Why more small businesses should tap into low-cost federal loans
The couple started Newity as a virtual business two years ago, but recently opened offices in the West Loop, although only a fraction of their 80 full-time employees travel to work there. A condensed and edited interview follows:
Crain’s: why start as a virtual practice?
The hedge : It certainly breaks down one of the barriers to starting a business. Covering even short-term rental costs can be a big investment for a small business. Last year we signed a lease for 5,000 square feet of space, but a year earlier it would have seemed risky. What we learned is that Zoom is an amazing tool.
The PPP program was not launched as a gift. It now appears that most borrowers have had their PPP loans canceled by the government. What do you see?
At our peak, we were managing 115,000 PPP loans through 150 different banks. At first I thought 75% of PPP loans would be canceled by the government and 25% would be repaid. But more recently, my estimate is that almost 95% of loans have been forgiven. Of what’s left, I’d say about 20% to 25% are in default. Thus, on the entire portfolio, about 3 to 4% of the loans are actually repaid by the borrowers.
Critics suggest the government poured too much money into businesses, helping to trigger the inflation that followed.
Times were so uncertain two years ago that it seemed the government had to do it. Put too little money into PPPs and other programs and you run the risk of a deep recession, with far worse consequences than what we are facing now. Without help, most restaurants would have been wiped out and permanently bankrupt.
I own a gym in River North called Mag Mile CrossFit which had to close for a while. We got $20,000 in P3s which allowed us to keep our two employees working. A total of 10 million PPP loans have been issued, but I suspect nearly 40 million more US businesses have not received the money. Many of them could have been eligible.
So now you’ve taken on a new identity as an SBA-backed 7(a) loan manager. But you don’t work with bigger companies and bigger banks there?
We focus on customers with annual sales less than $1 million. There is a niche in 7(a) that makes microloans of up to $25,000 available for working capital for these small businesses. However, very few of these loans are processed. Too many business owners get away with credit card loans carrying interest rates well above 20%.
The SBA offers loans at a rate closer to 6%. The difference is huge. But this program doesn’t get many reviews and many people don’t even know it exists. We went back to our PPP clients, 80% of whom have loans under $100,000 from the government, to promote this. We think many of them are eligible.
What else does your business do?
Later this summer, we will move into the market for working capital loans of up to $250,000, also secured under SBA 7(a). The rules are a bit different from the smaller program, but we think that’s an underserved market right now.
With inflation soaring and a potential recession looming, is now a good time for small businesses to take on debt?
Business owners should focus on consolidating their balance sheets with longer-term, lower-cost debt. At the same time, they should reduce their cost structure where they can.
Businesses are discovering that they need money – more capital – to better pay their workers. In our gym, we gave raises to employees, but we also raised our prices for the first time in three years by 10%. Nobody complained.