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Small business legislation, State of the Union address, President Joe Biden

Legislative Proposals Small Businesses Should Worry About in 2023

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Small business owners should be keeping an eye on the current 118th Congress. While it’s only a month old, there are several pieces of legislation and proposals that could have wide-ranging impacts on small- and medium-size businesses should they pass, and issues such as  manufacturing costs, tax breaks and whether a popular government grant program survives could all be in play in 2023.

So as the year progresses, here are the legislative issues small business owners should keep on their radar screens.

Made in America

“Tonight I am announcing that all construction materials used for federal infrastructure projects to be made in America,” said President Biden during his State of the Union Address on February 7. While “Made in America” is always a great talking point for a politician, it really isn’t feasible for small construction companies and contractors to execute without ballooning the costs of construction projects.

The 2022 Infrastructure Investment and Jobs Act (IIJA) included the Build America Buy America provision that currently requires that only 55% of the materials used by a contractor for a federal project be made in America. If Biden’s statement comes to fruition, it would cause considerable difficulty for independent contractors and small construction firms to stay on budget if they win a federal construction contract. 

Patriotism is always appealing of course, but according to Construction Dive, a news site for contractors, forcing contractors to use 100% American-made supplies could raise project costs by 25% on average. 

The reason for this is that the most vital construction materials such as lumber, steel, copper, aluminum and cement, are all imported from countries in Asia, South America and Canada. Those offer those materials at a far lower cost due to lower labor costs. 

STEP Renewal Act

This bill, introduced by Sen. Jeanne Shaheen (D-NH), would renew the popular State Trade Expansion Program (STEP) and would direct the SBA, which administers millions of dollars in STEP grants through local and affiliate offices every year, to make it easier for small businesses to apply for these grants. With a Republican-controlled House that wants to cut federal spending, there could be a partisan showdown on whether the STEP grant program gets renewed. 

Since 2011, the SBA has administered millions of dollars in grant money to small businesses starting out or expanding into the import/export business through its State Trade Expansion Program (STEP) grant program. In the past 12 years, the agency has awarded over $200 million through state and affiliate offices to support US small businesses in learning to export products, participating in foreign trade missions and designing international marketing campaigns, among other activities related to international trade. 

Easier to Obtain Microloans?

In late January the House unanimously passed HR 1487, the Microloan Transparency and Accountability Act, sponsored by Rep. Tim Burchet (R-TN). The bill is designed to ensure that the funding for the microloan program is, in fact, being disbursed to small businesses in underserved and rural communities as it was intended to through greater oversight of the SBA. 

The Microloan is one of the most popular lending programs that the SBA offers. These loans have far less restrictive lending requirements, are one of the few SBA lending programs that can help fund startup businesses, and are crucial to small businesses in rural and low-income communities. 

The bill, if passed, would offer 5% technical assistance grants to the program’s affiliate lenders if they lend to businesses in rural communities, and would require them to make at least 25% of their lending funds to rural businesses to qualify for the 5% grant. It would also require the SBA to produce an annual report on the number of loans that have defaulted as well as the number of loans made to small businesses in rural areas.

More Audits?

As part of the Infrastructure Investments and Jobs Act (IIJA), the Internal Revenue Service was given

A new bill could prevent further audits of small businesses – a bill that’s opposed by the Biden Administration.

more funding to conduct additional audits on companies and individuals that produce $400,000 or more in gross annual income, with the idea that this would increase tax revenue by forcing multi-billion dollar corporations and wealthy individuals to pay more in taxes. 

In January, HR 23 was introduced in the House to rescind that additional funding – a move adamantly opposed by the Biden Administration, which insists that the additional audits would only affect large companies and the country’s ultra-wealthy elites.

In reality, $400,000 or more in gross annual income for a pass through business would likely make the small business owner financially well off,  but it certainly wouldn’t make the business owner ultra wealthy. Once parcel out payroll, taxes, inventory purchases and other expenses are all parceled out, a small business owner would be left with far less than $400,000. If the IIJA provision is kept, it would mean a higher tax rate and further audits of high margin small businesses such as law and accounting firms and doctors offices, so one can expect a showdown between House Republicans and the Biden Administration over this bill. 

Easier to Unionize?

President Biden, as expected, made a plea to Congress to pass the Protecting the Right to Organize (PRO) Act during his SOTU address, which would make it easier for workers in any business to organize and form unions. Of course, Democrats and Republicans have always been far apart when it comes to supporting unions, but the issue has garnered far more attention in the past two years due to the tightening labor market and highly publicized unionization attempts by workers at large companies such as Starbucks and Amazon.

This obviously affects small businesses that are already feeling the brunt of the labor shortage and rising wages. More unions would ultimately lead to rising labor costs that some small businesses would have a difficult time being able to afford. 

Should the Tax Credit Stay?

One issue that has concerned small business trade groups such as the National Federation of Independent Businesses (NFIB) is the possible sunsetting of the Qualified Business Income (QBI) tax credit, which was created by the Tax Cuts and Jobs Act (TCJA) of 2018. Shortly after taking office, President Biden promised to rescind elements of the TCJA to ensure that large corporations and the wealthy pay their share of taxes.

While Biden did later say that he was not considering eliminating the QBI deduction, it is scheduled to sunset in 2025. The NFIB continues to actively lobby to make the deduction permanent, as it claims many small businesses have come to rely on that deduction to stay afloat amid the myriad of economic challenges they are currently facing. President Biden has not commented on this deduction in the past year, but if he does indicate a move to eliminate it, it would set up a showdown between him and the GOP.

The QBI deduction allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. In general, total taxable income in 2022 must be under $170,050 for single filers or $340,100 for joint filers to qualify.

Expect Gridlock

All-in-all, while the Biden Administration has made  progress in passing bi-partisan legislation to reduce inflation and rebuilding the nation’s infrastructure, we can probably expect more gridlock over the next two years with Republicans controlling the House.

Play Pits, Building Resilient Businesses, Chantel PowellKapitus

BRB Stories: After Devastating Setback, Play Pits Takes First Place in Kapitus’ BRB Contest!

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Congratulations to Play Pits, an African American-owned producer of specialty deodorants made from all-natural ingredients, for being named the winner of Kapitus’ inaugural Building Resilient Businesses (BRB) contest. The Atlanta-based family business will receive $100,000 and 8 hours of complimentary educational consulting/advising sessions on its business. 

Embodiment of Resilience

Chantel Powell, Play Pits, Kapitus, Building Resilient Businesses, contest

Chantel Powell’s small business has endured the COVID-19 pandemic and a warehouse fire, making it one of the most resilient businesses out there.

For Chantel Powell, creator and CEO of Play Pits, resilience isn’t just a trait, it’s a necessity. The four-year-old company suffered through the pandemic shortly after it was created – a period in which nearly 40% of all black-owned businesses were forced to shut down. As if that weren’t enough, in September 2022, its Atlanta-based headquarters and warehouse (where all of its inventory was stored) were completely burnt to the ground in a fire – a catastrophic event that left Powell and her family reeling.

In the aftermath, however, instead of giving up, Powell and her family members are determined to rebuild the business and will use their $100,000 prize to help do so, making  Play Pits the very embodiment of everything for which BRB stands..

