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Puerto Rico: Big challenges for small businesses

Running a small business is hard. It's even harder on an island facing an $72 billion debt crisis. (Tweet This)

Rosio Contreras waits for customers at Cafe Rosio in San Juan a day after Gov. Alejandro Garcia Padilla gave a televised speech regarding the government's $72 billion debt.
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Rosio Contreras waits for customers at Cafe Rosio in San Juan a day after Gov. Alejandro Garcia Padilla gave a televised speech regarding the government's $72 billion debt.

Aside from the general state of economic uncertainty gripping the island, Puerto Rico faces new taxes—some already in effect, others being considered—that affect small firms and their customers. And those problems come on top of other disadvantages related to shipping that already affected the commonwealth before the crisis came into play.

"The cost of living in Puerto Rico has already risen since July 1," said Heidie Calero, president and CEO of H. Calero Consulting Group, a San Juan-based firm that works on business and economic issues.

On July 1, a new law raised the commonwealth's total sales tax from 7 percent to 11.5 percent. The higher tax was implemented in order to raise $1.2 billion in revenue, but Puerto Rico now has a higher sales tax than any other U.S. state or territory.

Small and medium-size businesses may deal with more taxes come April 2016, as the government is expected to shift to a value-added tax by that date, according to The Associated Press.

A value-added tax (VAT) is collected at each stage of a product's supply chain, whereas a sales tax is collected only when a product is sold. It's unclear how high that tax would be. Puerto Rico's lawmakers in April struck down a bill that would have implemented a 16 percent VAT.

Calero added that a value-added tax would require small-to-medium size businesses to install new software and hardware in order to collect and maintain the appropriate records. "There are higher costs for in the horizon, and businesses have to prepare for it now," Calero said.

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Smaller firms also have to contend with the possibility that a solution to the island's economic troubles may not be found, especially since Gov. Alejandro García Padilla told The New York Times that Puerto Rico's debt is unpayable.

"It raises a whole other degree of uncertainty under which they operate," said Gerry Durr, senior municipal credit analyst at Wilmington Trust.

Garcia Padilla's comments came out at roughly the same time as a report authored by Anne Krueger, the former deputy managing director of the International Monetary Fund, which provides several suggestions for jump-starting Puerto Rico's stagnant economy, including exempting the territory from the Merchant Maritime Act of 1920, better known as the Jones Act.

"Exempting Puerto Rico from the U.S. Jones Act could significantly reduce transport costs and open up new sectors for future growth. In no mainland state does the Jones Act have so profound an effect on the cost structure as in Puerto Rico." -Anne Krueger, former deputy managing director, IMF

The Jones Act requires all transport between U.S. ports to be executed on U.S.-flagged vessels. Durr estimated that it doubles import and export costs.

"Exempting Puerto Rico from the U.S. Jones Act could significantly reduce transport costs and open up new sectors for future growth," Krueger's report said. "In no mainland state does the Jones Act have so profound an effect on the cost structure as in Puerto Rico."

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The crisis has also made it harder for businesses to obtain financing through the larger commercial banks in island, said Carmen Marti, executive director of Puerto Rico's Small Business and Technology Development Center.

That said, credit unions in Puerto Rico have stepped in to lend to these smaller businesses, Marti added.

"There are some challenges, but we've seen many small businesses grow," she said, pointing to companies in the health, tourism and agriculture sectors.