I assume nothing else with her lemonade stand was done “legally”.  Let’s determine the costs involved to setup her lemonade stand if she were to do it legitimately for the event:

• Incorporation Documents and Seal – $139 (from LegalZoom)
• Oregon Incorporation Fee – $50 (paid yearly)
• Temporary Restaurant License – $120
• Kool-Aid Drink Mix, Sugar Sweetened Lemonade, 20-Ounce Containers (Pack of 6) – $23.14
• 5 Bags of Ice – $20 (I’ve seen higher)

I’m sure I’m missing other permits and legal fees, but you get the idea.  Lets not forget she’s technically underage and also subject to child labor laws (for this exercise I’ll assume she’s of legal age).  So for a one day event (that was only open from 6p till 10p) at maximum would have to outlay $352.14, or assuming she’s already in business $283.14. The price set per drink (according to the photo) was set to $0.50 per drink.  To break even with the up-front costs, she would have to sell at least 566 drinks.  Worst case she would need to sell 704 drinks.  With those numbers, it’s highly unlikely she would sell that many in such a short time frame.  She probably would be lucky to sell $50 worth of lemonade.  It could be said the complex rules, fees and regulations makes the stand unprofitable.  With any entrepreneur one of three things would occur; either the price would need to increase, find a way to increase sales, or not pursue the business at all.  So is the license of $120 appropriate for selling lemonade? When was the last news report of someone getting sick from a lemonade stand (fake lemonade no less)?

Now you know why it costs $5.00 for a drink at a state fair.  The raw materials to make the drinks cost nowhere near the fees to be in legal compliance.  Of course the larger the business the less these costs become relevant.  For a child, or an adult for that matter, who is trying to make a few extra dollars this can make or break the deal.

The inspector of course stated, “Our role is to protect the public”. Their argument is it’s important to regulate and monitor the quality and cleanliness of the businesses selling food to the public.  Are they really protecting the public in this case?  In most cases, it’s common sense when picking a food vendor.  After all, you don’t have a food inspector reviewing your home kitchen.  Julie’s mom said it best in the article “It’s gotten to the point where they need to be in all of our decisions. They don’t trust us to make good choices on our own.”  I’m obviously not stating a completely free “for-all” market.  Some regulation is needed but inhibiting commerce, especially things the general public can make a reasonable decision on, should be left alone.

Of course more fees, rules and regulations don’t affect large multi-national businesses as much as small businesses.  They are already established and have a large infrastructure to support the weight of these issues. They have a staff of lawyers, accountants and assistants to help manage the legal red tape. Things like new IRS 1099 requirement in the Obamacare law will do nothing to help small business.

Here are five simple bullet points that the Obama administration could do to help small businesses:

• Make it easy to create a business.  The process should be quick easy and low cost.
• Simplify taxes.  Create a flat tax for businesses.
• Don’t constantly change rules and regulations.  Businesses hate changes because this causes unknowns in their profits.  From this causes delays in new business ventures.
• Stop vilifying “Joe the Plumbers”, and how they must give their “fair share” to others.  After all, they must take all of the risk, should they not get rewarded? Taxing the “rich” in most cases is taxing small business owners. Most rich today are first generation wealthy.  They did not inherit their wealth from a trust fund.
• Offer to assist in job creation.  This can include tax cuts, but can be other incentives and deregulation.

Instead, at least from my vantage point, our government is doing the exact opposite of all of these items. Hurting small business growth and creation, does nothing to help with unemployment.  So I’m not seeing unemployment lowering anytime soon unless things change.  Until then, expect slow, low or no growth in our economy.

Update: Oregon County Apologizes to the 7-Year-Old girl. It appears this issue is not that uncommon because a week ago a similar event similar was reported in San Francisco.

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I too think it’s important to teach children about money, and not rely on our public education system for any insight.  During the interview on how the financial reform law will help the general public, the topic wandered into the financial education of his children.

