The Cost of Capital Is Surging
And with Interest rates on SBA loans hitting double-digits, that’s especially true for smaller businesses.
Good Morning!
Here are today’s highlights:
Are we really going to ban an app that so many businesses depend upon?
What you need to know about the IRS’s search for ERTC fraud.
How the largest restaurant franchisee sets its prices.
The default deadline looms ever closer.
21 HATS PROGRAMMING NOTE
The Dashboard podcast will be published a little later than usual today: In it, Gene Marks talks about Montana’s TikTok ban, what business owners need to know about the ERTC and fraud, and why bankruptcies are skyrocketing.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
FINANCE
For smaller businesses, the cost of capital has surged: “The Federal Reserve’s rate-raising campaign has put a notable crimp in financing for companies with smaller payrolls and valuations. The average rate for a loan from the U.S. Small Business Administration, which historically costs less than a bank loan, has reached double-digits, driving many small firms to borrow less. Those include Tim McConnehey’s Izzard Ink publishing company in Salt Lake City. McConnehey had previously planned to beef up Izzard’s technology platforms and increase the company’s offerings for business-to-business sales, in part by tripling the number of employees and bringing on more freelance editors, designers, and coders this year. Instead, he has focused on eliminating his company’s debt and scaling back growth, as the interest rate on the line of credit he holds at his bank increased to 10.62 percent from 5.62 percent over the past year. ‘I’m leery of making any kind of business investment right now,’ McConnehey said.”
“Small businesses had been the source of all of the net job growth in the U.S. between February 2020 and the end of 2022, defying the Fed’s efforts to cool the economy. This year, smaller companies are accounting for an increasing share of layoffs.”
“U.S. companies with between one and nine employees laid off or fired 341,000 workers in March, more than twice as many as in February, according to data from the government’s Job Openings and Labor Turnover Survey. That was the highest number of layoffs and discharges since May 2020 and four times as many as these companies reported in March 2022.”
“A recent survey of small-business owners from Goldman Sachs 10,000 Small Businesses Voices found 77 percent reporting they are concerned about their ability to access capital. The investment bank called it a ‘stunning shift’ from one year ago, when 77 percent of respondents said they were confident in their ability to access capital.” READ MORE
MARKETING
Montana is banning TikTok, and businesses are not happy: “Montana governor Greg Gianforte signed a bill on Wednesday that would ban sales on and use of TikTok within the state as of January 1, 2024. It's the most extreme prohibition in the country, and one experts say will land in the courts. It immediately drew opposition—and no small amount of nail-biting—from small-business owners in Montana, many of whom have been fighting the bill, formerly known as SB 419, for months. According to TikTok, 6,000 small businesses in Montana use the app.”
“Taylor Reed, a home painter and TikTok content creator, has said the organic reach of a post on TikTok is more promising for small businesses in terms of finding new customers. When he posts on Facebook, it might get 700 views, but on TikTok, he says, it might get 17,000 or 70,000.”
“‘I'm a little scared, to be honest,’ says Keri Williams, the founder and artisan behind Billings, Montana-based the Branded Pinto. TikTok itself initially inspired Williams to turn her hobby of burning hand-drawn designs into wool hats, which she calls pyrography, into a business. She registered the name after her short videos of her hobby took off virally on TikTok in October 2021.”
“‘TikTok is literally 90 percent of my business,’ she says. ‘I've had orders from Ireland and from Australia, and I'd never have found customers there without it.’ The Branded Pinto has 50,000 followers on TikTok, and just 2,000 on Instagram, which Williams says is her second-best customer-acquisition channel.” READ MORE
PRICING
Here’s how America’s largest restaurant franchisee decides to raise prices: “San Francisco-based Flynn [Restaurant Group], considered the largest U.S. restaurant franchisee with more than $4 billion in annual sales, is harnessing reams of internal and competitor data to take a more surgical approach to selling fast food and sit-down meals. The company’s two-year-old data team has sought to better track what competitors are charging. And as inflation wears on consumers, Flynn is also studying whether prices can come down for certain items without hurting profit. ‘It speaks to the growing sophistication of our business. There’s a lot of money at stake,’ said Greg Flynn, who owns more than 2,350 restaurants spanning Applebee’s, Taco Bell, Panera Bread, Arby’s, Wendy’s, and Pizza Hut chains.”
“Pandemic-driven growth in online ordering helped the effort, Mr. Bellamy said, making more of rivals’ menus publicly available and allowing Flynn to monitor prices down to individual items sold by a chain and across different markets.”
