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The SBA Is Making Changes
It’s planning to use new technology to take over vetting the loan eligibility of small businesses. Meanwhile, banks are increasingly confronting an old-fashioned problem: check fraud.
Here are today’s highlights:
As the debt ceiling looms, businesses are being advised to prepare for catastrophe.
A long-time CEO attributes his company’s reduction in recruitment costs, its decline in absences, and its higher employee engagement to a four-day work week.
Suddenly, says a restaurant critic, the best pizzas are coming from pop-up pizzerias.
As cities evolve, they should do more to level the playing field for brick-and-mortar businesses.
The SBA says it wants to encourage more lending: “One big change — among a series set to be announced later Thursday — is the SBA will start determining whether a business is eligible for loans in its 7(a) and 504 programs, taking the burden and responsibility from banks and allowing them to focus on making the loans, the agency said. The agency said it would use new in-house technology to vet small businesses for loans starting Aug. 1, 2023, giving it time to iron out the specifics. The goal is to help boost the smallest of loans, the agency said. The change comes at a time when small businesses are bracing for a capital crunch thanks to turmoil in the banking sector, higher interest rates, and economic uncertainty.”
“The agency will also start using a combination of advanced data analytics, third-party data checks, and artificial intelligence tools to review all loans it guarantees in its loan programs for fraud.”
“Currently, lenders are expected to run fraud checks and to approve loans without the agency checking for indicators of fraud up front.
“The focus on small-dollar loans comes as the average size of 7(a) loans approved each year has increased, but the number of loans has dipped. In fiscal 2010, the year the agency increased its loan limit on the 7(a) program from $2 million to $5 million, the average loan size approved was $263,958.”
“In fiscal 2019, that had climbed to $446,487, and spiked during the pandemic to $704,581 in fiscal 2021. It fell to $538,903 in fiscal 2022.” READ MORE
Ami Kassar will testify before Congress next week about the SBA’s planned changes (spoiler alert: he’s not a fan): “I am honored to share that I have been invited to testify at the House Small Business Committee next Wednesday at 10 a.m. ET to discuss my concerns about the currently planned changes to the SBA program. While I have visited Washington, D.C. over the years, including lobbying meetings with senators, presentations to the Federal Reserve, and meetings with Treasury Department and White House officials, testifying in front of Congress is a first for me. I take the responsibility seriously and hope to add my two cents to the debate about widespread proposed changes to the SBA program.” READ MORE
Banks are grappling with a big rise in old-fashioned check fraud: “It took California businesswoman Jennifer Krempp one day to realize someone had stolen and fraudulently cashed several checks she mailed on behalf of her family plumbing company. Three months later, she is still waiting to get all her money back. ‘I’m out almost $5,000 on one check,’ said Mrs. Krempp, 47 years old, who along with her husband runs Mann Plumbing out of El Cajon, a city about 17 miles northeast of San Diego.”
“She isn’t the only one anxious to recoup the money—so is her bank, JPMorgan Chase. Yet thanks to a tangle of bank bureaucracy, both Mrs. Krempp and Chase have had to wait for the institution that cashed her stolen check to determine whether her case was indeed fraud.”
“Here’s how it usually works: A bank customer writes a check and drops it in the mail. Fraudsters fish it out of a mailbox and, often, alter the check in one of two ways: either fraudulently endorsing it or changing it through a process known as washing. Washing allows thieves to change the amount of money, and the recipient, then deposit the check with another bank.”
“Banks can decline to cover a stolen check if a customer takes too long to report it. Most banks require a claim be filed within 30 days to 60 days of the fraud appearing on their statement. They can also deny a claim if investigators suspect the customer was negligent or involved in the fraud.”
“That gives banks a reason to delay reimbursements until an investigation makes it clear who is responsible, Mr. Mann said.” READ MORE
THE DEBT-CEILING CRISIS
Small businesses are preparing for the worst: “The most direct consequence of a default for small businesses would most likely be a significant pullback in bank lending in the chaos expected in financial markets. Banks would be less willing to give businesses loans, and any loans they would issue would be at significantly higher interest rates, economists predict. That lack of lending would prevent some companies from covering short-term costs, like payroll, as well as force them to put longer-term expansion plans on hold, said Todd McCracken, the president of the National Small Business Association. Those whose revenues drop because of a government default would be less likely to be able to borrow money to stay afloat.”
“‘A default for small businesses would be catastrophic,’ [an SBA] official said. ‘They'd be among the first to feel the impacts, they would feel the pain before big businesses, and they would potentially feel a severe impact even from a near-default.’"