President Obama stated, “They’re starting to get old enough where they may be able earn some money baby-sitting. They’ve got their own savings accounts.”  Obama, like president Jimmy Carter when he walked to the White House after inauguration, is trying to appear he still lives like the common man.  To be president of the most powerful nation, you are anything but common.  His life, even if he is speaking from naivety and not to his political base, will never be like pre-president Obama.  If Obama’s children really go out and baby-sit for a family, don’t you think the secret service would chaperone?  All for a $10/hour baby-sitting job so his children get that “teachable moment”.  Lets not forget of course at the taxpayer’s expense no less.  So remind me again what is Obama teaching them?  I assume his children part-time activities will be included the 3.6 million jobs created or “saved”.

He also goes on to say, “That if they got $100.00 in their bank account at 2-3% for six months this is how much money they’ll have at the end of it”.   The Obama children must get a special CD rate directly from the Federal Reserve with that political pull he has.  As I see the highest 6 month CD rate offered nationally is currently only 1.50% APY, and shows how much in touch he’s with the common man.

Obama then goes on to say, “I mean, it was only a few years ago when, you know, we had high credit card balances, we had two little kids that we were trying to figure out how to save enough for college.”   Records show the Obama household was making a decent salary since 2000, even before becoming the rock star book writer. In other words, depending upon their tax-filing year, their household income placed them within the top 1-10% in the nation.  He’s one of those rich people that the administration likes to vilify.  The Obama’s were not struggling by any means, and if planned properly should have a sizable nest egg for their children’s education.

It’s telling that Obama had such high consumer debt (his words not mine), even with such a high salary. Maybe the Obama family fit into “The Millionaire Next Door” profile of high income, but low net worth.  I assume he’s gotten assistance with his debt from one of those debt counselor ads you see on TV. Maybe it’s time he sat down with one of those counselors to help him with our ever-growing national debt and large deficits.  Granted the previous administration was no slouch with Uncle Sam’s credit card either.

Obama also says, “We were still thinking about our own retirement and looking at our retirement accounts and wondering are we going to be able to get enough assets in there to make sure we’re protected.”  Based upon their 2009 income statement alone, most common folk would have enough to a live conformable retirement.

Then again maybe I’m being too harsh on the President.  After all he called the bottom of the stock in March 2009 and stated it was a great time to invest.  I’ll have to take Obama’s business and investing advice from now on since he’s a big proponent of the free market right?

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On a web page sponsored by the payday loan companies they discuss the myth’s vs. realities of payday loans.  Obviously their statements are somewhat biased, and should be taken with a grain of salt.  Out all of the myths the one that caught my eye was:

Payday lenders’ high fees help the industry make billions in profits.
Small denomination, short-term loans are very expensive to originate and maintain, which is why most banks no longer offer the product. According to the Federal Reserve Banks 1999 Commercial Bank National Average Report, the cost for a small bank to originate and maintain a loan for one month is $174.

Industry critics fail to recognize that, in addition to the cost of administering the loan, payday lenders incur the normal overhead costs of running a business and paying employee salaries and benefits.

A study by the FDIC Center for Financial Research found that “operating costs lie in the range of advance fees” [collected] and that, after subtracting fixed operating costs and “unusually high rate of default losses,” payday loans “may not necessarily yield extraordinary profits. ”

Of course government leaders and the mainstream media like to vilify these companies, when in reality they are offering service to a previously ignored market.  Traditional banks stopped offering services to this group many years ago.  After all, in a free market economy, who decides if a business should stay in business?  The buying public at large.  A business couldn’t exist if it didn’t have customers who want their service.  Furthermore, if another business can offer better service (in this case a lower APY) while staying profitable, some other company will find a way to do it.  This is what competition, and the free market is all about.