“The data team discovered instances when Flynn’s restaurant managers had boosted prices too much for individual items or too little compared with other types of food. At Flynn’s roughly 290 Taco Bell restaurants, for example, some stores had increased prices for the brand’s popular Doritos Locos Tacos by around a dollar more than the regular version, and some customers were starting to resist, executives said.”
“Flynn said it pays millions of dollars a year for its data analytics team and its infrastructure, but executives said the results are worth it. Company profit increased around 35 percent in the first three months of this year compared with 2022, and executives attributed some of the gain to its data team.” READ MORE
TAXES
The IRS is moving slowly on ERTC claims, in part because it’s finding a lot of fraud: “The Internal Revenue Service has paid out more than $150 billion amid a surge of claims for an expired pandemic-era tax break for small businesses. Agency officials are wading through another roughly 800,000 returns that need processing—and more are still arriving. The continued flood of claims for the employee-retention tax credit is straining the IRS, which is caught between pressure to process refunds quickly and concerns about paying money that businesses don’t deserve.”
“The agency has repeatedly warned about advisers who are encouraging employers to file returns that stretch or flout eligibility requirements. Small business owners, meanwhile, complain about monthslong waits for much-needed tax refunds.”
“Holly Thalman, the owner of K. Charles & Co. Salons in San Antonio, said she received her first tax credit payment, $329,000, a month after filing a request in early 2021. But it took the IRS nearly 10 months to process one subsequent request and more than 18 months to process two others. The IRS still hasn’t acted on the final request, for an additional $297,000, filed last July.”
“Thalman said she ended up selling her vacation home and taking out a high-interest loan to pay for equipment and renovations at a salon she had decided to expand because she expected the IRS to process later requests as quickly as it did the first one. ‘It was very tight, very scary,’ said Thalman, whose three salons have a total of 70 employees.” READ MORE
HUMAN RESOURCES
The percentage of immigrants in the U.S. labor force has hit a new high: “People born outside the U.S. made up 18.1 percent of the overall labor force, up from 17.4 percent the prior year and the highest level in data back to 1996, the Labor Department said in its annual report on foreign-born workers. The number of immigrants in the labor force—those working or actively looking for jobs—rose by 1.8 million, or 6.3 percent, to 29.8 million in 2022. More foreign-born people joined the labor force than native-born Americans, accounting for more than half of the 3.1 million overall gain last year, the report said. There were roughly 164 million workers age 16 or older in the U.S. labor force last year. Sluggish U.S. population growth and accelerating baby-boomer retirements during the pandemic created labor shortages in many industries, increasing job opportunities for foreign-born workers.”
“The Labor Department’s report was based on a monthly survey of 60,000 households and doesn’t break down foreign-born workers by country of origin or legal status. The figures include legally admitted immigrants, refugees, temporary residents such as students and temporary workers, and immigrants lacking permanent legal status.”
“Foreign-born people increased their share of the workforce despite a pandemic slowdown in immigration that left the U.S. with fewer immigrants than if pre-pandemic trends had continued. By the end of 2021, the U.S. population had around two million fewer people than it would have had if not for the pandemic, according to a 2022 Goldman Sachs analysis, and the labor force had around 1.6 million fewer. Immigration has rebounded since then.”
“Foreign-born workers are often concentrated in lower-paying industries because of skills, education or language barriers, with notable exceptions in fields such as tech and medicine.” READ MORE
TRAVEL
The NAACP has issued a warning about travel to Florida: “The National Association for the Advancement of Colored People on Saturday issued a travel advisory for Florida, saying that under Gov. Ron DeSantis the state has become ‘openly hostile toward African Americans, people of color and LGBTQ+ individuals.’ The NAACP joins the League of United Latin American Citizens, a civil rights organization that issued a Florida travel warning on Wednesday, and Equality Florida, a gay rights advocacy group that issued one last month. The NAACP’s travel advisory does not explicitly recommend against travel to Florida. But it urges travelers to be aware of the state’s politics, and the organization said that the governor and the state of Florida have shown that African Americans are not welcome in the state of Florida.”
“Disney on Thursday announced it was backing off a plan to build an office complex in Orlando that would have cost about $1 billion and brought thousands of jobs to the state.” READ MORE
THE ECONOMY
Businesses are beginning to panic about the looming default: “Rosemary Swierk’s company builds about a dozen government buildings a year: Warehouses for helicopter parts. Vehicle maintenance facilities. Low-rises for any number of federal agencies. Now, though, her biggest client — the federal government, which supplies about half of her Chicago-area firm’s annual revenue — has also become her biggest liability. With U.S. lawmakers locked in a battle over raising the debt ceiling, small business owners like Swierk say their optimism that Congress will soon strike a deal has given way to panic. They are beginning to brace for a worst-case scenario of delayed payments, stalled projects and sweeping layoffs if the nation defaults.”
