E
conomic indicators are up and
the stock market is down. Is that
a major surprise? Let's hope it is
only a market correction from the buildup
in 2013 along with the Federal Reserve's
decision to pull back on its qualitative
funding program (however it works!). If
the correction continues, however, concern
will soon shift to a view the market is an
advance prediction of a downturn in the
economy. This would be difficult to accept
because most of us believe the economic
upturn is past due and that it should occur
before there is a downturn.
I see the economy as a conundrum.
The growth of small business is the age-
old predicate to strong Gross National
Product (GNP) advancement and higher
employment. Consumer spending drives
GNP. The more job creation — the greater
consumer spending. The problem with
consumer spending is that it typically is
financed by high-interest credit card debt;
and, while the economy grows, the con-
sumer's savings are traded for high credit
card balances.
Creating the jobs to fuel growth requires
the growth of small business, which is
derived from the American dream to "be
your own boss." Small business is funded
by home equity loans and SBA
loans (government-guaranteed
loans). These loans require col-
lateral — typically equity in a
home as a pledge of security.
Without equity, there is no
collateral to support the loan;
and banks will not grant loans
without security. If there are
no loans to spur small business
expansion, there will be no sig-
nificant job expansion and then
no sustained growth for the
economy.
While real estate values increased in
2013, there is still a dearth of equity in
most residential homes. The alternative for
funding is an unsecured loan, which, in
the small business arena, is practically lim-
ited to small business credit cards. We are
seeing an increase in this type of loan, but
the problem here is that the user of such
a loan faces the same old disastrous result
of any credit card — the high interest and
liberal payment terms make it
too easy not to pay it off and
then debt becomes the rule, not
the exception. Before you know
it, you can't service the debt.
If a home equity loan or SBA
loan is not an option, you're
better off borrowing the money
from family and friends. Pay
back the debt over five years,
with market interest on a fixed
monthly basis.
We need your entrepreneur-
ial spirit to create jobs so con-
sumer spending can drive the economy.
But don't be the sacrificial lamb. Your job
is to succeed. Saddling yourself with credit
card debt is not the solution. You need to
avoid this on both ends, as a consumer
and as the owner of a small business.
While incurring the debt may help the
economy, it will harm your future.
If the only way you can start the ven-
ture is with funding via a small business
credit card, should you do it? The answer
is maybe. You need to assess the risk care-
fully. If you are otherwise collectible and
have assets, you need a backup plan that
preserves your assets in case you fail. The
need for the backup plan is true in every
key decision. Should I hire the new sales-
person and expand the business or pur-
chase that piece of expensive equipment?
If you can cover the downside with Plan
B — the backup plan— then you are ready
for Plan A.
❑
Ken Gross is an attorney with Thav Gross and
host of The Financial Crisis Talk Center show
that airs weekly at 8:30 a.m. Saturdays on
WDFN 1130 AM, "The Fan," and 11 a.m. Sundays
on MyTV20.
•
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44 February 27 • 2014