Capital Gap

Bridging Fast Growth
Alix StuartAugust 1, 2001

Too tiny for venture capitalists or banks and too risky for angel investors, promising young businesses are often hamstrung by cash needs, despite climbing profits. To help solve the dilemma, a coalition of business trade organizations, led by Tatum CFO Partners LLP, is hoping Congress will agree that Uncle Sam can wait when it comes to extracting taxes from newly profitable businesses.

“In just about every business, there’s a point where the cash flow turns negative even though the company is profitable, and a capital gap emerges,” says Doug Tatum, CEO of the eponymous 300-person CFO practice. The needed capital infusion, usually $500,000 to $1.5 million, is too small for traditional capital markets, he says, but too large to be raised through personal loans. What’s more, the tax burden that accompanies profits can be the straw that breaks the camel’s back. “Companies are so fragile when the capital gap emerges that the cash requirements of the taxes can jeopardize the profit momentum,” he says.

The trade groups are working with House of Representatives Small Business Committee members Jim DeMint (R­S.C.) and Brian Baird (D­Wash.) on the Bridge Act bill. If passed, the bill would allow high-growth firms with annual sales below $10 million to bank up to $250,000 in owed taxes for future borrowing or loan collateral. The firms would pay the federal interest rate for such borrowing, and would have up to four years to repay the deferred taxes, along with accrued interest. To qualify as high growth, a firm’s current annual gross receipts must be at least 10 percent higher than its average receipts for the previous two years, and must use accrual accounting. All deferred taxes would be due immediately in the event of a sale or merger.

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Patrick Von Bargen, of the National Commission on Entrepreneurship, estimates the measure could benefit up to 200,000 high-growth firms, especially “knowledge-intensive” firms that own few physical assets they can secure loans against. A side benefit of the measure, he notes, is the opportunity for young companies to establish bank relationships early, giving nascent businesses the chance to secure loans more easily. –Alix Nyberg