“‘This really has the potential to be catastrophic,’ said Swierk, president of Direct Steel and Construction. ‘If we have to shut down a project, that’s 300 people who aren’t working anymore. Then what do we do? Do we keep people on payroll? Do we lay them off?’”
“Karns Quality Foods, which has 10 supermarkets in southern Pennsylvania, is steeling for a potential disruption in sales if food stamps, social security checks and other federal benefits are delayed in early June because of a failure to reach a debt deal.”
“About 10 percent of the company’s transactions are funded with federal assistance, Supplemental Nutrition Assistance Program, and many shoppers rely on social security checks or are government employees.” READ MORE
SOCIAL MEDIA
Welcome to the world of influencer barbers: “When he’s on the road — usually at least one day a week — [Marcus] Harvey follows a fine-tuned routine. He flies Delta Air Lines and picks a window seat, typically in first class. He uses FaceTime to connect with his young children, Nova and Kingsley, every night from his hotel and always packs his supplies into the same black hard-shell carry-on. ‘My barbershop is in my bag,’ said Mr. Harvey, who grew up in Atlanta and got his first job as a teenager sweeping up hair clippings at a shop just outside the city.”
“Between his celebrity clients, classes that he teaches to help other barbers build their brands, and his contracts with Bevel and a booking management company, Squire — both of which he frequently tags on his Instagram profile — Mr. Harvey typically brings in around $500,000 a year, he said.”
“Last year, Mr. Harvey spent several weeks in Europe with Nas during his world tour, and these days he sometimes makes house calls to the rapper in New York and Los Angeles. It’s a reality beyond what he had ever imagined. ‘A dream,’ Mr. Harvey said.”
“Powered by social media and word-of-mouth recommendations among V.I.P.s, the barbers have transformed what was once a stationary, monotonous job with modest pay — a trade group estimates that barbers in the United States make $36,000 a year on average — into six-figure salaries, whirlwind travel, and a peek from the periphery into the world of celebrities and pro athletes.”
“The barbers are full-fledged influencers but also confidants to their clients — sports stars, hip-hop legends, and actors — and although their schedules and prices have changed, they still strive to offer the same thing they got from going to the barbershop on weekends as boys: community and consistency.” READ MORE
PROFILE
A former NFL football player, Al “Bubba” Baker, thought “Shark Tank” might launch his barbecue empire: “After the usual shark banter and grilling, Baker accepted fashion mogul Daymond John’s offer: $300,000 in return for a 30 percent cut of the company (over Canadian multimillionaire Kevin O’Leary’s play: $300,000 for a 49 percent stake), contingent on finding a licensing deal with a large meat processor. Within three years, Baker and his Bubba’s Q Boneless Baby Back Ribs were being promoted on the show and various press accounts as one of the biggest ‘Shark Tank’ success stories, generating $16 million in revenue. During a ‘Shark Date’ update episode, John said of Baker’s ribs, ‘I still believe that this will potentially be my biggest deal ever.’ However, the Bakers say the reality that unfolded was far different. They say they’ve received just $659,653, barely 4 percent of the business’ publicized revenue.”
“The Bakers accuse John and some of his associates and partners — including one former contestant facing felony charges — of misleading them, trying to take over their business and depriving them of the profits from potentially lucrative partnerships.”
“According to the Bakers, John and his representatives ceased communicating with them until last month, when The Times made inquiries, and stopped promoting a product that once sold in 1,400 locations and is now hard to find.”
“Baker’s big plans for success and riches have stalled, and legal battles have bled his family’s savings. Baker has shuttered his restaurant; after renting out his house, he was forced to sell it at a loss, and his truck was repossessed.” READ MORE
THE 21 HATS PODCAST
Marketing Workshop: I Didn’t Know It Was Going to Work: This week, Shawn Busse and Loren Feldman talk to John Garrett about his contrarian approach to newspapers, marketing, and competition. Garrett has built a Texas-based chain of print newspapers that has managed to outcompete established news organizations and digital platforms for both community engagement and local advertising. Not surprisingly, when he first took out a $39,000 credit card loan in 2005 and started telling people that his business model would feature a monthly print publication that he would mail to everyone in his target communities for free, he didn’t get a lot of congratulations. And not everything he’s tried has worked. An expansion into Arizona, Tennessee, and Georgia, for example, failed early in the pandemic. But almost 20 years after its debut, a period during which most local publications have been in retreat, Community Impact is thriving. And from his seat as a publisher, Garrett offers a perspective on marketing that any business owner would be wise to consider.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren