CPG Week: Small Business Administration Bureaucracy & Bankruptcy

[00:00:05] Monica Watrous: Welcome to the CPG Week Podcast by BevNET and Nosh, your source for the latest food and beverage industry news. I'm Monica Watrous, Managing Editor of Nosh, here with my co-hosts, Brad Avery and Adriannene DeLuca. If you're enjoying the show, please subscribe on your listening platform of choice. CPG Week Podcast today, we're discussing Small Business Administration, bureaucracy and bankruptcy. But first, hey, Brad, what snack are you bringing with you to outer space?

[00:00:34] Brad Avery: I'm going to have to go with Dippin' Dots, the ice cream of the future.

[00:00:38] Monica Watrous: Don't you think those little ice cream pearls would be flying everywhere in the zero gravity environment?

[00:00:42] Brad Avery: It would actually probably be horrible to bring into space for that exact reason. It would be like the Simpsons where Homer goes into space and he's eating the chips, doing a ballet dance in zero gravity, but I would still do it because it's the ice cream of the future.

[00:00:59] Monica Watrous: It's like confetti.

[00:01:00] Brad Avery: Yeah.

[00:01:02] Monica Watrous: Well, Frito-Lay has developed Doritos Cool Ranch Zero Gravity Mini Tortilla Chips, and they were formulated specifically to be eaten in space. Instead of the classic Doritos dust, the chips feature an oil-based coating to protect the zesty flavor from floating away. These astronaut-approved chips are being sold in partnership with St. Jude Children's Research Hospital and the Polaris Dawn Mission.

[00:01:25] Brad Avery: Do we know if there's any plans to actually bring them into space is the question.

[00:01:29] Monica Watrous: I believe so. I think that's part of the plan. I wonder who serves as the broker for NASA. How do we find this out? Good question. Yeah. How do you get your products up in space? Yeah, let's look into that.

[00:01:42] Brad Avery: All right, well, that's something for a future podcast, I think.

[00:01:46] Monica Watrous: Awesome. Well, moving on. Adrianne, you reported and wrote about the SBA's Economic Injury Disaster Loans Program and how it's affecting businesses four years later. Can you tell us more?

[00:01:58] Adriannene DeLuca: Absolutely. I think one of the best ways to understand some of the issues this program has brought up is understanding where it kind of came from in the first place. So when COVID hit right in March 2020, this was the first program that offered any sort of federal financial assistance to Small Business Owners. It had been in place for many, many years in different forms. So during Hurricane Katrina, it helped businesses then. was quickly retrofit to help businesses at the onset of COVID for anyone, you know, right when those lockdowns hit needing assistance, the SBA pretty quickly realized it was not going to be a broad enough program to service the volume of loan requests they were getting. So that's what led to that. later creation of the Paycheck Protection Program, PPP, which has been, you know, lauded for being designed to be forgiven, unlike EIDL, which is, you know, it requires repayment. So I think understanding that, you know, from the onset these loans were designed to be repaid and how that differs from the PPP is really important to understand some of the issues that business owners are facing now.

[00:03:10] Monica Watrous: So Adrianne, how did business owners know which loan to choose between EIDL and PPP? And were they aware that one was designed to be repaid and one was not?

[00:03:21] Adriannene DeLuca: I'd say, speaking generally, most business owners were probably aware of that fact. The difference is that PPP didn't come out until April 2020. So you're a month into the pandemic at this point. Everyone, if you guys can think back to that time, was in panic mode. They didn't know if we were going to make it to June. Business owners who needed funds right away when COVID hit, they chose the EIDL program. It quickly became clear that PPP, once it was set up and once it was an active program, that that was going to be the preferred vehicle to get investment from the federal government and get your business through COVID. But, you know, with three weeks of kind of uncertain times and a bit of panic just generally within the community, plenty of business owners took these loans right from the onset. They ended up doling out, it was $390 billion in EIDL loans through, I guess it was September 2021. Small Business Owners were still taking this once PPP came out, but you could essentially mix and match these two different loan programs if you were requesting them for different uses. So some definitely took both EIDL and PPP loans, thinking they were about the same program but you know now four years later a lot of business owners that have realized EIDL's not going to be forgiven are revisiting those terms that they agreed to understanding they're not going to be forgiven but realizing that a lot of these terms actually inhibit their growth moving forward so their ability to take on investment to even sell their company becomes a lot more challenging having this loan on your books it's a 30-year term it's a great rate but the changes of ownership structure and how you can request that when you're taking money from a VC or private equity firm becomes really muddy and complex when you're going through the SBA. And that's been one of the main challenges that a lot of the business owners I spoke to are facing right now.

[00:05:26] Brad Avery: Why are these hurdles? Is it just that investors get skeptical? Is it just that a potential buyer doesn't want to deal with the loan? Or is there something more that is logistically preventing them legally from selling?

