Small Business News

Though outsourcing has its detractors in the United States and pro-labor countries because of protectionism and/or grim economic prospects, many international credit professionals at FCIB's Annual International Credit & Risk Management Summit in Hamburg still rely on a shared services center or have more regularly come to establish their own new roots working in one.

FCIB Board Member Martine Zimmermann, credit manager at F. Hoffman-La Roche in Switzerland, noted many in her industry have centers in places like India and some Eastern bloc countries. However, having faced uncertainties, with the most notable ones being salary increases and frequently changing staff, she admits some colleagues are not quite as sold on it.

"This is especially an issue in India, where its known escalation as a key emerging economy is forcing a change in demographics, or at least demand from those who want to move up a rung amid newfound wealth, or for some, a livable wage," one credit executive at the conference noted during a question-and-answer session that intimated it might not be the right time to outsource anything more to India. "But there are still plenty of Asian and Middle Eastern areas drawing attention for the same reasons India did a few years ago: significant cost reduction."

Meanwhile, FCIB Board Member Henk Swinnen, of Netherlands-based DSM Shared Financial Service Center, defended the use of shared services centers. He noted," let's say the average rate is 7000 euros—if you increase it 10% per year, it's still much cheaper than Holland, and northern Europe." He added that his company was not outsourcing, "we're offshoring," and noted that after 10 years of use, a shared service center has been very positive.

Katarzyna Wawro of Hitachi Data Systems noted that she has been working in a shared service center, adding that, like many others, that satellite office of a foreign corporation started small and expanded after finding success. "Initially, we only did simple processes. Now everything for managing credit is there and we are doing all collection for Europe, Canada and the U.S.," Wawro said.

Not every delegate at the summit was without serious concerns, however. For example, panelist Raul Davila of New York-based Bamberger Polymers was among those who said complications with moving functions of the business farther and farther away from the main credit department hub can easily arise and oftentimes be harder to fix when thousands of miles away, or when they're operating on significant time differences, or in a vastly different cultural landscape.

- Brian Shappell, CBA, NACM staff writer

Look for more coverage on FCIB's recently-concluded International Credit and Risk Management Summit in NACM's eNews, on NACM's blog, and in Business Credit magazine!

If there was any federal agency that lawmakers were tripping over themselves to help, it’d be the Small Business Administration (SBA). Its close connection to the nation’s job creators is an easy source of political points for any interested legislator.

Yet, the SBA’s budget for Fiscal Year 2013 has recently received scrutiny for the agency’s skyrocketing cost of loan subsidies. At a hearing in the Senate Committee on Small Business and Entrepreneurship, Ranking Member Olympia Snowe (R-ME) grilled SBA Administrator Karen Mills on her agency’s ability to handle these increases.

“With our country’s economic recovery from the recent recession still lackluster at best, we must ensure that the SBA can be the catalyst small businesses require to get Americans back to work,” said Snowe. “That’s why it is critical the SBA establish a clear plan to reduce the subsidy costs in future years.”

From 2005 to 2009, the SBA’s flagship 7(a) and 504 loan programs operated at zero subsidy, meaning they paid for themselves through fees without any need for taxpayer support. In each of FY 2010 and FY 2011, however, the SBA required $80 million to subsidize these programs due to increased defaults, with subsidies ballooning to $350 million this year. “Looking at historical data, subsidies compared to the overall SBA budget continue to get higher every year, accounting for 12% of the total SBA budget in FY 2011; 26% in FY 2012; finally reaching an alarming 37% in FY 2013,” Snowe added. “This is the paramount issue in the Agency’s FY 2013 budget, and I urge the SBA to take these concerns seriously.”

It wasn’t all bad news for Mills, as Snowe tempered her concerns with effusive praise for Mills’ efforts to reduce the SBA’s administrative costs. “I have said that all Federal agencies, including the Small Business Administration, must tighten their belts during this difficult economic time, and I commend Administrator Mills for her effective management in this regard,” said Snowe. “Agency-wide overhead costs are largely held steady or reduced in this year’s budget request. Karen is demonstrating that the Federal government can and must do more with less, and I appreciate her leadership.”

Jacob Barron, CICP, NACM staff writer

It’s been a long, hard-fought trip to the finish line, one wrought with political and labor interests, even though a free trade agreement FTA between the United States and South Korea was forged some five-years ago. But now, barring a threatened yet unlikely veto by South Korea opposition lawmakers, the FTA is set to go into effect in a few weeks.

U.S. Trade Representative Ron Kirk and South Korean Minister for Trade Park Tae confirmed that the US-South Korea FTA will be fully in play on March 15. The deal's value is estimated at nearly $90 billion. Domestic manufacturers, especially in the automotive and agricultural products industries, stand to gain levels of market access with the Asian trade partner never realized before within said industries.  Approval of the FTA with South Korea as well as Panama and Colombia had long been seen as important to boost business for U.S.-based companies feeling the pinch of lower domestic demand. The FTAs, in theory, will significantly expand U.S. exports in those markets, help small businesses and lower tariffs on American goods. The Korean FTA was widely regarded as the most significant of the three new U.S. pacts and will be the first to go into effect.

(Note: More extensive background on the fight to establish the U.S.-South Korean FTA will be featured in this week's NACM eNews, available Thursday afternoon at www.nacm.org).

Brian Shappell, NACM staff writer
 

U.S. production should continue to move forward with solid growth through much of 2012, largely on the strength of the automotive and aerospace industries, says a manufacturing trade association economist and recent study.

Dan Meckstroth, chief economist and director of research for the Manufacturers Alliance for Productivity and Innovation (MAPI) said the organizations latest measurement of the overall business outlook was essentially unchanged between November and December. Meckstroth characterizes this as an “extremely optimistic” view for continued expansion over the next three-to-six months. Granted, small businesses are somewhat less so because of its dependence of real estate values as a primary asset in most cases.

Meckstroth noted a “major driver” for U.S. manufacturing will be necessary capital spending on the part of most U.S. businesses because so much capacity shed during the downturn needs to be replaced. Other significant drivers for manufacturing, according the recently unveiled forecast, are tied to aerospace and motor vehicle/parts production, said Meckstroth, who recently appeared at a National Economists Club event. 

(Note: For extended coverage of this topic, check this week's eNews compilation available late Thursday afternoon at www.nacm.org).

Brian Shappell, NACM staff writer

The Federal Reserve’s periodical roundup of economic conditions in each of its 12 districts throughout the nation finds that, in most areas, growth is continuing but at a notably weaker pace than the same time last year. Additionally, the word of the day appears to be “uncertainty.”

The Fed’s Beige Book roundup finds growth best characterized as “modest or slight,” with a decidedly slower pace than in recent months or early fall 2010. Though not every industry sector or district is reporting bad news, conditions are not nearly as positive as had been expected because of long-time “expert” predictions that, by this point, the economic recovery would be in or near full-swing.

Consumer spending, overall, was up for the recent six-week period ending in early/mid-October. However, much of that was driven by auto sales and tourism increases. Businesses also increased spending in most districts, with areas of construction and mining equipment as well as auto-related products setting the pace. Yet, in a continuation of the good news-bad news theme, Fed contacts noted particular “restraint in hiring and capital spending plans:”

Manufacturing, long the proverbial bread-winner among all industries during the slow recovery period, showed improvement from the declines reported in the last two Beige Book periods. Again, the auto producers performed best.

On the credit front, a lengthy period of small improvements in credit conditions are ceding in some areas for anyone not in the very top tier of borrowing. That said, demand remains stunted anyway, especially in districts like Chicago and Kansas City. Also important to those two districts were declines in the agriculture sector. While yields have not fallen to shortage level, almost unilaterally, yields are noticeably down for this time one year ago. Part of this is fallout from unpredictable and/or uncooperative weather earlier in the year, especially in the central-south part of the country.

Real estate, unsurprisingly, was changed little as activity remains at low, weak levels.

Brian Shappell, NACM staff writer

The House Ways and Means Committee approved a bill yesterday, H.R. 674, that would repeal the 3% withholding tax. The legislation is expected to reach the House floor for a full vote before the end of the month.

Should the bill be signed into law, it would eliminate a provision that requires all local, state and federal entities to withhold 3% from their payments to contractors starting in 2013. H.R. 674 was approved by voice vote, a procedure typically used for measures that are non-controversial and enjoy widespread bipartisan support.

“Today we have taken an important step in doing what Americans have called upon Congress to do: work together in a bipartisan way to encourage job creation,” said Rep. Wally Herger (R-CA), the bill’s original sponsor. “The 3% withholding tax stands in the way of jobs because it threatens to constrict the cash flow of thousands of small businesses that provide goods and services to federal, state and local government agencies. Permanently repealing this tax is an important step toward giving these businesses the assurance that it’s safe to invest, grow, and hire more workers.”

“We’re looking for actions Congress can take to create jobs right now. This is a win-win. I urge all members to support this legislation,” he added.