“It’s by the grace of God that we won the Building Resilient Businesses Contest because in the last few weeks, Play Pits has proven that we are the personification of a resilient business,” said Powell.

A Family Commitment

Play Pits. Chantel Powell, Kameron, Kapitus, Building Resilient Businesses, Contest

Chantel Powell was inspired to launch Play Pits by her son, Kameron.

After spending nearly six years as an executive assistant at Viacom International Media Networks and graduating Summa Cum Laude from Clark Atlanta University with a degree in fashion design and merchandising, Powell had picked up the skills she needed to pursue her passion for launching her own small business. All she needed was an innovative idea and a product to sell.

That idea came in 2017 when she picked up her six-year-old son, Kameron, from basketball camp. Like most active kids coming home after attending a sweaty sports camp, Kameron’s body odor hit Powell hard. 

“My exact words to him were, ‘You smell like a grown man!’” said Powell. She was determined to make him wear deodorant but didn’t want to use the typical ones that were filled with toxic chemicals. When she searched for deodorants that used natural ingredients, she found them to be boring products that she knew she would have to fight her son to get him to use them. 

Powell spent days in her kitchen using organic ingredients to make an all-natural deodorant that she felt comfortable with her son wearing. To her surprise, Kameron loved the deodorant and suggested that she make it for all his friends at camp.

“After my initial refusal, I quickly reconsidered once it hit me that Kameron had a genius business idea!” she said.

Hard Work and Self-Sufficiency

Like many seeking to achieve the American Dream, Powell put in a lot of hard work and $3,500 of her own money to start Play Pits. With no outside investments, she spent nine long months perfecting the secret formula to create the first all-natural deodorant free of aluminum, parabens, synthetic fragrances and other harsh chemicals found in most deodorant products, and one specifically designed for active kids. 

She officially launched Play Pits in March of 2018, and success came quickly for the new business. Powell saw 497% growth after just 20 months in business, with over 12,200 units sold. Play Pits soon had both out-of-state and international customers, and distributed through both Amazon and Target, as well as directly.

Powell also worked hard by engaging in one of the toughest types of marketing campaigns a business can engage in: word-of-mouth. Powell works extremely hard to market the company through social media and customer recommendations. She also doesn’t keep herself on the company payroll. “Every dime made is completely due to us bootstrapping our business, getting out there and hustling. It has been the best method for us to advance and grow Play Pits,” she said.  

“Quietly, Play Pits has become the nation’s largest 100% black-owned deodorant company,” said Powell. “This grant money is going to be invested in scaling our company by allowing us to purchase larger amounts of raw goods and materials at reduced costs, increase our marketing efforts into youth and professional sports, and to add knowledgeable professionals to help us meet customer demand by expanding our product line and increasing revenue.”  

More Than Just Survival

As Play Pits recovers and rebuilds from the devastating fire, its mission to educate parents about the

Play Pits, Chantel Powell, Building Resilient Businesses, Contest, $100,000, Kapitus

Paly Pits has endured the pandemic and a devastating fire to come back better than ever.

dangerous ingredients found in commercial deodorants and to provide a healthier, all-natural solution for their children, remains the same. The business is still seeking to grow both domestically and internationally, and to never forget where it came from. Since launching, Kameron has been named the company’s Chief Inspiration Officer and is still active in sports, while Powell continues to work hard to market and sell the company’s products. 

“As we start recovery from this tragic event, this grant money is needed now more than ever as it will play a key role in helping us to rebuild, replenish lost inventory/materials, equipment etc., while still allowing us to continue our initial expansion plans,” she said.  

interest rates, small business, lending, bank loan, Ben Johnston, Kapitus

How Will Rising Rates Impact Small Business Lending?

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The Federal Reserve Bank has raised the overnight rate four times so far in 2022 to try to tame runaway inflation, with more hikes likely coming. This leaves Main Street businesses that rely on financing in a major bind – rising rates mean small business loans have become far more expensive than they were just a year ago, and that added expense creates yet another challenge for those that have already faced rising costs, a demand for higher wages and supply chain shortages, among other things.

So now that we’ve been forced to live with higher interest rates for the time being, what should small businesses do? Should small businesses hold off on plans to take out loans until interest rates come back down? What if you need financing now, despite the current interest rate environment? 

Ben Johnston, Kapitus, rising interest rates, lending, small businesses

“Better credit quality small businesses can expect to see lower increases in rates while businesses with lower credit quality can expect to see a more dramatic increase in rates,” says Ben Johnston. Kapitus’ chief operating officer.

Ben Johnston, the Chief Operating Officer at Kapitus, tries to decode this situation by offering valuable advice for small businesses during these difficult times. 

Borrow for the Right Reasons

With the cost of capital being especially high right now, small businesses may want to hold off on borrowing if they can afford to. Interest rates often swing wildly from year-to-year, and once the current inflationary environment begins to settle down, the Federal Reserve may start to loosen its belt once again, so it may be worth waiting until then to apply for financing. 

If you need to borrow money now, however, it’s now more important than ever to make sure you are using the proceeds of that loan to invest in a project or aspect of your business that will increase your profits. These can include growing your business with new hires or expanded inventory, or the development of a new product that is projected to increase your revenue. The increased revenue should offset higher costs of capital and will enable you to comfortably pay back the loan.

“Small businesses should always weigh the cost of the capital that they are seeking with the expected economic return of the project they are financing,” said Johnston. “If the project provides sufficient returns at the cost of capital being offered, then they should move forward with the project. Unfortunately, as interest rates rise the number of economically viable projects declines, meaning that many small businesses will choose to hold off on financing growth until rates either come down or revenue and expense prospects improve.”

Fix Your Credit Score

Despite the fact that the prime rate is now far higher than it was a year ago, one fundamental rule of

credit score, small business, lending, interest rates, Kapitus, Ben Johnston

Fixing your business’ credit score is especially important in a high interest rate environment.

lending still applies: the higher your credit score, the less you will have to pay in interest rates. As the COVID-19 pandemic winds down, however, many small businesses may have taken hits to their credit scores given the COVID-related recession the US endured in 2020 and 2021. 

“Most lending companies are seeing their own cost of capital increase, and over time, this rise in interest rates can be expected to be passed on to small business customers in the form of higher rates as well,” said Johnston. “Better credit quality small businesses can expect to see lower increases in rates while businesses with lower credit quality can expect to see a more dramatic increase in rates.”

If you struggled during the pandemic and your FICO score decreased as a result, don’t worry – fixing it may not be as daunting of a task as you may think. There are some basic steps you can take to possibly improve it:

  • Talk to your creditors. If you have any outstanding debt, it’s worth contacting your creditors to see if you can modify your payment structures. Remember, creditors would much rather negotiate a new payment arrangement with their borrowers than have to send the debt to collections. Once a new arrangement is agreed upon, you can comfortably make payments without having any late payments show up on your credit score.
  • Pay off or lower your revolving debt. If you can afford to, make sure your debt on your line of credit or business credit card is 25% to 30% of your spending limit, as that is the credit utilization level that credit agencies prefer to see. Not only will this reduce your interest rate payments, it also lets potential lenders know that you can properly manage your debt.
  • Encourage your suppliers to give you trade references. Having a strong payment history with your suppliers will not be reflected on your credit report. However, your suppliers can give you a trade reference: a verbal or written notice to credit reporting agencies such as Dunn & Bradstreet, Experian Business or Equifax stating that you’ve always made payments on time. These positive references may increase your score and will be looked upon favorably by potential lenders. 
  • Try to increase your credit limits. If you have a line of credit or a business credit card, increasing your limits on them can increase your credit utilization ratio and help boost your FICO score. 