“McCracken said he’s advising businesses to hang on to their cash to weather a default and to consider taking out loans now while they still can in case they need the money and credit markets seize up in the coming weeks.”
“‘What businesses should do is make sure they hang on to as much of their cash as possible and diversify where that cash is,’ he said.”
“[Rosemary] Swierk, whose construction company is based outside Chicago, has tried to put some contingency plans in place over the past three months, like moving up the timeline to submit invoices to the federal government for existing projects. She hopes to be able to access the company’s line of credit to keep solvent, although that would come with interest payments that could hurt the company in the longer term.” READ MORE
Here’s another testimonial to a four-day work week, this one from the CEO of a digital retail bank with 470 employees in the U.K.: “Before making the decision, we planned it out in great detail to remove the risk of the policy backfiring. We designed new shift patterns and established some core hours that had to be worked. We looked at studies in Nordic countries that showed it could be done and suggested best practices. And in November 2021, we introduced the four-day workweek to our staff, cutting 3.5 hours off each employee’s work week while leaving their pay unchanged.”
“I believe there’s some buffer in just about every company. I don’t believe staff members are lazy. But perhaps having fewer hours in the workweek encourages everyone to be more efficient, streamlining cumbersome processes.”
“Since we made the change, we have seen a reduction in recruitment costs, a fall in unwanted staff attrition, lower absences due to sickness and higher employee engagement with our brand. We’ve also seen higher employee productivity, higher profitability and higher customer satisfaction.”
“And while we can’t be sure of cause and effect — some of the positive trends could be because pressures on staffing eased, or because our company is getting older and wiser — it’s hard not to believe our approach to the workweek is not contributing in some measure.” READ MORE
FOOD & BEVERAGE
New York’s most interesting pizzas are being cooked in pop-ups: “Since the start of this decade, on-the-fly food businesses of all sorts have sprung up in the city, cultivating a following through pop-ups and product drops announced on social media without the expense or stability of a permanent address. Some of the busiest have been these mobile pizza kitchens. In a sense, pop-up pizzerias are a byproduct of new technology. The ovens they use, including the electric Breville Pizzaiolo and several models made by Ooni that run on propane or wood pellets, were designed for home use and introduced during the past decade, at prices under $1,000. These devices have allowed a batch of self-taught pizza makers to storm a tradition-bound business that hasn’t always been easy for outsiders to break into. Two of the most avidly followed pop-ups in the city are run by women, which is still unusual at brick-and-mortar pizzerias.”
“Miriam Weiskind, who calls her floating pizzeria the Za Report, lets the dough for her round, 12-inch pies ferment for four days, during which the yeast breaks the starches down into compounds that give the crust a smooth, well-rounded taste and a texture more soft than crisp.”
“At some of her pop-ups she serves only thick, cushiony Sicilian squares; that dough goes through a seven-day process and comes out with a graceful, light-footed texture unusual for Sicilian pizza.”
“Single pies at these pop-ups start at around $15 and can go up to $25 or so. When I think about the energy it takes to lug multiple ovens, bins of wet dough and sauce, and multiple toppings, some of them cooked in advance, the prices don’t seem excessive at all.” READ MORE
Craft breweries are getting even smaller: “Adam Romanow, president at Massachusetts Brewers Guild, defines the recent trend toward hyperlocal craft breweries as a small taproom focused on its immediate geographic area, where the beer is ‘probably traveling less than 20 miles.’ In a current wholesale market that is very challenging for beer and with capital investment harder to come by, these small, niche breweries may be the way to survive the next era of an industry whose spotlight is dimming. Brewery growth in the Bay State has exploded over the past decade, with the number of breweries in the state more than quadrupling from 2011 to 2020.”
“Now the industry is going through a maturation phase. Of the 38 breweries that planned to open in 2022, only half actually opened. That is down from the 38 that actually opened in 2019. Nationally, beer volume sales were down 3 percent in 2022, according to the Brewers Association.”
“But in the face of rising costs and supply chain issues, some Massachusetts beer makers aren’t ready to slow down. For many brewery owners still planning to open their breweries in 2023, their positioning as hyperlocal craft breweries is key.”
“Hyperlocal craft breweries typically brew their own beer and sell it solely out of their taproom. ... Romanow said that not only does a local taproom create a hub in a community, but it makes sense economically. Without having to go through a distributor, the brewery gets the benefit of higher margins on its direct consumer beer sales and can generate additional sales from merchandise, gift cards, and events.” READ MORE
SELLING THE BUSINESS
Corporate giants are buying up primary-care practices: “CVS Health, with its sprawling pharmacy business and ownership of the major insurer Aetna, paid roughly $11 billion to buy Oak Street Health, a fast-growing chain of primary care centers that employs doctors in 21 states. And Amazon’s bold purchase of One Medical, another large doctors’ group, for nearly $4 billion, is another such move. The appeal is simple: Despite their lowly status, primary care doctors oversee vast numbers of patients, who bring business and profits to a hospital system, a health insurer or a pharmacy outfit eyeing expansion.”