As reported in yesterday’s edition of NACM’s eNews, the 3% withholding tax was originally enacted as part of the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. While its goal was to address the nation’s tax gap, representing the annual $345 billion in taxes legally owed but left uncollected, the provision would ultimately do more harm than good, wreaking havoc on the cash flow of companies that do business with government entities.

Prior to the markup, NACM sent a letter in support of H.R. 674 to Ways and Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI). NACM has opposed the 3% withholding requirements since its enactment and welcomes the repeal bill’s progress.

For more information on NACM’s fight to repeal the 3% withholding tax, click here.

Jacob Barron, CICP, NACM staff writer

One provision in President Barack Obama’s recently released American Jobs Act would further delay the 3% withholding tax on government contracts by another year. GOP lawmakers, and a coalition of business advocates, are pushing him to go a step further, to a full repeal.

The 3% withholding tax is currently set to go into effect on all government contracts worth more than $10,000 in 2013, after a series of delays since its enactment in 2006. A full repeal has remained elusive however, as eliminating the withholding requirement from the books would keep an estimated $11 billion from the nation’s ailing Treasury. Nonetheless, Republican officials are using the newly proposed delay to mount a new push for a full repeal.

"The President must know how damaging the 3% withholding rules are, as his Jobs Act calls for an additional year delay in its implementation. But if it is so harmful to small business—which it is—why not repeal it outright?,” asked Rep. Mick Mulvaney (R-SC), chairman of the House Small Business Committee’s Subcommittee on Contracting and Workforce. “Majority Leader Eric Cantor has signaled that the repeal of this job-crushing withholding requirement will be on the House agenda this fall. I hope that the President & Senate Majority Leader Harry Reid (D-NV) will also support this repeal.”

“The 3% withholding tax would hurt small business cash flow and job growth. Delaying its repeal only continues uncertainty for small business contractors. Permanent repeal will provide more certainty and help create jobs now,” he added.

Joining Mulvaney at a press conference this week was Rep. Wally Herger (R-CA), sponsor of H.R. 674, a bipartisan bill that would repeal the 3% withholding tax and has garnered 241 cosponsors. “The 3% withholding tax will harm small businesses as well as state and local governments. We need to get it off the books once and for all to avoid placing small businesses, jobs across America and our economic recovery efforts at greater risk,” said Herger. “I look forward to working with House Leadership to ensure that we get this bill passed to help our economy.”

NACM has supported a full repeal of the 3% withholding tax since its enactment, and is a proud member of the Government Withholding Relief Coalition (GWRC), which continues to lobby for relief from this burdensome tax. Stay tuned to NACM’s blog and NACM’s eNews for further updates on the repeal effort.

Jacob Barron, CICP, NACM staff writer

The Credit Managers’ Index (CMI) for August hasn’t been this low in more than a year—falling from July’s 53.9 to 52.7—and is now tracking at levels last seen in 2008–2009. “The news this month is not good and comes as no shock to anyone who has been tracking the data coming from all directions,” said Chris Kuehl, PhD, economist for the National Association of Credit Management (NACM). If there is any good news, it is that the combined number has not yet fallen below 50, the threshold separating contraction from expansion. But the index of unfavorable factors fell to contractionary levels. The last time the unfavorable index was this low was in the 2009 period when the recession had just started to show signs of easing. The fact that the data was not worse this month than it was is probably worth noting as most of the other indices released in the last few weeks suggested there might have been an even steeper decline.

Kuehl said the best news in this month’s data is found in the favorable index. Here the data barely changed, going from 58.9 to 58.1. This is still much lower than most of the last year, but the precipitous collapse that took place in the companion part of the overall index did not take place here. There was even some improvement in the amount of dollar collections, while declines in the sales category were slight, from 60 to 59.2. “The most interesting aspect of the data is that extension of credit actually improved in the middle of all this gloom and doom. The fact that favorable factors have improved slightly or remained stable provides some hope that conditions will improve in the coming months,” said Kuehl. “There is still demand and business progress, but the crisis in the overall economy has been putting pressure on the finances of many companies.”

Upon examining the unfavorable factors, it is striking that the problem is primarily one of sudden business stress and failure. The biggest declines were in accounts placed for collection and dollar amounts beyond terms. These are signs of real distress among customers, but it is equally significant that filings for bankruptcies did not increase dramatically and there was not an acceleration in the rejection of credit applications. The divergence in these factors is particularly interesting and informative. While speculative, one could look at this data and conclude that companies got in trouble in the last month or so because of a sudden drop in business after anticipating better times. Evidence from earlier in the year showed that companies across the board were anticipating better days in the second half of the year and many were trying to prepare for this with expansion plans. This anticipated economic growth did not come to pass and these companies swiftly got into trouble.

If there is a small silver lining to all this, it is that the level of bankruptcies has not risen at the same pace. That means one of two things. If the economy gets back in gear in the next couple of months, companies struggling now will have some time to gain control of their budgets and be able to avoid sliding further toward collapse and ultimately bankruptcy. If the economy doesn’t catch fire to some extent in the near future, the bankruptcy rate will start to climb and the index will reflect it. The other mildly encouraging piece is that the rate of rejection for credit applications was not markedly different from last month. There is still credit available to customers that are bucking the trend. This is not like the situation at the end of 2008 when the entire credit system came screeching to a halt and even the best of companies were denied access.

The data this month is mixed but with a decidedly downward slope. The CMI remains in expansion territory, but is holding on to that status by a thread. There may be another month of essentially flat growth in store, but after that the economy will begin to tilt in one direction or another. If there is no real improvement in some of the fundamentals, the index will reflect continued deterioration. There is some resilience evident in the index numbers as the favorable categories are holding their own. The sectors that will drag the whole index further under include those that are most dependent on the decisions that companies made when they were expecting some solid economic growth by now. The credit requested made sense at the time, but now there is some serious concern as far as what happens next if the growth rate remains mired in the predicted 1% to 1.5% region.

The online CMI report for August 2011 contains the full commentary, complete with tables and graphs. CMI archives may also be viewed online.

As noted an eNews story last week (link at bottom of story), a small business trade association took issue with the U.S. Small Business Administration’s declaration that nearly 23% of government contracting dollars went to small businesses, calling the statistics “misleading.” In a subsequent interview with National Association of Credit Management, which occurred after this week’s eNews deadline, the SBA is firing back saying its statistics are legit.

The new federal “Scorecard” on small business contracts for FY2010 included statistical findings that nearly $100 billion, 22.7% of all federal contracting dollars, went to small businesses. However, the American Small Business League (ASBL) alleged that 61 of the top 100 recipients of the so-called small business federal contracts in 2010 were, in reality, large firms. The association calls the Obama Administration’s assertions “dramatically inflated” and alleges some of the “small business” recipients in FY2010 included Lockheed Martin, AT&T and Hewlett-Packard.

Michele Chang, SBA’s senior advisor for government contracting and business development, told NACM that agencies have gone through painstaking processes to ensure the data is “clean” and free of data anomalies such as “miscoding.” She said SBA stands by the 22.7% number originally released and said an allegation from ASBL that only 5% of those receiving federal contracts were, in reality, small businesses simply was “not true.”
“We have a comprehensive data-quality process that ensures accuracy,” said Change. “We’re confident this is the cleanest data we’ve had and the cleanest it can be.”

However, when asked if Lockheed Martin, AT&T and Hewlett-Packard received money classified under small business allotments, Chang said she “can’t comment on them specifically.” Change noted that, sometimes, a smaller firm awarded an ongoing contract sometimes expands and becomes a mid-sized or large business or gets bought out/taken over by a larger firm; but she placed the onus on the businesses to report the happenings to SBA within 30 days for classification. When pushed, Chang admitted none of the aforementioned businesses would have been considered small business for a number of years and again declined to comment on whether any were classified among small businesses for the purpose of this year’s scorecard.

The original eNews story posted Thursday is available here.

Brian Shappell, NACM staff writer

Though overall business optimism has appeared to remain on a small upswing or at least level, that of small businesses continues to wane as the slow economic recovery has repeatedly failed to demonstrate signs of a quick acceleration. Meanwhile, some of those same small business owners take issue with more recent mainstream media and analysts’ suggestions that credit has been easier to come by for companies.

This week, the National Federation of Independent Business’ (NFIB) Small Business Optimism Index slipped for the third straight month in May by a slight 0.3 points. NFIB characterized the present index reading (90.9) as that of a ‘recessional-level reading.”

The results corresponded with the decline found in the Wells Fargo/Gallup Small Business Index for the first-quarter, released earlier this spring, which found small business owners positions shifting from slightly-to-moderately positive to neutral.

Wells Fargo followed that up this week with a report that small businesses still are finding it exceedingly difficult to access credit with any kind of favorable, or even perceivably fair, terms. The firm’s study found that at least 30% of responding company representatives found credit hard to come by during the last year, and 36% believe it will be increasingly difficult to do so. Despite economic growth, albeit tepid, conditions changed little in the Wells Fargo study from the first-quarter to the second-quarter. The peak in actual difficulty was slightly more than 35%, reported in Q1 2010, according to Wells Fargo statistics.

Businesses did, however, get at least one piece of somewhat good news this week…sort of. The Producer Price Index (PPI) statistics for May showed a 0.9% increase, mostly tied to increases in food and energy costs. The good news was that experts had expected the PPI to increase at a much higher rate.

Brian Shappell, NACM staff writer

With small business exporting becoming an increasing important element of the majority of U.S. commerce, attendees at NACM’s 2011 Credit Congress in Nashville flocked by the dozens to the first sessions in a series of five on “Doing Business in ___” series hosted by FCIB.

The first of which, “Doing Business in Canada” drew well in excess of 100 people and became one of the first standing room only, so to speak, sessions of Credit Congress this year. Hubert Sibre, of Davis LLP, described Canadian business terms as extremely varied depending on the province. For example, Alberta is considered very liberal from a pro-debtor standpoint, while Quebec is considered much more conservative on matters of business and credit.

Sibre suggested registering one’s business in every province is almost essential because it greatly improves their position to protect intellectual property in Canadian courts, among other things. It also helps to have a subsidiary based there because bankruptcy judgments made in the United States are unenforceable without a Canadian court officially recognizing it.

A subsequent session on South Korea was led by Kyle Choi, Esq. of Bluestone Law Ltd. Choi spoke the various aspects of why the nation’s stock is rising in the international business community, which includes a highly evolved infrastructure, a wealth of available credit information available on companies there and business-friendly law. Also helpful is its prestigious business quality rating by the World Bank and, according to Choi, that its free-trade agreements with the United States and the European Union will increase competitive fairness by reducing the gap in tariffs, estimated by some at 10%. Also, he contends it will force South Korean companies to produce better products, components and services across the board.

But there are many cultural differences and barriers that need to be taken into account, such as a desire for officials at companies to speak directly with employees on their level with your company (don't pawn her off on the secretary) and the need for formality even in e-mail correspondence.

(Note: Subsequent sessions on Doing Business in Chile, China and Brazil had not been completed at the time of this posting. More coverage is coming to NACM’s blog, eNews and the July/August edition of Business Credit Magazine in the coming days and weeks).

Brian Shappell, NACM staff writer, can be reached brians@nacm.org

U.S. trade activity went through its growingly common routine of another one leap forward, one leap backward in March, the latest U.S. Department of Commerce Statistics indicate. The sum of it all remains an ever-growing trade deficit.

U.S. Commerce Secretary Gary Locke announced that U.S. exports of goods and services in March 2011 increased 4.6% between February and March to a record $172.7 billion. Both the goods side ($124.9 billion) and services ($47.7 billion) hit high-water marks historically. Among other records were the surge in the export value ($7.7 billion) as well as value of trade routed to Canada and South and Central America. The U.S. even managed to shave its Chinese trade deficit down from $18.8 billion to $18.1 billion, thanks in part to small business exporting levels. Ignoring the elephant in the room, escalating demand and prices for oil products, Locke celebrated the news in a brief statement on the Commerce website.

Far less discussed by Commerce officials was that the trade deficit increased to $48.2 billion, about a 6% increase from February to March. Oil imports spiked by 18% in March to a dollar-value-level of $39.3 billion, the highest in nearly three years.

Brian Shappell, NACM staff writer

Hearing Scheduled in House Small Business Committee

The Internal Revenue Service (IRS) issued final rules last week that delay the 3% withholding requirement on government contracts until 2013. Under this arrangement, the withholding and reporting requirements will generally apply to payments made after December 31, 2012.

Additionally, the House Small Business Committee will hold a hearing in order to more thoroughly address the 3% requirement on May 26. A repeal bill in the House, H.R. 674, originally introduced by Rep. Wally Herger (R-CA), has also garnered more than 100 cosponsors.

All of these developments, taken together, could increase the chances for a full repeal of the 3% withholding before the end of the year.

Previous attempts to delay the provision have been supported by industry as well as Congressional and Executive leaders. In March, President Barack Obama called for a three-year delay, echoing the requests of other observers who have hoped that a delay will give lawmakers more time to enact a full repeal.

The 3% withholding requirement was originally enacted in Section 511 of the Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in 2006. It was originally scheduled to go into effect on Jan. 1, 2011, but was delayed to Jan. 1, 2012 in 2009 by the American Recovery and Reinvestment Act (ARRA), and delayed to 2013 by last week’s IRS rulemaking. Should the requirement go into effect, most transactions for goods and services with a government entity would be subject to a 3% withholding tax, kept by the governmental entity in question.

NACM has fought the enactment of this provision, which will fall disproportionately on smaller businesses, since its introduction. As a member of the Government Withholding Relief Commission (GWRC), NACM has lobbied for a full repeal and hopes Congress acts quickly to remove this unfair and potentially harmful provision from the tax code.

Stay tuned to NACM’s Credit Real-Time blog, NACM’s eNews and Business Credit magazine for future updates.

Jacob Barron, NACM staff writer

As the clock continues to tick toward 2012, many credit professionals have been asking about the 3% withholding tax, which is still set to go into effect at the end of the year on most government contracts.

The provision was tucked into the Tax Increase Prevention and Reconciliation Act (TIPRA), enacted in 2006, originally included as a means to reduce the nation’s tax gap, which is the annual difference between taxes legally owed and taxes collected, totaling about $345 billion. Essentially, the idea was that since a number of contractors that did business with the government didn’t accurately pay their tax bills, a withholding requirement would offset the revenue lost from these contractors’ non-compliance. Observers quickly noted that merchants selling to the government that were forced to comply with this new requirement would simply raise their prices, meaning the whole provision would provide zero sum gain.

The provision was originally set to go into effect on all contracts dated after December 31, 2010, but that deadline was delayed to contracts dated after December 31, 2011 by a provision in the American Recovery and Reinvestment Act of 2009, popularly known as the stimulus bill.

The details of the provision are many, and more than a little beguiling.

According to the text, the withholding requirement would apply to government entities, including states, municipalities or any instrumentality thereof, with annual procurement budgets in excess of $100 million, which would exclude a lot of local agencies in many smaller towns. It would also only apply to purchases worth more than $10,000, and according to the Internal Revenue Service (IRS), entities and businesses would not be allowed to divide payments up into two or more in order to make them exempt under the $10,000 threshold. Certain payments would be excluded, like payments of interest, for real property, to tax-exempt entities and to foreign governments, although it should be noted that “real property” does not include payments for the construction of buildings or public works. This is a fairly vague definition, so establishing which of these payments would or would not be subject to the withholding requirement could prove challenging.

IRS guidance on the subject notes that the withholding would only apply to payments made by the government entity to the prime contractor, meaning there is no flow down to subcontractors. Payments made under contracts existing prior to the December 31, 2011 effective date will not be subject to withholding.

Advocacy

NACM has opposed the 3% withholding tax since its inception, and continues to hope that lawmakers come to their senses and repeal it.

Several bills and amendments have been proposed over the course of the provision’s life that would remove it from the record, and prevent it from ever damaging the cash flow of companies that do business with local, state and federal entities. The most recent of these is an amendment, still pending at the time of this writing, to S. 493, the Small Business Innovation Research (SBIR) and Small Business Technical Transfer (STTR) Reauthorization Act, introduced by Senators David Vitter (R-LA) and Scott Brown (R-MA). Vitter and Brown have previously introduced their own standalone repeal bills before combining them into this amendment, which would likewise eliminate the 3% withholding requirement and tell agencies and companies to act as though it were never enacted.

The issue with previous repeal efforts was that they weren’t attached to measures that would offset the revenue loss of repealing the 3% withholding; as expensive as it would be in the long run, the 3% tax would generate revenue for the government, and any repeal effort will have to include some commensurate form of spending cuts or revenue generators. Amendment 212 gets around this by rescinding $39 billion in funds appropriated but unspent by government agencies, excluding the Departments of Defense and Veterans Affairs.

“The withholding is a flat percentage of revenues from government payments, bears no relationship to companies’ taxable incomes and will restrict cash flow needed for day-to-day operations and investments,” said the Government Withholding Relief Coalition (GWRC) in a recent letter to lawmakers in support of Amendment 212. NACM is counted among the dozens of members of the Coalition, which was formed to repeal the requirement shortly after its enactment and the NACM Government Business Group (GBG) has been active in keeping its members informed of the implications and encouraging contact with respective representatives.

The letter continued, pointing out that governments and governmental entities themselves will scarcely have the resources to handle the implementation of the new requirement. “In addition, the administrative and capital investment costs that compliance with 3% withholding will impose on businesses and governments will be substantial, and the mandate will be exceedingly complicated to implement. Three percent withholding will be especially burdensome for small firms. With the withholding mandate scheduled to take effect on January 1, 2012, businesses and governments are expending limited resources now in order to make the major system and process changes needed to implement this provision. This is a particular challenge for cash-strapped state and local governments.”

For more information on the 3% withholding tax, stay tuned to NACM's Credit Real-Time blog, NACM's eNews, and Business Credit magazine.

The Obama administration, U.S. businesses and domestic analysts alike have been pining for a narrowing of the domestic trade gap. And, although just that occurred in February, the news was overshadowed greatly by statistics indicating the first decline in exporting activity in six months and a worrisome price spike on both exports and imports.

Newly unveiled Commerce Department statistics indicate that the trade gap narrowed in February to $45.8 billion from $47 billion. However, both importing and exporting activity were down, by $3.6 billion and $2.4 billion, respectively. The drop in exporting activity despite a doubling-down by the Obama administration to make trade more of a priority in recent months than in any stretch of this presidency came as an unsettling surprise to analysts and economists. The knee-jerk response from markets has been one of renewed uncertainty regarding the continued strength, or lack thereof, of what has already been considered a lackluster and disappointing economic recovery over recent months and years.

Meanwhile, Bureau of Labor Statistics numbers on import and export price indexes, also announced Tuesday, show higher fuel prices causing a surge in the cost of various products and materials worldwide. Import prices increased by 2.7% between February and March. The index for the important fuel category alone jumped 9%, the largest advance since June 2009, the bureau noted.

Export prices also increased, by 1.5%, from February to March, similar to the previous month’s uptick. Of particular interest is the continued rise in agricultural exports. Those increased another 2.3%, with spikes coming within the corn (9.2%) and cotton (10.5%) commodities. The bureau noted Ag prices has surged by 34% over the last year. Much of this is attributable to draughts and wildfire catastrophes in places such as Russia as well as supply damage caused by out-of-season freezes in some key growing areas. While the high prices are helpful for those producers who evaded crop damage and saw quality yields, the price surge certainly is a double-edged sword that could cut those in the small business exporting game deeply.

Brian Shappell, NACM staff writer

The central banks and governments for a pair of key targets in small business exporting took very different paths this week in fighting growing inflation. China’s central bank, concerned with its economy getting significantly more overheated than it already has, tried again to pump the brakes this week by raising interest rates. It’s a decidedly different track than is being taken in Brazil.

The People’s Bank of China announced it would raise its rates by 25 basis points, the second time this year it has opted to make such a move. The move was perhaps more surprising in its timing, very close to the last rate hike, than its inevitable appearance. China is contending with, among other things, an inflated housing bubble not too different from the one that propped up and eventually destroyed U.S. economic growth during the middle of the last decade. 

Brazil, acknowledging inflation is a real issue within the growing economy, in essence said it will a take a sort of wait-until-next-year approach to addressing the problem. Officials in the administration of new President Dilma Rousseff, who has a history of being leftist and pro-labor, this expressed concern and/or disinterest in making more significant efforts toward slowing down booming economic growth there. The central bank predicted it will usher in monetary policy tightening sometime in 2012 to curb inflation though, if it is playing catch up, may have to tighten significantly more than it would if addressing the issue this year.

“In fairness to the Brazilians, they do at least recognize the problem and have taken action (albeit with limited results) by raising interest rates twice since late December...policymakers in Brazil are challenged on a variety of fronts,” said Economist Byron Shoulton, of FCIA Management Co., a speaker/panelist at FCIB’s I.C.E. Conference in Chicago.

(Note: More on the varied approaches to inflation-fighing by China, Brazil and the U.S. in this week's eNews, available Thursday afternoon. For more information on or to register for the I.C.E. Conference, visit www.fcibglobal.com).

Brian Shappell, NACM staff writer

In a move designed to increase opportunities for U.S.-based exporters, Ex-Im Bank of the United States is investing in a series of infrastructure projects in new economic hotbed Brazil. 

Ex-Im, the nation’s official export credit agency, authorized $1 billion this week to help grease the wheels, so to speak, for exporting of goods and service to be used in a serious of infrastructure projects around Rio de Janiero. Among them, will be stadiums and other venues related to Brazil’s sought-after status as host to both the FIFA World Cup (soccer) and the Olympics within the next decade. The $1 billion in financing will be available for the state of Rio de Janiero to borrow to finance purchasing supplies from U.S.-based companies to complete the work.

“Brazil is an emerging economy with extensive infrastructure needs, and this authorization will provide further opportunities for American exporters and small business owners…it is important that we encourage our businesses to compete globally,” said Ex-Im Chairman/President Fed Hochberg.