Consider Alternative Lenders

Higher costs of capital means that traditional banks will have to take on more risk when they lend to small businesses. As a result, many banks will have stricter requirements for small businesses seeking financing, thus making it harder for Main Street businesses to qualify for loans. This may make alternative lenders – non-bank lenders such as Kapitus – more attractive. 

Alternative lenders often require less paperwork and fewer requirements than banks for small businesses seeking financing. Plus, interest rate hikes often don’t affect the cost of capital from alternative lenders as much as they do traditional banks. 

“Banks too are seeing the effect of higher interest rates on their cost of capital and all lenders are looking warily at the economic uncertainty in today’s economy,” said Johnston. “Given this uncertainty, we can expect banks to reduce their exposure to small business loans in the coming months, and to continue to increase the cost of capital offered to small businesses. This means that Kapitus and other non-bank small business lenders will play an even more important role in providing small businesses with the capital they need to grow and weather uncertainty in this challenging economic time.” 

Johnston added that he “absolutely” expects that alternative lenders will be more attractive in the small business loan market than traditional banks. “I expect that non-bank small businesses lenders will be slower to raise rates to strong credit quality customers and will be less likely to tighten their credit boxes significantly, making small business lenders a critical source of capital in the coming months.”

Be Prudent

It’s no secret that we are living in uncertain economic times. Small business owners that rely on financing would be wise to shop around for the best rates, lower their revolving debt and seek financing products, such as SBA and term loans, that typically offer the lowest costs of capital. As the country is officially in a recession, small businesses should seek ways to tighten their spending and maximize profits. 

Small business legislation, small business lending Kapitus Vince Calio

Small Business Legislation: Childcare, Credit Card Fees and Part-Time Benefits Proposals That Could Affect You

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Small businesses should be keeping an eye on this current session of Congress as well as the upcoming midterm elections. There are three bills still being debated in this current session of Congress that, if passed, could make it easier for small business owners to fund childcare for themselves and their employees, as well as lower credit card processing fees and give part-time workers additional benefits. 

The Credit Card Competition Act of 2022

A controversial bill to reduce credit card processing fees for small businesses could be in the works this year.

This bill, S.4674, and an identical bill in the House, H.R. 8874, are easily the most controversial pieces of small business legislation being debated. It was introduced by Sen. Richard Durbin (D-IL) in July and, if passed, would require credit card companies to offer two options for credit card processors whenever a customer makes a purchase with a small business. The goal of the legislation is to reduce the credit card processing fees that merchants, including small business owners, must pay in exchange for giving their customers the ability to pay with a credit card. 

Critics and Supporters

The typical credit card processing fees range from 1.5% of a purchase to 3.5%, raking in hundreds of billions of dollars in profits for credit card issuers. These fees are typically priced into the costs of products and services offered by small businesses. Small business advocates such as the National Federation of Independent Businesses support the bill, saying that it will reduce the credit card processing fees charged to small businesses that are already feeling the burden of inflation, rising interest rates and other economic issues. 

Banks and credit unions, however, are against the bill, saying that banks will cut cash-back rewards and other credit card perks as a way to offset the losses they will suffer if the bill gets passed. Many of them point to the controversial Durbin Amendment that was attached to the Dodd-Frank Act in 2010, which limited the interchange fees banks charged on debit cards, as a forewarning of the consequences consumers will suffer if the bill passes. That amendment, critics claim, did nothing to lower the cost of banking and led to retail banks eliminating rewards and perks offered on checking account debit cards. 

Likelihood of Passing?

Democrats in Congress are pushing for the bill to be voted upon in the current session of Congress. The Senate Committee on Banking, Housing and Urban Affairs even tried to attach the bill as an amendment to the National Defense Authorization Act (an annual defense spending bill that Congress almost always passes), but the effort was rejected. The likelihood of passage rests greatly on the results of the midterm elections, as it will most likely die if Republicans gain control of Congress. 

Part-Time Worker Bill of Rights Act of 2022

This is probably the most partisan piece of legislation being debated in Congress as it pertains to small

Kapitus small business lending part time workers

Part-time workers could be eligible for full-time benefits if Democratic legislation is passed.

businesses, as Democrats have been pushing for versions of this legislation since 2015. Renewed debate has once again begun on this bill, H.R. 6699,  and Congressional Democrats may want to push this bill out for a vote before the current, 117th session of Congress expires in January. 

The one section of the bill that most pertains to small businesses is the one stating that if a part time employee has been with a company for a year or more, that employee is entitled to the protections of the Family Medical Leave Act. This act allows employees to take up to 12 weeks of unpaid leave for medical reasons as well as the birth of a child without fear of being fired. This could have an obvious impact on small business owners who are already facing labor shortage problems. 

Another provision in the bill would affect high margin small businesses that offer retirement plans to their workers. This provision would allow part time workers who have worked at least 500 hours per year for two consecutive years for a company to participate in any retirement plan that company offers. If the bill were signed into law, it could cost small businesses that offer matches to their employees’ contributions to their 401(k) or other retirement plans, as they would have to make more matching contributions. 

Likelihood of Passing?

The eight co-sponsors of the bill, all Democrats, are pushing hard for a full vote on the floor of the House before the 117th session of Congress expires, especially if Republicans win back control of Congress. If that happens and the bill isn’t voted upon and signed into law by President Joe Biden before January, the bill will almost certainly die. 

Childcare DESERT Act

Kapitus childcare small business lending

New legislation could make it easier for small businesses to fund childcare for their employees.

This bill, S.5022, is a bi-partisan bill introduced in late September 2022 that, if passed, would allow small businesses to use a portion of the proceeds of the popular Small Business Administration 504 CDC loan to provide childcare services to employees. This would help address a serious problem that small businesses face in hiring and retaining employees. Goldman Sachs found in its most recent 10,000 Small Businesses study that 80% of small business owners cite childcare as a hiring issue, and just as high of a percentage of those surveyed said that they support the government providing childcare assistance to workers. 

Right now, qualifying small businesses can borrow up to $5 million through a SBA 504 CDC loan through Certified Development Companies to finance new equipment, build new facilities or purchase or lease additional land. The loan can also be used to improve storefronts and existing facilities, and the borrower must demonstrate that the proceeds will be used to create new jobs and help develop the community in which they operate. 

Likelihood of Passing?

This bill has a high chance of passing, as it was introduced by Sen. Chuck Grassley (R-IA) and co-sponsored by prominent Democrat Senator Gary Peters (D-MI). The bill was introduced in the Senate and will be debated by the members of the Senate Committee on Small Business and Entrepreneurship. Given that it is receiving bi-partisan support, the biggest threat to the bill being passed is time. There are only two months left in the 117th session of Congress, but if it isn’t voted upon within that time frame it could get reintroduced in the next session.

Show Your Support (or Opposition)!

There are several pieces of legislation being debated in Congress right now that you can show your support for. You can view upcoming bills and how they can affect your small business by clicking here. The site, Legiscan, also gives you access to the specific Representatives and Senators in your state and allows you to write to them to show your support or opposition to current bills circulating in Congress.

Kapitus small business halloween

This Halloween, Slay Your Biggest Fears as a Small Business Owner

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Children may be afraid of ghosts and goblins during the Halloween season, but for small business owners, things that go bump in the night are nothing compared to their real-world fears. If you’re a small business owner, you’re likely more afraid of an auditor from the IRS knocking on your door than you are of Michael Myers or Jason coming at you with a knife. 

In the spirit of Halloween, here are some of the biggest fears that small business owners face, as well as tips to overcome them. 

#1 – Fear of Catastrophe

Halloween Kapitus small business

The fear of catastrophe monster can be slain with some planning and insurance.

The COVID-19 pandemic proved disastrous for small businesses, as it forced more than 300,000 small businesses to close their doors permanently. Many small business owners that survived had to take out PPP loans and other government assistance to survive, and many are facing challenges with having to pay back rent the last two years are suffering from anxiety. 

Now, with inflation and interest rates out of control and the labor shortage persisting, small business owners are waiting in fear for the next catastrophe – be it a full-blown economic recession, a fire, a natural disaster or some other event that can drive them out of business.

Slaying the Monster – It’s important to remember that the pandemic was a historic once-in-a-century event, and while hurricane Ian did devastate parts of Central Florida, natural disasters don’t occur very often. Just in case disaster does hit, however, you want to be prepared. Some steps you can take now are: 

  • Take out small business hazard insurance. It may be an added monthly expense for your business, but it could prove to be worth it when the next crisis hits.
  • Check out SBA Disaster Mitigation Assistance. This SBA program allows businesses within declared disaster zones to apply for additional funds specifically for improving their businesses to better protect against future disasters. 
  • Take out a business line of credit (BLOC). BLOCs are offered to qualified borrowers from both traditional banks and alternative lenders, and can provide you with emergency cash to help you quickly recover when disaster hits.
  • Protect your business records. You should always have a backup of your most important business records. You can do this by storing important information on a separate hard drive or through cloud computing. 

#2 Rapid Growth

Having more customers or receiving too many demands simultaneously from clients than you can

handle is another monster that may be hiding under the beds of small business owners. While some may say that this is a good problem to have, this fear can threaten your business if you aren’t in a position to quickly obtain additional inventory or are understaffed.

Slaying the Monster –If your business is growing at a rapid pace, the first thing you should do is take pride in knowing that you’re doing something right. After you give yourself that little pat on the back,  your first priority should be customer service. Be ready to explain politely to them that they need to have patience because you are experiencing overwhelming demand but assure them that their needs will be taken care of. 

You should also have a plan to add more hourly or full-time staff if you find yourself overwhelmed with customer demands, or consider hiring a virtual assistant. If you need more inventory fast but don’t have the cash upfront to pay for it, you may want to consider purchase order financing to help you.

#3 Employees Quitting

Kapitus small business halloween

The fear of all your employees quitting can be very spooky, so make sure you’re treating your workers well!

Small businesses in nearly every industry are feeling the brunt of the labor shortage, as workers are increasingly demanding higher salaries and better working conditions. The prospect of your best employee – or all of your employees – suddenly quitting at roughly the same time is scarier than the thought of Freddy Kreuger visiting you in your dreams, especially if you employ hourly workers that don’t get benefits.

Slaying the Monster – Every business, no matter how small, must deal with employee turnover. The scenario you want to avoid, however, is having all of your employees quitting in a short period of time. You want to create a system that doesn’t overly rely on a single employee, no matter how good that employee is. You also want to make sure that you create a company culture that your workers feel comfortable and safe in. You should also look to offer small perks, such as quarterly bonuses or limited essential coverage plans that your workers will appreciate. 

#4 Getting Audited

There are few boogeymen that are scarier to small business owners than an IRS auditor – which could

mean that you inadvertently misreported finances and that you suddenly owe a fortune in back taxes. 

Slaying the Monster – As a small business owner, you shouldn’t be too worried about getting audited if you’ve kept your books in order throughout the year. Only 1.5% of small businesses in the country get audited on a yearly basis, but to prevent yourself from being among them:

  1. Make sure you keep track of your business finances. It’s especially important to carefully separate them from your personal expenses.
  2. Carefully document your business expenses throughout each quarter. Sometimes the line between a business and personal expense can be blurry, so make sure when you document a business expense you have a good reason why it should be a business expense. 
  3. Consult with an accountant on how much in taxes you should pay each quarter. You’re probably better off being conservative when reporting your business expenses and getting a refund at the end of the year. 
  4. Stay up to date on new tax laws. The see-saw battle between Republicans and Democrats over who controls Congress and the executive branch has never been more volatile. Expect the tax code to change every time the balance of power shifts to make sure you’re not missing out on new tax deductions. 

#5 Continued Inflation

While inflation has slowed a bit in the past two quarters, it is still growing at a rapid pace thanks to continued supply chain disruptions, rising gas prices and higher wages for workers across the board. Indeed, the inflation monster has forced small business owners to raise their prices and fear losing customers as a result. 

Slaying the Monster – The prospect of having to raise the prices of your products and services is always  scary for small business owners, but here’s the good news: inflation is showing signs of slowing, and while consumers resent having to pay more for goods and services, they’re still spending, according to a recent JPMorgan study. Also, if you raise your prices carefully, you can actually beat out your larger competition, since they’re also raising their prices.

#6 Failure

This fear is probably the most prevalent among new business owners. Having to close your business due

to lack of sales does count as a tangible definition of failure, but there are other definitions of the word that haunt small business owners, making this fear much more opaque. Those fears can include the fear of not providing enough income for your family, losing control of your business, or losing confidence in your ability to run your business. An overwhelming fear of failure can take its toll on your mental health, as any unexpected problem can cause you to go into full-blown panic mode.

Slaying the Monster – Fear of failure is normal among small business owners, but having that fear to an unhealthy degree is not good. One of the most important things to remember when it comes to the fear of failure is that, more than anything, it’s psychological. Sometimes overcoming this fear is as simple as developing a positive mindset. Here are some steps you can take:

  1. Set daily goals. If you feel overwhelmed in the number of tasks you need to complete, try breaking down those tasks on a daily basis. Be realistic in what you can get done every day, and feel good about accomplishing those tasks afterward – they can serve as reminders that you’re succeeding.
  2. Adopt a philosophy of learning. Failure, in many cases, isn’t a dirty word. Some may argue that there are no such things as failures – just lessons. If you experience a setback, solve it, learn from it and move on with no regrets. 
  3. Prepare for obstacles. As a small business owner, you will face obstacles, both big and small, every day – there may be a delay in the delivery of important inventory; your credit card processing machine may break down, or an employee might unexpectedly not show up.  It’s important to prepare for these obstacles by having a backup plan.
  4. Find relaxation time. Constant stress can lead to serious mental health problems over time. Try to carve out time every day to take care of yourself. This can be in the form of meditation, exercise and spending quality time with your family.

#7 Slowing Sales

Kapitus small business halloween

The prospect of slowing sales can be terrifying, but don’t worry, there are ways to prepare for that.