Who are the customers of these payday loans, and the related industry of check cashing?  Usually lower income individuals, who either do not have the documentation (remember the Patriot Act makes banks document all accounts), or people who cannot get overdraft protection or credit cards.  These individuals are categorized as subprime borrowers.  Just like businesses with a higher risk to default on their bonds (otherwise known as junk bonds), individuals also fall under this category.  It’s interesting to note a few studies about junk bonds returns.  While the rates are high with junk bonds, the effective returns have been shown to be much lower.  Could the same apply to sub prime borrowers?

What’s the Purpose of Charging Interest?

I grant you 400% effective interest rate mentioned in the article is insane.  I do think imposed limits of 36% are somewhat fair with no direct experience in the industry.  After all, if you had a traditional bank account with overdraft or a credit card you should be able to get rates lower than 36%.  In the end though, the borrower, as long as the terms are clear, should be able to charge whatever rate they deem appropriate.  They are taking risk by giving out the loan, so they should be best qualified on what rate to charge.

Getting back to Puffington Post article it’s quite interesting some of the comments made.  The funniest and inane comment was:

The poorest of the poor shouldn’t pay any interest, they need every dollar. Risk could be managed
the way it is now, with re-payment history and credit limits.

There are two reasons why interest exists on loans:

• Time is money
• Risk to default

That’s it.  Nothing else matters.  In a perfect world everyone would pay everyone back, with on-time payments and in full.  If this was true, would this mean all loans would be at 0% APY?  No because you as the lender have a choice over other investments that would generate higher returns.

Time Is Money

This is one of the basic laws of money. Time is money, and money is time.  Having money in your hand now is worth more than in the future.  If you loan money out you expect not only the principal, but also interest.

Risk To Default

We obviously know in the real word that the faith of someone paying you back in full does not always happen. Payday loans are of the unsecured type.  In simple terms this means no asset, like a car or house, is tied to the loan should the borrower default.  With loans tied to an asset, you as the lender at least stand a chance to recoup some or all of your principal back.  If the borrower defaults on  an unsecured loan,  how can the lender make up for the loss?  A lender has only one of three ways:

1. Take a loss on your loan
2. Charge you a higher interest rate based upon your risk to default
3. Charge everyone else a higher rate to recoup the difference

So what is a lender to do in order to ensure they still make money lending?  They do one or all of the above items. TANSTAAFL (There Ain’t No Such Thing As A Free Lunch).  With my Lending Club experience, I can attest how this works.   If a person asking for a loan has defaulted, has little credit history, or cannot verify income I expect a higher interest rate on their loan.

By increasing regulation of the industry, similar to what happened during prohibition, it will go underground. The demand for these types of loans will not disappear because of increased regulation.  If you cannot get a loan via traditional means, you’ll contact real loan sharks (you know the Paulie Walnuts type).  With a loan shark you might even get a better rate.  Getting two broken legs or cement loafers is a great incentive to ensure prompt and full payment.  Bada Bing!

Readers: What do you think about payday loans? Have you ever taken one out?

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Once you realize this yourself, you’ll lead to a much happier life.  Unfairness is what makes everyone unique.  It makes you different than anyone else.  You’ll stop asking why are they richer than me?  How come my child is awful in sports?  You won’t be asking for government intervention to fix what’s “broken”.  Yet we constantly ask our politicians to help fix something that directly affects us in life because it’s unfair.

I recently watched on DVD with my four-year-old son, “The Sneetches” by Dr. Seuss.  Dr. Seuss was a rhyming rapping genius, and as a child of course I never got this.  When watching this video, the proverbial light bulb went off in my head.

The basic gist of the story: the Sneetches without stars on their stomach felt they were being treated unfairly by the ones who did.  The ones without stars met up with a man named Sylvester.  He had a machine that would allow them to also have stars by each paying $10 dollars.  Once everyone has stars, the ones that had stars initially wanted their stars removed by Sylvester.  It could be said that Sylvester is our government.  I won’t give away the rest of the suspenseful story, but I suggest you watch it.  For the complete video you can check it out on YouTube.

