"Handcuffed" is how Mark Strumwasser says he feels as owner of Sunshine Rentals, a supplier to the temporary-housing industry. Holdiplaceholderng him back are, on the one hand, lenders that won't fund expansion into new markets without secured interests and, on the other, the Affordable Care Act, whose small-business provisions kick in at 50 employees. "Getting credit to fund trucks or laundry equipment? Not a problem," says Strumwasser, president of the $3.4 million Vista, California, company. "To fund working capital? Problem." As for Obamacare, "I stopped hiring at 49. We did the math. That would be a very expensive 50th employee."
Even so, he says, "we have had a lot of growth. Growth is still there."
For business owners like Strumwasser, America's slog back to economic health is neither the worst of times nor the best of times. Call it the mehst of times. Entrepreneurs are more confident in the national economy than they were during the recession, but few are excited about the pace of recovery. And if many talk blue skies about their own company's prospects, they fume about obstacles--a surfeit of taxes and regulations, a paucity of skilled workers--that prevent them from growing faster.
For our annual report on the State of Small Business, we surveyed nearly 300 leaders of America's fastest-growing private companies (as ranked by the Inc. 5000) and interviewed 24 respondents. The percentage calling themselves "very confident" in the economy declined to 22 percent from 26 percent a year ago, with 17 percent saying they were "neither confident nor unconfident," versus 14 percent last year. Purportedly positive forces, such as low oil prices and new sources of funding, barely registered.
"Things are just a bit soft," says Bruce Ballengee, CEO of Pariveda Solutions, a $65 million technology services business in Dallas. Lately, Pariveda's public-company customers have been slower than usual to pay invoices. And consultancies whose customers serve the struggling oil industry are spending less or requiring higher returns on investment. "People are queasy and don't put themselves at risk for growth," says Ballengee.
The views of outside experts are rosier. Although small-business hiring peaked in April 2014, growth has been consistent and sustainable, says Martin Mucci, CEO of Paychex, which provides payroll and other services to small businesses. Even more auspicious, the rate of new business formation has seen the biggest year-to-year increase in two decades, according to the Kauffman Foundation, an entrepreneurship research organization based in Kansas City, Missouri. And Kauffman says 80 percent of new entrepreneurs are starting businesses because they spot opportunities, not because they couldn't find work.
Growth companies, in particular, have reasons to be cheerful. In addition to ample money for funding, says Herb Engert, head of strategic growth markets for the Americas at Ernst & Young, "labor markets are improving and M&A is still very attractive."
Yet as our survey reveals, a unified theory of small business does not exist. Entrepreneurs are like those proverbial six blind men describing an elephant by touch. Depending on their industries and profitability, different people experience a very different animalplaceholder.
"Banks are happy to increase credit lines. At least for us."
Nowhere is the disparity greater than in financing. Banks remain by far the most common source of capital for entrepreneurs, with 45 percent of respondents seeking loans or lines of credit from them this year. Many walk away unhappy. "Banks have started to come back, but it's not a very big comeback," says Rohit Arora, CEO of Biz2Credit, an online marketplace for small-business funding.
Still, respondents had a relatively sunny perception of banks' lending practices, with 63 percent saying banks are more willing--or slightly more willing--to lend. Stephen Fernands, founder of Customized Energy Solutions, a $26 million Philadelphia consultancy and energy services provider, says, "Banks approach us to increase our credit limit, which is a strange experience."
Owners of tech companies may be happier still. "There is plenty of investment capital and all-time high valuations," says Justin Bellante, CEO of BioIQ, a $15 million health care technology company in Santa Barbara, California. This year, BioIQ raised institutional, venture, and angel money; next year, it may do the same.
But shoulders remain cold for business owners in industries like construction. "We have literally been told by banks, 'We don't want anything to do with a landscape company,'" says Eric K. Weishaar, president of $4 million Breckenridge Landscape in New Berlin, Wisconsin. "Trying to get a bank on board with that is like pulling teeth."
"Just tell us what the rules are and stop helping."
Company owners find the eternal money hunt frustrating, because it distracts them from working on their businesses. But at least fundraising is about growth. Compliance issues may curtail growth; at minimum they bury entrepreneurs with paperwork. This year, 54 percent of respondents cited regulations as a major drag on the economy.
Entrepreneurs fret over new federal rules that extend eligibility for overtime. Regulations meant to prevent misclassification of employees as contractors also raise hackles. States come in for separate attacks, especially California, which in the past year passed or implemented a volley of rules related to such issues as paid sick leave and equal pay. California's Labor Board "is always going to side with the employee," says Sabina Keil, COO of Xcaliber Solutions, a $3 million e-commerce consulting business in Silverado, California.
Despite their frustration, 55 percent of entrepreneurs support a minimum wage hike of $1 or more. And a few respondents saw an upside to regulations that they believe strengthen the middle class. "Having a healthy, balanced work force is in our best long-term interests even if it costs us some short-term labor dislocation," says Aaron Ribner, CEO of Romanoff Renovations, a $101 million construction services company in Smyrna, Georgia.
But to entrepreneurs, most regulations are gnats compared with the blood-swollen mosquito that is the Affordable Care Act. Though few respondents say the ACA has forced them to drop their coverage, lay off workers, or raise their pay to cover premiums, 73 percent are seeing costs go up, and 43 percent report cutting back in other areas to pay premiums. Twenty-nine percent say the impact of ACA on their company has been "worse" or "much worse" than expected, while fewer than 10 percent describe the effect as "somewhat better" or "much better."