Every small business owner fears a sudden slowdown in sales, especially now that we’re living in uncertain economic times. This fear is often exacerbated by the holiday period – a time when many small businesses rely on seasonal sales to survive. 

Slaying the Monster – Overcoming this fear comes down to your marketing strategy. Are you offering the proper discounts during the holiday season? Are you implementing a strategy to retain existing customers and gain new ones? Are you offering something different and better than your competitors? Focusing on marketing throughout the year should help you overcome this fear.

Happy Halloween!

This Halloween, don’t allow your fears to stand in the way of running your business successfully. If you find yourself overwhelmed by fear, it’s important to face those fears head-on by making good decisions and celebrating victories and milestones in your business.

Small business video Kapitus lending

Tips on Making the Perfect Video for Your Small Business

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If you’re a small business owner, being camera shy is more than just a personal insecurity – it’s a trait that can threaten your livelihood. Study after study has shown that using videos is now more important than ever to promote your business. Consider that online shoppers, on average, consume up to 16 hours of videos per week, according to a study on video marketing statistics by Wyzowl. 

Videos provide what text can’t, which is both audio and visual stimulation. A little more than 87% of consumers surveyed said they’d rather watch a video about a product than read about it. Additionally, over half of consumers say that they watch video product reviews before making a purchase, and most said that they believe videos explain products better than text.

How Can Videos Benefit Your Business?

Many small business owners, however, are still reluctant to make videos to benefit their enterprises, either because they believe video production will cost too much, or they simply aren’t comfortable with the idea of putting themselves in front of a camera. Including videos on your website or for social media, however, can benefit your business in a myriad of ways and may not cost as much as you think. Videos can:

  1. Gain a following on social media. A strong social media strategy for your business can invite thousands of followers and produce a huge return on investment. In 2021, the video-based social  media platform TikTok surpassed Google as the most popular domain in the world, showing that browsers prefer watching videos on their social media platforms than all other types of posts. Since then, Instagram and Facebook created algorithms prioritizing videos over photo-based posts. 
  2. Tell your story. A short video introducing your story and how you became a small business owner can form an emotional connection with your customers and thus increase your sales. Whether it’s on Youtube, Facebook, Instagram, or your own website, a clever video about you and your brand – rather than a block of text that drones on – can bring followers and increase business.
  3. Win grants and other contests. Winning free money is always good for business. Grant opportunities for small businesses have increased since the COVID-19 pandemic began in 2020. Many grant contests, including Kapitus’ $250,000 Building Resilient Businesses contest and the FedEx Small Business Grant contests accept video submissions for prizes.
  4. Provide customer testimonials/product demos. Consumer researchers have shown that a large majority of buyers watch product reviews before making purchases, so it’s no surprise that one of the most effective marketing tools are videos showing customers raving about your product and demonstrating how your product is meeting their needs. 
  5. Improve your internet search rankings. Much like you do with your website and blog articles, you can add meta data and descriptions for your videos, thus increasing your chances of popping up in search results on Google and other search engines. 


Should you Hire a Video Production Company?

There are hundreds of companies out there that can provide you with the necessary equipment and expertise on how to create effective videos for both your website and social media and give you a much better chance of getting an ROI on your videos than if you made them yourself. While a good video production company can help you tremendously, their services will probably set you back thousands of dollars, depending on the video you’re making and how long you plan to be shooting. 

If you believe that investing in a video production company will help you, you need to do your research as you would before purchasing any other product or service. Search for reviews and testimonials about the company before you hire them, and have the company give you examples of past videos they’ve made for other clients to get a sense of their style. 

How can I Create a Video?

If you decide to go it alone, there are several cost-effective ways to make your own promotional videos. Whether you’re creating a video to promote your products, telling the story of your business or submitting a video as part of a grant contest, you’re most likely going to need to invest in some equipment and editing software, take time to learn how to make an effective video, as well as get your creative juices flowing on how you will connect with your audience. 

That said, to make a video that will grab the attention of your viewers, there are several steps and suggestions you’re going to need to follow:

#1 Invest in Video Editing Software

You want your video to be sharp, visually appealing, have the right background and be well-edited. Including minor special effects and a custom background will also help make your video more attractive, and this is where video editing software will come in handy. Popular software editing video packages such as InVideo, Adobe Premiere Pro and Cyberlink’s PowerDirector 365 can easily walk you through the process of making a great video and add the effects you’re looking for, such as customized backgrounds, audio effects, streaming images and lighting options. 

These packages can typically cost several hundred dollars but are significantly cheaper than hiring a video production company. 

For example, check out this storytelling video from a small business, which used video editing software to compile and smoothly streamline images and audio to tell the story of Sipping Streams Tea Company.


 #2 Purchase Video Equipment

Obviously, you want your viewers to be able to clearly see and hear you in your video, so it’s worth making an investment in some basic video equipment. Video equipment doesn’t have to cost a fortune either. While a $2,000, high quality hand-held video recorder would certainly be useful, you don’t have to spend that much. A basic tripod, an updated smartphone with high quality camera/video recorder, a small microphone and the right lighting can do the trick. These are low-cost items that can turn you into a video wizard overnight. 

(Pro Tip: Make sure you don’t have bright lights behind you when you’re speaking into the camera, so you don’t end up looking like a shadow. Also, use a good microphone so that your audience can clearly hear you.)

#3 Have a Script Ready

Before you make a video, carefully consider who your audience is and spend time crafting your message to say exactly what it is that you are seeking to convey. 

Remember, when you make a video, this is your chance to speak directly to your audience. You may want to make flash cards highlighting the most important points you wish to make, as well as informing your viewers of the value you bring to them.

For example, this educational video from River Pools is a great example of a small business owner succinctly articulating the informative points he wants to make in a visually friendly way.

#3 ‘Same as it Ever was, Same as it Ever was’

Kapitus small business video lending Vince Calio

You never want to be a “talking head” in your business video, unless you’re a member of the 80’s band, Talking Heads.

That’s what viewers will be saying if your entire business video is simply someone’s face blandly speaking in front of a plain white wall. So, unless you’re a member of the popular 80s band Talking Heads, you generally want to avoid being a talking head in your video. You can do this by featuring varied and colorful backgrounds to keep the viewer engaged.

This video from the 2022 winner of the FedEx Small Business Grant competition, the SuitShop, for example, does an excellent job of smoothly transitioning between visually appealing images and clearly articulating its message, which set it apart from other contestants.

#4 Plan and Coordinate for Product Demos/Customer Testimonials

One of the most effective videos for your business is a video of real customers demonstrating and raving about your product. These videos, however, will take more time and effort to produce than others. While advice about lighting, sound and colorful backgrounds still apply, you’re probably going to have to get real life customers to agree to be in your video and create scripts for each of them. Second, you may have to shoot in multiple locations, and third, you must make sure your product can be easily demonstrated. 

This is where you may want to hire a video production company to ensure you get the highest possible ROI on your video. A great example of a high-quality customer testimonial video is this one from Magic Flask,  which showcases customers using the product.

#5 Social Media is a Different Animal

Social media video posts, especially for the world’s most popular video platform, TikTok, require different types of videos than ones you would create for your website or YouTube. These videos shouldn’t be professionally made, rather, viewers should be able to relate to them on a personal level. 

