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Kennedy School Review

Topic / Public Finance

View from Main Street: The Case for Financial Reform


In early 2009, I attempted to secure a loan through a new federal program designed to help entrepreneurs improve their cash flow by consolidating outstanding debt. As a cash-poor but profitable enterprise, my tutoring business, Omniac Education, seemed to be a perfect candidate for the program. Although we sometimes had trouble making rent, we had survived the enormous downturn brought on by the financial crash in 2008, and I knew that if we could get a loan to steady our cash flow, my company would be able to get back on its feet.

But it soon became clear that I was not actually eligible for the loan in question.  While America’s Recovery Capital loan program was designed to “help small businesses meet existing debt payments” to succeed in the long run, after going in to apply and completing two hours of paperwork, the bank agent informed me that Omniac would only be eligible if we had been profitable in 2008. I was furious. Who would ask for a loan if they had made money the year before?

Yet as I drove from the bank back to my struggling business, I felt strangely free. The idea that you needed to have money in order to borrow money seemed almost Kafkaesque, and somehow the realization of this absurdity released me from many of the self-imposed burdens I had been shouldering up to that point. I had spent years under the impression that the success of my company depended solely on my own effort; now I realized that I had reached the edge of my personal capacity, and that no matter how hard I worked I could not overcome the financing wall that my business was now facing.

I sent the Wells Fargo staff a card the next week. “Thank you for your time and energy,” I wrote, “it has made a world of difference for myself and my company.” I sent the note without malice or anger; the whole experience had finally let me face the reality of my situation, and I felt it was only fitting to thank the employees of the bank for the good deed they had done.

Unless you live in Albuquerque, New Mexico, and have a high school age kid you have probably never heard of Omniac Education. But for the past five years, my for-profit education firm has employed a dozen tutors and administrators who help New Mexican students prepare for college. We coach and advise kids from all parts of the economic spectrum, from wealthy high achievers who want to pay top dollar for exclusive, extensive programs to low-income students who work with us in programs subsidized by the city or state. While we are a for-profit company, we take great pride in making sure that each and every family we work with is ready for college by the time they leave us, and we are especially focused on the quality of our teachers and counselors. To that end, Omniac Education has paid out nearly half a million dollars to its employees and contractors over the last five years.

For most of the last five years I personally handled payroll for Omniac, collecting Excel sheets from tutors tracking the hours they worked, then painstakingly entering the information submitted into our accounting software before writing checks to the employees. Twice a month I would sit down to an oversized business checkbook filled with enormous, blank checks and sign away a few thousand dollars in revenues to tutors and administrators who earned every penny that they were paid. I grew to love the moment that I handed an employee a pay stub and a check: it was a tangible reminder that we had made a difference in a child’s life and that the business had provided an opportunity for someone to be gainfully employed.

This past summer, I stepped out of my role as Omniac Education’s executive director to enroll in the Master in Public Policy program at the Harvard Kennedy School.  I considered closing down the business, but I did not have the heart to pull the plug on teachers who wanted to teach and students who wanted to learn. I spent most of the first half of the year preparing everyone for my impending departure, hiring a new executive director, and training other key workers to do new jobs.

Since leaving, I have discovered that being an owner rather than an operator merely exchanges one set of challenges for another. In August, accounting problems required me to reenter dozens of transactions into our system from my apartment in Boston. Then in September, the new executive director sent me an e-mail explaining that although they had secured a large government contract for the fall, they did not have the liquidity they needed to make it through the next month. Once again, financing difficulties were proving to be Omniac Education’s Achilles’ heel.

Omniac’s finances have always been a bit precarious. I started my business the way most businesses are started in America: without enough money. I neither procured a loan nor secured a line of credit; instead, I used my last paycheck from my previous job to open a corporate account and then, for the first year, financed my new business from cash sales. At first it was exhilarating to try and figure out how to pay the bills each month, but the rush quickly turned to fear as I questioned whether I would be able to pay my employees the money they were legally owed.

It was 2008 and the following year was marked by national economic difficulties, a period that Berkeley economist Brad DeLong has described as “The Lesser Depression.” We were broke, and I was forced to fire the majority of my administrative staff. I delivered the news personally to each one of them over a cup of coffee, awkwardly explaining that as much as I wanted to keep them on, it was simply not possible. Most of my employees nodded sadly, conveying emotions that made me feel like it was me, and not my company, who was terminally ill. They moved on to other jobs, and I found myself alone in the office, trapped in the company I had built. I still had teachers to meet with kids, but managing Omniac Education became my lonely vigil.