Life is full of unfairness.  Here are some examples in the real world:

• US government employees make more than the private sector
• Someone else is richer than you
• Your child has a learning disability
• You are born in North Korea (sad part they don’t realize it)
• Too young or too old
• Too ugly or too pretty (yes being too good looking has issues)

All of these are unfortunate things, but that’s the way things are.  Those were the cards you were dealt with in life.  It’s your decision how you play your hand.  I’m not saying I don’t have compassion for these issues.  I do, I really do have compassion for others.  My point is instead of complaining, use the unfairness in your life, and work around them.  Use what could be considered a disadvantage, to your advantage.  There have been many examples throughout history of people who have, against all odds, made themselves into a success story.  What made them unique was the reason for their success, not failure.  They didn’t blame others for their issues, and instead took action regardless of the circumstances.  We need to become the best we can be, and not compare ourselves to others.

Entitlement

Related to unfairness is entitlement.  I’ll send out the all points bulletin, but you aren’t entitled to anything.  Just because you worked hard all of your life doesn’t mean you deserve anything.  Even though every child wins an award in an elementary school sporting event, that’s not how the world works.  Some examples:

• You already got two years of unemployment benefits, does not mean you are entitled for more.
• If I don’t listen to what my existing or future customers want does not entitle me to still be in business.
• You don’t deserve a corner office when just getting out of college.
• The senator, who doesn’t listen to their constituents, isn’t entitled to their position come elections.
• You aren’t entitled to own a home.
• You aren’t entitled to an education.
• You are most definitely are not entitled to free health care.

Entitlement to me means everyone deserves the same quality of service for the same price (or “free”).  We all know in economic reality there is no such thing as a free lunch.  Some way, somehow someone has to pay for the services.  Since I’m in the spirit of St. Patrick’s Day, there aren’t magical leprechauns dancing around a pot of gold so an entitlement can exist (or maybe they do).  Even communist and socialist countries have shown that people still get treated unfairly with entitlements.  For example, it’s safe to assume in his failing health, Fidel Castro gets better health care than the average person within his country.  Everyone in Cuba is entitled to the same health care, but not everyone gets treated equally.  In the end, entitlement leads to mediocrity, which leads to overall poor service, and lack of innovation.

Readers what do you think?  Do you think I’m a heartless bastard who has no care for his fellow man? Or do I just accept the facts of life, and deal with it in a rational way?

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It seemed like it was only yesterday they increased the limit.  Oh wait it was.  What seems like eons ago, but was December 24th 2009, Congress raised the debt ceiling 12.4 trillion.  It’s the Christmas gift that keeps giving back for many generations to come.  Moody’s is again threatening to decrease our AAA rating.  Being always late the party, by the time Moody’s actually decreases the U.S. credit rating it will become already accepted fact.  Some analysts are saying we should already be downgraded, but we do have some reasons why we haven’t been yet.  We are still the world’s reserve currency, but for how long who knows.  At least the last crisis people flocked, like seagulls, to treasury bonds.  The next round, we might not be so lucky.  Who is going to loan us additional money when other countries are tapped out.  Countries like China have also threatened to decrease purchasing more treasuries, and from some news reports appear to be doing this already.  Brother can you spare a trillion?

Readers what do you think, we as owners of this country should do? Should we do anything?  Am I just uneducated about Keynesian economics, and this is nothing to worry about?

If you believe what I say is true, how can we ensure our deficit is reduced, and decrease our spending.  Keep the conversation apolitical.  I do not want to see comments blaming Bush, Obama, Pelosi or any political party.  Let’s look forward, and what action items we can do as a people to get this under control.

Let me circle back to the purpose of this blog – investing and small business.  Brett Arends from the WSJ has a good article on ways you can protect yourself financially.

Readers, do you have any other recommendations to help protect yourself financially?

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