When making a short video for TikTok or Instagram, you should first ask the question, “What aspect of a person’s life should I be showcasing, and how can I showcase that in an amusing and entertaining way?”

Here are some examples of successful small business videos on TikTok that are both affable and entertaining.

#6 SEO Your Videos

Now that you’ve made a video for your business, you want people to be able to find it. Google, however, loves content that has a mix of text, videos and images, so when you go to embed your video on your website, it’s important that you optimize it with keywords in the description, as well as meta tags and descriptions so your video appears in the results of searches on multiple search engines. 

#7 Don’t get into Legal Trouble

We live in the most litigious environment at any point in our history, so when you make a video for your business, you want to make sure you avoid legal trouble. This means (among other things):

  • Getting permission to use music. Musicians are especially touchy these days, so you want to obtain the proper permission to play a song by a popular artist in the background of your video.
  • Avoiding the sight of company logos (aside from your own) in your video. This can even include a Starbucks coffee mug or any other item with another company logo on it, as that has the potential for a copyright infringement lawsuit against you.
  • Not having children under the age of 13 in your videos – even though you have the best of intentions, this is something you want to avoid, as the Federal Trade Commission has strict laws against advertising to children, especially if your product involves alcohol.

You may want to run your video by your small business’ attorney before you publish it to make sure everything is hunky dory. 

Videos are Essential

Making videos for your business will take time, effort, and some money – depending on the equipment you purchase and whether you hire a production company – but videos now should be an essential part of your marketing strategy no matter what type of small business you own. A well-made video clearly appeals to consumers more than texts and can increase brand awareness, consumer engagement and even revenue for your business.

Kapitus small business rent crisis lending

Small Business Rent Crisis: What You can do to Survive

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Small businesses, facing a markedly different world than the one they faced at the height of the COVID-19 pandemic, are getting hammered by rising rents and demands for back rent payments. Rising inflation, employee shortages, rent increases and federal pandemic relief funding running dry have all contributed to 40% of small businesses in the US not making the rent in August 2022, according to Alignable – up from 33% in March. Another 45% of small businesses said that their rent has increased since 2021.

This has become an urgent crisis for Main Street businesses in virtually every industry that operates out of physical locations. Small agricultural businesses, independent restaurants, nonprofits, automotive dealerships, and the travel/lodging industry have been hit the hardest, with 50% of agricultural companies and 46% of restaurants missing their rent payments in August 2022. 

Small Business Kapitus lending rent crisis Alignable

Roughly 40% of small businesses missed their rent payment in August 2022, according to Alignable.

What can Small Businesses do?

If your small business has missed a rent payment or if you are struggling to figure out how you’re going to meet your next rent payment, your options obviously aren’t great. There are, however, some steps you can take to try to help ease your situation. 

Kapitus spoke to Stephen Cameron, president and founder of Level On Demand, a real estate services company that provides small businesses with real estate services such as contract reviews and property analysis. Cameron, a 20-year veteran of the commercial real estate market, shared his advice on how to deal with the current rent crisis.

#1 Know Your Landlord’s Situation

Before you try to negotiate with your landlord on missed or late rent payments, it’s important to first research whether the landlord is even allowed to compromise. Commercial real estate spaces are often owned by investment funds such as hedge funds or private equity firms, or even by pension funds or family offices. 

Hedge funds and private equity firms often require their landlords to enforce lease agreements to the letter with no room for negotiation, while a family office or pension fund will see some payment as better than nothing. If this is the case, you may want to consider moving your business to another space altogether.

#2 Read Your Lease Carefully!

If you informed your landlord that you’re going to be late on your next rent payment, it’s important to

Kapitus Small Business Real Estate Stephen Cameron Level On Demand rent crisis

Stephen Cameron, president of real estate consulting firm Level On Demand, stressed that small businesses should know their lease agreement before negotiating with their landlord.

read your original lease agreement, as most agreements do contain a grace period to make the payment on time. Often, these grace periods are three- to five days, and sometimes can even be up to 15 days. 

“The more important part of the lease to check is how many days you – as a tenant – have before you’re in default,” said Cameron. “This is much harder to recover from than just making a late payment. 

Cameron also stressed the importance of notifying your landlord in writing if you know you’re going to be late with rent, let them know you’re going to make that payment and see if it’s possible to negotiate late fees, as many landlords would rather avoid going through the hassle of looking for a new tenant. 

“If you have missed your payment deadline and any grace period, in most cases it is to your advantage to make written contact with your landlord as soon as possible,” said Cameron. “Sometimes it’s easy to forget that, in many cases, landlords are not large corporations, but just people who have a mortgage to pay and just want everything to work out with minimal problems.”

#3 Can You Negotiate Late Fees?

Negotiating late fees often depends on the goodwill of your landlord, because those fees are usually spelt out in your lease agreement. According to Cameron, these fees can range from 5% to 15% of one month’s rent, and a tenant won’t be in good standing with the rent until the full rent and late fees are paid. Cameron warned that “This is a commercial space, not a house; the eviction process is not as friendly here.”

small business lending, financing, rent, lease agreements, Vince Calio

Negotiate with your landlord early, as the eviction process for small businesses is a lot harsher than for residential properties.

He also emphasized that it’s important to negotiate late fees and a grace period before you sign a lease. “For anyone contemplating signing a new lease right now, who may be concerned they will need a longer grace period, there are options,” he said. “Especially in the case of new, seasonal or sales-dependent businesses, negotiating with a landlord to get a few ‘freebies’ or months per year in which rent can be paid late without a penalty or fee is not out of the question. Just be prepared for a landlord to ask for something in return.”

#4 How do you Negotiate Your Lease?

If you are looking for a lower rent but don’t want to move, one strategy you may want to consider is negotiating a new lease with your landlord. 

This isn’t going to be easy because landlords, like small businesses, felt the brunt of the economic impact of the pandemic. Many small businesses could not pay rent for months during the height of COVID, and many more still owe back rent.

Before you attempt to negotiate, Cameron suggests trying to gauge whether your landlord is in good shape or hurting financially before you negotiate a new lease. 

“There are a lot of motivations, financial and otherwise, in play these days, so asking for a reduction in rent or to keep it at its previous rate is very common right now,” he said. “I’m seeing tenants across the country having more success negotiating down their base rental rates in exchange for increases on their variable expenses, such as common area maintenance, utility reimbursements, etc.”

#5 Consider a WFH Arrangement or Shared Space 

Obviously, a working from home arrangement isn’t an option for businesses such as independent

restaurants and small construction companies. However, if your business operates out of an office, working from home or even moving to a cheaper, shared space through companies such as Industrious or Regus can be a much more cost-effective option for you, as it has become for many companies since the beginning of the pandemic.

“For smaller or more agile companies, having a dedicated mailing address may be enough,” said Cameron. “I’ve seen many of these companies supplement their occasional need for dedicated space by having company retreats at larger Airbnb homes or even reserving hotel-style conference rooms.” 

#6 Is it Worth Buying Your Property?

If you believe you can save enough for a down payment and can afford to wait until interest rates come down again, there are definite advantages to purchasing the space in which your business is housed outright. The biggest being that (depending on the purchase arrangement with your bank) your monthly payments will be fixed and never increase, and you’ll never have to beg for an extension or negotiate a lease with a landlord again. Not only will your property become an investment, but purchasing the property can also reap tax and depreciation benefits of ownership. 

There are also disadvantages of ownership, however. For one thing, it takes away your ability to easily move locations. Second, just as you are responsible for maintaining your house, you will be responsible for maintaining your business property, which can be costly. If you need a new roof or wish to re-landscape the space, you will be responsible for paying for that.

“Ultimately, the choice for a small- to medium-sized business between remaining a tenant or purchasing a property should be looked at objectively,” Cameron warned. “I’ve seen many business owners absolutely fall in love with a space that was perfect for their business but had no real value to anyone else. When it came time to move the business and find a new tenant, there were none to be found.”

#7 If you Have to Move…

As we are living in uncertain economic times, moving your business and finding a cheaper location won’t

be easy, but if you’re unable to reach an agreement with your current landlord, you may not have a choice. 

If your business relies on local customers, you’re probably going to need a space in the same neighborhood in which you currently operate. Since you’d be seeking a space that is ideally cheaper than the one you’re moving from, you may have to consider making due with a smaller space since the commercial rent market is fluctuating right now. 

As previously mentioned, if you do move to a new space, carefully negotiate your lease with your new landlord.

Carefully Consider Your Options!

Being late on or missing your rent payment is never ideal and comes with few easy answers. The worst thing you can do, however, is to just ignore the situation. You should realize that you do have a few options, the first being to make sure you keep your landlord in the loop as to what’s going on. Carefully try to renegotiate, and in case that fails, it’s crucial to have a backup plan. 

Kapitus secured line of credit small business lending

Pros and Cons of a Secured Business Line of Credit

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If your business needs to have fast access to cash, having a business line of credit (BLOC) in place can be invaluable. Before you apply for one, however, one of the first questions you need to ask is whether a secured or unsecured business line of credit is for you. Both options come with pros and cons, so it’s crucial that you carefully consider which is best for you.

What is a Line of Credit?

Secured and unsecured lines of credit are types of financing that give your business the flexibility to borrow funds at will with pre-agreed upon payback terms and credit limit. Whether you need cash to meet a business emergency or to meet payroll during the offseason, you can use the borrowed money to finance any aspect of your business that you see fit. 

Secured and unsecured lines of credits, however, have different risk profiles for the borrower, so they  usually come with different limits and interest rates. 

What’s the Difference? 

A secured BLOC is a form of financing that requires collateral to ensure that you pay back the borrowed amount, while an unsecured line of credit does not require collateral. 

An unsecured line of credit typically requires a high FICO score, a certain number of years in business (usually at least two years) and a strong cash flow. This type of line of credit normally ranges between $10,000 and $100,000, depending on the needs of the borrower, and comes with a variable interest rate often pegged to the prime rate plus several percentage points.

A secured line of credit, while typically reserved for business owners with lower credit scores, requires borrowers to put up valuable assets as collateral. That collateral can include real estate, equipment, present and future invoices and inventory. If you operate a pass-through business, you may even have to put up personal assets such as your house or personal savings. That said, however, a secured line of credit does have distinct advantages:

#1 Secured Lines of Credit Usually Offer Lower Interest Rates

The Federal Reserve has hiked interest rates five times so far this year with more probably coming, so cost of capital is a major concern for borrowers. Since a secured line of credit is collateralized with tangible assets, the lender takes on much less risk when providing this type of loan, so therefore, depending on your FICO score and the amount of collateral you put up, there’s a good chance that the interest rate on a secured BLOC could be lower than an unsecured one. 

#2 Your FICO Score can be Lower

Almost all lenders consider a high credit score to be one of the most important qualifications for financing, so if your FICO score is below 650, trying to secure a loan may be a frustrating experience. Since a secured BLOC is backed by assets, your chance of getting approved with a lower credit score is far higher than if you were applying for an unsecured line of credit.

#3 You Could Secure a Higher Line of Credit

A secured line of credit could come with a higher limit than an unsecured one.

While not in all cases, an unsecured BLOC usually tops out at $100,000 to limit the risk of the lender. Even for small business owners with great credit who are able to get approval for an unsecured BLOC, they often have to put up collateral if they want a limit exceeding $100,000. Depending on the value of the collateral being put up, a small business owner is more likely to obtain a higher limit with a secured BLOC than an unsecured one. 

#4 Secured BLOCs May Have Longer Repayment Terms

Securing your line of credit brings a host of benefits, and one of them is that your repayment term will usually be longer than with an unsecured BLOC. Putting up real estate as collateral can be especially beneficial, as the lender may increase the repayment term and the limit since the value of real estate usually increases over time. In some cases, the repayment term on an unsecured BLOC can be up to 10 years, whereas with an unsecured BLOC, it is usually far less. 

Cons of a Secured BLOC

While a secured BLOC does have its advantages, there are also potential drawbacks to consider before applying for one:

#1 You Risk Your Most Valuable Assets

To get approval for a secured BLOC, you need to put up valuable collateral. These can include your home or a highly valued piece of property. If your business relies on expensive pieces of equipment such as tractor-trailers or medical devices, or the future payment of invoices, those assets could be put up as collateral but would be at risk if you fail to pay off your debt. Therefore – just as you would with a personal loan – it is crucial that you make sure you can meet the repayment terms before you take out a secured BLOC.

#2 More Paperwork is Involved

You’ll probably need to consult with an attorney when applying for a

A secured line of credit will involve a lot of paperwork, as well as advice from a business attorney.

secured BLOC. That’s because you will need an expert to hash out the terms of repayment, especially if calamity hits and you are unable to pay back the amount you borrowed. An attorney can negotiate terms of what assets you will have to surrender in case you default on payments. 

#3 Interest Rates Vary

While the interest rate on a secured BLOC is generally lower than an unsecured one, the rate will still be variable, meaning that it will fluctuate as interest rates fluctuate. This underscores the importance of making sure you understand the exact terms of the secured BLOC before you take one on. 

A BLOC is not a Credit Card!

There is a common misconception that a line of credit is like a business credit card, but don’t be mistaken – the two are not the same. Yes, they both provide a line of credit and only charge interest on the amount you borrow. However, a line of credit ideally should be used for bigger, foreseeable expenses than a credit card since the interest rate is typically lower, and in some cases, you won’t get the cash from a line of credit for 24 hours. Plus, lines of credit have term limits and different repayment terms than a credit card. 

A business line of credit is a great tool if you need to get new office furniture or appliances, if you need cash for a business emergency, or if there is unexpectedly high demand for one of your products and you suddenly need to purchase more inventory. On the other hand, a business credit card is handy for sudden cash needs, such as picking up the tab for a business meal, or if your flight gets canceled during a business trip and you suddenly need to pay for a hotel room. Business credit cards also offer perks such as travel miles, but generally charge a higher interest rate than a BLOC. 

Carefully Weigh Your Options

A secured BLOC can give you great benefits if you need access to cash to grow your business or for an emergency. However, you need to carefully consider the terms of this type of financing, and like you would with your personal finances, you shouldn’t spend more than you need to.