Like so many other small business owners operating in the worst economic environment of the last seventy-five years, my waking hours were spent scheming for survival. Although the company endured and my teachers were paid, at one point, I ended up in the emergency room on the verge of a nervous breakdown, shaking uncontrollably from the stress of running a business on the verge of collapse. The doctors ran me through the MRI, showed me bright and healthy images of my brain, and told me to get some sleep. I went back to work the next day. I tried to pretend that the incident had not fazed me, but the shaking continued, and the business suffered further. It was not until I shut down our satellite offices in Arizona and brought the business back into the black that I was able to rest easy.

I recently spoke on the phone with a fellow small business owner, Jennifer Hartman. A former stay-at-home mom, Jennifer now owns two snack bars located in call centers in Albuquerque. We met a few years ago at a networking event called “Connect 4 Lunch” and have kept in steady contact ever since. Jennifer’s daughter is completing high school, and we talk often about her progress toward college.

Before opening her snack bars, Jennifer worked for McDonald’s, on and off, for about seven years. Like me, she opened her business without any formal training, but unlike me, she was unable to personally cover the cost of getting her business running and struggled to raise the $800 required to open up her location.

Unsure of where to find the money, she turned to the place of last resort: her own precious valuables. A few years back she had been given a bracelet from her grandmother that was an agglomeration of different kinds of gold. Although it was not worth very much money, selling it could cover the small startup cost of the snack bar. “I was really upset, thinking ‘Is this the right thing to do?’” she told me in our conversation. “I talked to my grandmother, luckily she was still alive. . . . She said ‘Just sell it. It’s fine.  I want you to have money. I wish it was more.’”

Using the proceeds from the bracelet, Jennifer was able to start her small business in 2008, the first year of the recession. Ironically, her business’s success owed much to the dire market conditions that had made financing her business so difficult.  Her product line—what she calls “moderately priced snack meals” but what is essentially cheap food with low profit margins—has been popular with call center employees, in part, because of the poor state of the economy. Many of these employees have been forced to buy Jennifer’s cheaper fare because they are paid so little that they can spare no more than a few dollars for lunch.

Jennifer told me that the demands of her business do not allow for time to keep up with politics. However, she does believe the status quo is untenable and that much of the blame can be laid on the financial establishment. “The corruption in our own government is despicable,” she told me. “It’s what’s driven us, I believe, into this recession, with the government and the bankers, the people with all the money.”

Financing problems like Jennifer’s and mine are all too common for small businesses in today’s current climate. In the face of the recession, most banks view us as too risky and unprofitable for a loan. Consequently, many businesses are forced to scrape by through creative means: either by scraping every last penny available from our personal accounts or, as in Jennifer’s case, selling our family’s past for a shot at a better future. While larger firms continue to enjoy the deep pockets of committed financiers, many small businesses close down not because their business model is unviable but because no financing is available. Of course, in an ideal world, this would not be the case. We hope that our policies reward and protect entrepreneurs who work to make a real difference in the world and who care if their business offers something of value to their community, regardless of the size of the business in question.

Yet even if we expand opportunities for small business financing, the cold truth is that businesses like mine and Jennifer’s are not going to fill the gaping hole that years of deregulation and financial management punched in our economy. While securing greater lines of credit or reducing the payroll tax would surely help a few small business owners keep their doors open, businesses of all sizes will not be truly sustainable until we substantially increase and regularize consumer demand. What we need is an influx of customers—regular people with money in their pockets—to build great businesses and hire more employees. Anything short of a comprehensive solution to get the economy moving again is a Band-Aid for our problems. That means reregulating the banks so that it is more profitable to invest money in actual businesses than in unproductive financial instruments and enacting public policies that produce middle-class jobs that leave people with enough money to pay for our services. Washington needs to acknowledge that it is not higher taxes or regulatory uncertainty but a simple lack of demand that keeps small businesses like mine and Jennifer’s on a knife’s edge.

As our nation takes steps to address the growing inequality between those who get too little and those who have everything, I am stunned by the lack of American leadership. Why is the Republican party so eager to further deregulate financial markets that have become so diseased and sickly that they no longer function as real markets? Why is our president, a man who comes from modest means and has dedicated his life to public service, so unwilling to confront bankers who have done so little to better the lot of their fellow man? And why are we, a people who once prided ourselves on our almost unhinged ability to dream of a better tomorrow, so willing to settle for so little from those we place on the thrones of power?

It should be obvious now that what is good for big business and the 1 percent may not be good for the rest of the American economy. A world that caters to large firms and the economies of scale they enjoy may be toxic to the people at the lowest rung of the business ladder. The denial of that fact has meant that we have increasingly balanced the economy on the backs of people who have worked too hard and too long for too little. Washington owes us a more honest assessment.

This article was originally published in the 2012 edition of the Kennedy School Review.

Mark Truman is a 2013 Master in Public Policy candidate at the John F. Kennedy School of Government at Harvard University. After spending the last five years working in for-profit education, Truman is now committed to community development and organization.

Photo source here.