[00:05:40] Adriannene DeLuca: That's a great question, Brad, because I would say there's a lot of different factors coming into play here that make each business owner situation pretty unique as to why they aren't able to continue growing their business. One of the overarching issues is for any loan over $200,000 and for Small Business owner that held more than 20% stake in that company, you had to put down a personal guarantee that if your business could no longer service this loan, you would. However, when it comes to taking on, say, VC investment or even private equity money, the challenge of going back to the SBA and asking for their blessing on those deals becomes pretty complex when you, back to that number I just referenced, they doled out a lot of money here and they're dealing with a lot of different Small Business across the country. Essentially, it's an administrative issue at its very core. However, a lot of these Small Business Owners, if they cannot secure approval within a certain time frame, a lot of those times those deals just essentially die on the table, especially for those looking to sell their company. When it comes to raising investment, securing a personal guarantee from a VC firm that may be taking 20% share of your business is not something the SBA has regularly allowed for. The challenge is less been asking for that change of ownership through the Small Business Association, but Rather, a lot of these Small Business Owners who agreed to these terms back during COVID maybe raised money in 2021, 2022, or even 23. And now four years later, they were allowed to defer payments until March 2024, are revisiting those terms that they agreed to and realizing they've essentially been in violation of their loan terms up until this point. So a lot of the complexities here and challenges that they're facing are going back now, wading through SBA's directory of people who may be able to help them and finding that right person that could essentially say, you know, you're allowed to take that money even though it was, you're supposed to ask us back then. And then, you know, not keeping their loan in a technical default state.

[00:07:59] Brad Avery: When we talk about how PPP loans were designed to be forgiven and these weren't, what does that really mean? Why can't the government just say, okay, never mind, it's forgiven. What is preventing that from happening?

[00:08:14] Adriannene DeLuca: I'd say there's two different arguments going on there because there's been plenty of Small Business Owners and even a few congressmen that have put bills together trying to get these loans forgiven. It comes down to the fact that the SBA itself served as the lender for this EIDL program, whereas PPP was set up with an authorization for Congress that they could give out this money. EIDL, they essentially built the boat and sent it off to sea and then realized how much it needed to bring back with it and that it was overflowing. So they need this money back is kind of where the US government stands. Congress is not going to allocate any more funding to keep this program going. They're actually having challenges even authorizing funding to collect on the loans that are very clearly in default and for companies that have gone bankrupt. In one case, they were actually asking business owners to sell off their own collateral and then essentially hand the money off back to the SBA. It really comes down to the fact that they're underwater. They don't have the infrastructure, the authorization for Congress, and Everyone kind of wants to see that $390 billion back in taxpayers' wallets and not just disappeared.

[00:09:30] Monica Watrous: For this feature, you spoke with several brands who talked to you under the condition of anonymity. What's going on with those brands and how dire is it?

[00:09:41] Adriannene DeLuca: It definitely is a tricky situation and I say a lot of their circumstances are really just rooted in fear of navigating this federal agency. So actually, one of the initial reasons I got into this story was a Small Business owner at an industry event came up and shared that they had heard the SBA was sending out bounty hunters to find who had been in default of their loan over the course of reporting this story. pretty much confirmed, you know, the bounty hunters aren't out there, but the SBA is calling in plenty of these loans, quite a few of them, not necessarily are declaring bankruptcy because of these loans, but have gotten themselves into a circumstance where they can't take outside money, they can't sell their company, but they're not growing at the rate they need to to become profitable. So it's left them just almost forced into a corner where they can keep going. They could maybe be breaking even, but they're not going to be able to grow. And with a 30 year term, it just, it makes it more challenging to get yourself out from under this debt. And then you layer on, you know, communication with the SBA and that brings another whole host of problems. There's really just an online portal that you can go through to request these change of ownerships. which are required for pretty much any transaction that would grow your business and timelines on those are or responses for those are inconsistent at best.

[00:11:09] Brad Avery: I understand that it's going to pretty much take an act of Congress for anything to change, and that is, of course, the biggest roadblock to anything getting fixed. But what are some of these proposed fixes for this issue? What could Congress do, or are there any specific proposals for how we could untangle this mess?

[00:11:32] Adriannene DeLuca: I hate to say, but there's not much on the legislative docket that would really solve the issues that are going on right now. For most of these Small Business Owners, it's becoming aware of the fact that these loans do require certain terms and to make sure they're in compliance with them. A few congressmen, like I said, have proposed a bill to forgive these loans, but given the challenges we said earlier with just the vast sums of money they lent out, it has not gained any traction and is looking very unlikely it will. So in terms of resolutions, it's really kind of an awareness game at this point and making sure business owners are just continuing to service their loans. I was in conversation with the SBA throughout reporting this story and from what I gathered from them, they're willing to work with business owners given certain circumstances and especially if they're in you know, what they define as a hardship position, are more likely to elevate those requests to the top of their pile when it comes to, say, if they're trying to sell their company to someone who could fully service pay off the loan and keep that company in good standing. You know, they're going to look on those leniently. And aside from that, It's really just, you know, continuing to pay it off. As we mentioned, the rates are fairly good, but there's not a whole lot business owners can do other than understand those terms that they agreed to back when, you know, they may have just been like, I need this money now and I'll think about the impact later.

[00:13:12] Monica Watrous: Well, this is a developing story, and we know you'll be continuing to follow it, but insiders can read more at Nosh. The story is called, Is SBA Bureaucracy Bankrupting Small Business? It's Not That Simple. Here are some other notable bits of news from the week. Growing Goodles, deluxe line launch set to double consumer base. Upside Foods takes Florida's cultured meat band to court. And Ready to Brew, West Rock kicks off new era in Conway. For these stories and more, become an insider at BevNET and Nosh. That wraps up this edition of CPG Week by BevNET and Nosh. Thank you to our audio engineer, Joshua Pratt, our director is Mike Schneider, and our designer is Aaron Willette. If you enjoyed Week Podcast, please subscribe on your listening platform of choice, and we will see you next time.