Kapitus rising interest rates small business lending

How to Handle Another Painful Rate Hike

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More bad news for small business owners – for the fifth time since March, the Federal Reserve Board has hiked the overnight rate, this time by 75 basis points (0.75%) as part of a year-long effort to tame inflation. 

The latest hike will further drive up the cost of capital on most loan products, especially those being offered by traditional banks, and cause more pain for small business owners that have had to rely on financing this year in the wake of skyrocketing inflation, supply chain disruptions and rising worker salaries.

How Painful is the Hike?

Rising interest rates Kapitus small business lending

Fed Chair Jerome Powell announces yet another painful rate hike to tame inflation.

Small businesses that rely on financing have already bore the brunt of several rate hikes this year, and the latest rate hike will further raise the cost of capital for both fixed- and variable-rate loan products. The first pain point will be felt by small businesses that already have variable rate financing tools in place, since a hike to the overnight rate means that the prime rate – the interest rate commercial banks charge their most credit-worthy borrowers – will once again rise. 

The prime rate, which is used as a base rate for variable rate financing products such as business lines of credit, which often charge the prime rate plus several percentage points as the cost of capital, will rise once again. Since March, the prime rate has risen from 2.75% to 5.5%, and after this hike, could rise to 6.25%. 

What are the Current Loan Interest Rates as of September 2022?

It’s impossible to tell how high interest rates will go on specific lending products, since the rates charged greatly depend on the creditworthiness and other factors of the borrower. It is fair to assume, however, that the cost of capital for fixed-rate lending products, such as term loans – especially those being offered by traditional banks – will continue to rise. One measure to examine are the rates on the most popular small business loans out there, the SBA 7(a) loan. 

The 7(a) loan is a term loan offered through partner banks to small businesses with generally excellent credit history and at least two years in business. At the end of 2021, when the prime rate was just 3.25%, the maximum interest rate on a 7(a) loan of $25,000 or less with 7-year term or less was 7.5% (assuming the borrower has excellent credit). 

As of the end of August 2022, with the prime rate being 5.5%, the same loan carries a 9.75% rate. For a loan of $50,000 or more with the same term, the rate was 5.5% at the end of 2021, and in August 2022, it was 7.75%.

What can Small Businesses do?

No matter how you slice it, small businesses are going to have to pay higher rates now than they would have at the beginning of the year for most types of financing. If you already have a variable-rate loan, such as a business line of credit, the first thing you want to avoid right now is drawing down that line of credit since you will have to pay a higher interest on any money borrowed. 

Try to Renegotiate

One action to consider is attempting to renegotiate the terms of your loan with the lender, especially if

rising interest rates Kapitus small business lending

Rising interest rates may force small business owners to renegotiate terms with their lenders.

rising rates will affect your ability to pay back borrowed money. 

Remember, if you declare bankruptcy, it will be a long and costly process for the lender to recover any borrowed assets from you, so that’s an option they generally want to avoid and therefore, they will most likely be willing to work with you on a realistic plan to modify your loan. One thing that you can use as a negotiating tactic: if your credit score has improved since you opened the line of credit, you can use that to try and notch a lower interest rate.

Be Selective

If your small business needs financing during this period of rising rates, try to select the lending product that generally offers the lowest interest rate: an SBA loan. While interest rates have risen for SBA loans, they still generally offer the best interest rates and most flexible terms. The downside is that in order to obtain an SBA loan, you usually must have an excellent FICO score as well as a strong cash flow and several years in business, among other qualifications.

If you are seeking a business line of credit, you may even offer to put up collateral even if you have an excellent credit history, as secured lines of credit typically offer lower interest rates since the lender is taking on less risk. Additionally, term loans are typically cheaper than other types of financing, such as merchant cash advances and equipment financing.

Consider Alternative Lenders

An alternative lender, such as Kapitus, may be a good solution for you if you are seeking financing. Alternative lenders typically offer faster approval with fewer requirements and paperwork, and many have upgraded their customer service over the years to offer personalized service. 

Additionally, higher interest rates mean that traditional banks will be tightening their lending standards and make it more difficult for small businesses to obtain a loan, so alternative lenders may be a more appealing option if you’re seeking financing since they typically have less stringent requirements for potential borrowers.

Remain Steadfast

While now is not a great time to seek financing, just remember: interest rates rise and fall over time, depending on economic conditions. The Fed is hiking the overnight rate to combat inflation, so the high interest rate environment won’t last forever. If you must seek financing, try to go with the products that offer the lowest costs of capital possible, and consider looking at lending marketplaces to make lenders compete for your business. 

Employee Retention Tax Credit Kapitus Small Business Lending accounting

Are You Still Eligible for Employee Tax Credits?

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Thousands of small businesses are checking to see if they are still eligible for the popular Employee Retention Tax Credit (ERTC). While the sun set for the ERTC in September 2021, there is still a chance to retroactively claim that tax credit in 2022, albeit through a somewhat lengthy tax filing process. If your small business didn’t take advantage of this tax credit at the height of the pandemic, you could still be eligible for free money.

Is Your Business Still Eligible?

According to the IRS, if you operated a small business in 2020 and 2021 you must demonstrate that your business suffered a significant loss of business or was forced to temporarily close due to COVID-19 and COVID-related government shutdowns, yet you still retained your employees (at least on a part-time basis), to still be eligible for the ERTC. 

You should have a conversation with your accountant to see if you still qualify for the ERTC, but generally, to satisfy IRS requirements:

  1. You need to still have your gross receipts from 2020 and 2021. Your receipts from 2020 and 2021 should show that your gross income was at least 50% below what it was in 2019, or
  2. Under the Consolidated Appropriations Act (CAA) of 2021, businesses (including nonprofits, hospitals, educational institutions and 501c organizations) that were affected by closures and government-mandated quarantines and experienced a 20% drop in gross receipts in 2020 and 2021 compared to 2019 are still eligible.
  3. Under the American Rescue Plan (ARP) of 2021, businesses can be eligible for the ERTC if their receipts reveal a 50% loss in gross income in 2020 in the quarter immediately following the quarter in 2019 – not just to the corresponding quarter in 2019.
  4. The CAA also extended the dates for eligibility for the ERTC. The legislation stated that small businesses can still use wages paid through Q3 and Q4 of 2021 to claim a refundable tax credit of up to 70% of the qualifying wages, with a maximum of $7,000 per employee per quarter. 
  5. The Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 originally did not allow for small businesses that received a Paycheck Protection Program loan to claim ERTCs, but the CAA changed that. Employees that received a PPP loan can still retroactively claim the ERTX for past quarters by filing Form 941-X from the IRS.

How do I go About Applying for the ERTC?

Eligible Small business owners should speak to their accountants first, and then can still claim the ERTC when filing quarterly taxes using Form 941 Employer’s Quarterly Tax Return for applicable periods. If an employer does not have sufficient funds to cover the credit (because Social Security and Medicare taxes must be paid in order to be eligible), they can receive an advance payment from the government by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19 to the IRS.

Don’t Throw Away Free Money!

Economic times continue to be uncertain for small businesses, even in the waning days of the COVID-19 crisis, so you can’t afford to give up chances for free money. Talk to your accountant to see if your business may still be eligible for the ERTC. You could get up to 7,000 well-deserved dollars per employee for doing your part to keep people employed during the height of the pandemic.

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