan, use it wisely. Any time a small business needs to reach out for additional funds, care should be taken when deciding where the funds are most needed. Lenders have made the loan process simple and if you’re approved, the money should be available to you within a very short period of time. Have a step by step plan outlining where the funds will go to avoid misuse.