Note: In-depth sessions focused on doing business in Brazil will be featured both at NACM’s 2011 Credit Congress in Nashville in May and FCIB’s 2011 I.C.E. Conference in Chicago in April. Click the highlighted links for information on each event or to register. See more on Brazil in the upcoming edition of NACM eNews, available on the afternoon of March 31.

Brian Shappell, NACM staff writer

While the Red Flags Clarification Act may have exempted a number of very specific types of small businesses, it didn't exempt all of them.

For this reason, the Federal Trade Commission's (FTC's) much-discussed, oft-delayed "Red Flags" rules went into effect with the New Year, meaning many entities need to be in compliance with the amended statute. As described by the FTC, the new law "gives businesses the flexibility to tailor their written ID theft detection program to the nature of the business and the risks it faces. Businesses with a high risk for identity theft may need more robust procedures-like using other information sources to confirm the identity of new customers or incorporating fraud detection software. Groups with a low risk for identity theft may have a more streamlined program-for example, simply having a plan for how they'll respond if they find out there has been an incident of identity theft involving their business."

"We're pleased Congress clarified its law, which was clearly overbroad," said FTC Chairman Jon Leibowitz. "Now we can go forward with less litigating and more protecting consumers from identity theft."

While the new legislation made the "Red Flags" rules apply to far fewer businesses, it failed to exempt trade creditors in any meaningful way. "I don't think this changes a thing for our trade creditors," said Wanda Borges, Esq. of Borges & Associates, LLC. "It's so short and almost nonsensical, I really think they accomplished very little." Specifically, Borges noted that the bill's adjustments to the definition of what constitutes a "creditor" fail to explicitly exclude trade creditors. Moreover, a provision at the end of the bill serves as something of a catch-all, noting that creditors can be required to comply with the "Red Flags" Rule if they're determined to maintain accounts subject to a reasonably foreseeable risk of identity theft.

Instead, according to Borges, the law allows businesses to better determine how at risk for identity theft they are, and how much they have to do to comply with the regulations. "They may have succeeded in eliminating the need for small law firms and small doctor's offices to have 'Red Flags' programs in place, but that catch-all at the end means our trade creditors aren't exempt," she added. "I think what it does is gives businesses a better opportunity to determine whether or not they're low risk or high risk. It's clear that they have not excluded trade credit."

NACM continues to seek further clarification from the FTC. Stay tuned to NACM's eNews and Credit Real-Time Blog for updates.

Jacob Barron, NACM staff writer

House Ways and Means Committee Chairman Predicts Repeal Action Before March

After several failed attempts in the last Congress, the Senate finally voted to repeal the controversial 1099 requirement, originally passed as part of the health care reform bill.

In a bipartisan, 81-17 vote, the Senate agreed to erase the provision that would've required small businesses to file an Internal Revenue Service form 1099 for every vendor from whom they annually buy $600 worth of goods or services. The measure was originally enacted as a revenue generator, but quickly drew the ire of small business owners and advocacy associations nationwide, eventually becoming universally reviled.

The repeal came in the form of an amendment attached to the Federal Aviation Administration (FAA) Reauthorization bill.

"Today we provided a common-sense solution for business owners so they can focus on creating jobs, not filling out paperwork for the IRS," said Sen. Debbie Stabenow (D-MI), who proposed the successful 1099 repeal amendment. "Since last year, I have worked with my colleagues on both sides of the aisle to address this problem. If left unchecked, 40 million small businesses would see their IRS 1099 paperwork increase 2000%."

Repeal efforts in the House continue, however, most recently in the form of a hearing, titled "Buried In Paperwork: A 1099 Update," held in the House Committee on Small Business. "This new 1099 requirement will cause an avalanche of additional 1099 forms to be filed, and affect over 36 million entities," said committee chairman Sam Graves (R-MO). "At a time when we should be making it easier to create jobs, promote growth and invest in our economy, small firms don't need yet another costly and burdensome mandate."

Due to the tax implications inherent in a repeal measure, any bill that eliminates the 1099 requirement will have to pass through the House's Ways and Means Committee, which has jurisdiction over the tax code, before reaching the full House for a vote. However, Ways and Means Committee Chairman Dave Camp (R-MI) has indicated that he expects his committee to take up the repeal effort before March 1, 2011.

Stay tuned to NACM's eNews and Credit Real-Time Blog for latebreaking updates on the 1099 repeal efforts.

Jacob Barron, NACM staff writer