Health care costs have doubled at InTec, a $19.5 million federal contractor based in Fairfax, Virginia, according to president Bruce Donaldson, who blames ACA for most of the increase. InTec used to pay the full premium for employees and 85 percent for dependents. Under ACA, the cost of the company's small group plan has risen every year by double digits, forcing him to switch to a cheaper plan with fewer benefits. "It got so outrageous that we had to keep stepping down the quality of the health care we were giving people," says Donaldson.
"We want the Elon Musks of the world."
Many of the most detested regulations affect the cost of labor. The availability of labor is a broader, more intractable problem, the most emotionally freighted aspect of which is immigration. In this realm, the majority of small-business owners prefer building bridges to walls. Raising the number of visas for top talent is the most frequently cited immigration priority (by 45 percent).
In a year when companies such as Intel and Disney drew fire for replacing American IT workers with less expensive H1B visa holders, many respondents say they are skills-starved. "Give me Americans, and I will give them jobs," says Fred Fromm, CEO of nexVortex, a $14 million provider of cloud-based phone service in Herndon, Virginia. "But I can't find Americans with these qualifications in the numbers I want to hire."
Beyond immigration's contribution to the skilled labor pool, respondents cite its salubrious effect on entrepreneurship itself. "The U.S. government should be handing out investment checks to the most brilliant entrepreneurs in the world," says Stephan Aarstol, founder of Tower Paddle Boards, an $8 million maker of beach-lifestyle products.
In the tired, poor, huddled masses part of the debate, a similar number of respondents are supporters of tighter borders and of amnesty or paths to citizenship. (Respondents could choose both.) Arguing for assimilation, entrepreneurs cite practical concerns more than humanitarian ones. "You cannot simply pick up 11 million people and send them home," says Ribner. "Let's get these people out of the shadows and into the real economy, where they can pay taxes."
Others take a harder line. Jeff D. Jenson, founder of Utopian Luxury Vacation Homes, a $5 million rental- and property-management company in Park City, Utah, worries about the unknown economic costs that undocumented immigrants impose on matters from health care to traffic. Jenson also wants to bring immigrants into the system. But after that, he says, "we have to make our borders less open. We have to regulate more strongly the folks coming in and staying, so we don't have a black hole they cost us every year."
"500 or 600 résumés generated one interview."
Our failure to import skills hurts because we don't grow them here. Or so say the 36 percent of respondents who think workers aren't trained for new-economy jobs. BioIQ's Bellante opened an Atlanta office this year, chiefly to widen his tech talent pool. Now he competes for employees with Zifty, a $10 million food- ordering and -delivery service also based in Atlanta. "You have to use a headhunter to find a programmer," says Zifty founder Todd Miller. "They're scooped up before they even get to a job board."
The culprit, almost universally denounced, is the education system. More than half of respondents argue for greater focus on science and technical skills in colleges and better preparation of students for work. They also repeatedly cite the problem of student debt, which they say increases employee stress, cramps consumer confidence, and dissuades young folks desperate to earn from joining or launching startups.
Some entrepreneurs are less interested in fixing the education system than in finding alternatives to it. "There needs to be a lot more going on outside the university," says Kerry Ann Rockquemore, founder of the $3 million National Center for Faculty Development & Diversity in Detroit, which offers professional development to college professors. "Downstairs in my building, there is a coding boot camp that is packed," she says. "It should be, 'I need this skill now and I have many ways to get it.'"
The most popular model for education reform--German-style apprenticeship programs in which schools and businesses join to prepare students for specific jobs (cited by 58 percent of respondents)--is already in practice. MMI Engineered Solutions, a $26 million injection molding company in Saline, Michigan, partners with community colleges on machine-trade curricula. Students attend school at night and work in its factory during the day. And DPM Fragrance, a $27.5 million specialty candle manufacturer, runs an internship program in its hometown of Starkville with Mississippi State University. "Interns go back and work with their classes on projects that we might actually use with a customer," says CEO Tom Reed. "The ones that fit our team we like to hire as they graduate."
"Things can always get worse."
Companies like MMI and DPM are looking for micro-level fixes to macro-scale problems Washington has failed to resolve. Indeed, political gridlock comes in for withering disdain, with 57 percent of respondents citing it as a major economic depressor. Entrepreneurs lobbed invective at both political parties, at the president, and at a structure that appears incapable of resolving anything.
Not surprising in this silly/scary/surreal campaign season, the prevailing theme was uncertainty. "If election cycles skew the wrong way, people can lose rational thought," says Andy Latimer, CEO of Bluewater Media, a $27 million digital marketing and video production business in Clearwater, Florida. Latimer worries about the extreme positions of some candidates, particularly on the Republican side.
Though the recent budget deal lessens the chance of a government shutdown, many businesses are far from confident the threat won't return. "There's a lot of contingency planning we have to do every year because of that," says Chris Berry, president of Visionist, a $15 million software engineering services firm in Columbia, Maryland, that sells to the Department of Defense. "It's stressful for the employees. It's stressful for management."
Some political uncertainty is local. ComplianceSigns is a $10.5 million maker of safety, Braille, and directional signage in Chadwick, Illinois--a state with a substantial deficit. Founder and president Paul Sandefer fears that at some point, Illinois will go where the money is: small business. "They'll raise our taxes to cover the shortfall," he says.
Relaxing government's grip on the economy, many entrepreneurs say, is the best way to reduce uncertainty. A few respondents disagree. Keith Jackson, owner and CEO of Industrial Revolution, a $15.5 million supplier of camping gear based in Tukwila, Washington, would love to see more stimulus: job-creating investments in things like roads and other infrastructure. He's not even up in arms about tax rates.
Whatever the government or the economy does, Jackson's not terribly concerned. "We're not hugely dependent on it," he says. "The success or failure of my business depends on me."