“And there’s an added lure: The growing privatization of Medicare, the federal health insurance program for older Americans, means that more than half its 60 million beneficiaries have signed up for policies with private insurers under the Medicare Advantage program. The federal government is now paying those insurers $400 billion a year.
“That’s the big pot of money everyone is aiming at,’ said Erin C. Fuse Brown, director of the Center for Law, Health & Society at Georgia State University, and an author of a New England Journal of Medicine article about corporate investment in primary care.”
“And the investments may not halt the rapid disappearance of the doctor still sought by so many people for ordinary care, including a recent report showing fewer medical school graduates going into the field.
“‘We’re dealing with incredible levels of burnout within the profession,’ said Dr. Max Cohen, who practices near Portland, Ore. Since the pandemic, his low-income patients have become much sicker, he said, with the level of illness ‘through the roof.’” READ MORE
You could fit 26 Empire State Buildings into New York City’s empty office space, and it’s not just New York: “New York is undergoing a metamorphosis from a city dedicated to productivity to one built around pleasure. Many office buildings still feel eerily empty, with occupancy around 50 percent of pre-pandemic levels, harming landlords and the local economy. But 56 million people visited New York last year, making Fifth Avenue in December feel as crowded as Ipanema Beach during Carnival. The economic future of the city that never sleeps depends on embracing this shift from vocation to recreation and ensuring that New Yorkers with a wide range of talents want to spend their nights downtown, even if they are spending their days on Zoom. We are witnessing the dawn of a new kind of urban area: the Playground City.”
“Since the 1920s, single-use zoning has divided our cities into separate neighborhoods for home, work, and play. Work-from-home and Netflix have made these distinctions irrelevant, but our partitioned urban fabric has yet to catch up.”
“E-commerce enables convenient shopping, but it also destroys brick-and-mortar businesses, especially the small businesses that support local economies and give streets their distinctiveness. The multiplication of small, rapid deliveries causes congestion and increases emissions.”
“E-commerce companies avoid paying real estate taxes in the areas they serve and sometimes state and local sales taxes as well, although there has been progress in recent years. To sustain a vibrant street life, municipalities should fairly tax e-commerce for the congestion it creates and lower their retail sales taxes, making local shops more competitive.” READ MORE
TikTok has given comedians a new path to success: “‘I've always been an internet-first comedian,’ [Kareem] Rahma told Insider. The sketch and stand-up comic started out posting videos on YouTube and Instagram. TikTok, though, has accelerated his career like no other platform or stage. Today, with 417,000 followers, Rahma is carving out a new space for unscripted comedy on the app. ‘It's one of the best times ever to be a comedian,’ said Rahma, who was turned off by the grind of scrambling to book gigs and performing into the wee hours of the morning.”
“‘I'm not out trying to hustle and get booked — and that's because I can make TikTok videos in the comfort of my own home or in my neighborhood with my friends and generate millions of views, and hundreds of thousands of meaningful engagements, and build an audience that way.’”
“In 2022, he was approached by New York-based startup Mad Realities to create an original TikTok series. Between ‘Keep the Meter Running,’ his first show, and ‘Subway Takes,’ his most recent project, Rahma's TikTok series have garnered hundreds of thousands of followers.”
“Over the past year, Rahma has also co-hosted Instagram's Meme Con, launched a popular podcast, and co-wrote and starred in his first feature film.” READ MORE
THE 21 HATS PODCAST
I’m Not a Real CEO: This week, Jay Goltz, Liz Picarazzi, and Sarah Segal talk about the inherent conflicts between being an entrepreneur and being a CEO—and the different skill sets each role requires. Does it make sense for the same person to do both jobs? Is being CEO even a full-time job? And when does it make sense to replace yourself as CEO? Liz says she’s thought about it. Jay, not so much: “Could I have found somebody 10, 15, 20 years ago that was a better manager? Sure. But it just wasn't worth it.” Why not? “It's gonna cost you $250,000 a year,” Jay says. “Is it worth paying that?” Plus: Liz and Sarah talk about positioning a company to be acquired. And Sarah proposes a PR campaign for Liz’s package bins right on the spot.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren