Many small businesses wobble under weight of high rates
Small operations have endured pandemic rules, lockdowns and rising costs. Refinancing their loans could be as painful, or worse.
It’s early afternoon on the Lower East Side of Manhattan, New York, and Erin McKenna’s Bakery is buzzing. The cozy, little shop has pink walls, Christmas lights, knickknacks and, of course, desserts — a glass case with rows and rows of vibrant cupcakes, doughnuts, cookies.
Alessandra Fabiani has been coming to the bakery for years.
“I have a severe nut allergy, and my sister can’t do dairy,” she says. “So we found a place that we could both safely eat at. And, yeah, we’ve been loyal customers ever since.”
Today, she’s ordering the lemon tea cake.
Everything at the bakery is gluten-free, vegan and kosher. It’s been that way since McKenna opened it in 2005.
As it turned out, the food-allergic, kosher vegans of New York were a substantial demographic. And they were substantially excited that someone was finally letting them eat cake.
“In the beginning, we were the only game in town,” McKenna recalls. “People were coming in droves, and then I got on Martha Stewart.”
That TV spot was a very good thing for McKenna, who suddenly had orders pouring in from across the country. By 2019, she had a multimillion-dollar business with locations in New York, Los Angeles and at Disney World.
She was ready to take her thriving business to the next level: opening her biggest shop ever, in a wealthy Santa Monica, California, neighborhood.
“This location was going to be transformative for us,” McKenna recalls. “I knew the customer. I’m like, ‘This is a slam dunk.'” It was a major investment, but McKenna had done her homework and she was confident. “I took out this massive loan, and we opened in July of 2019.”
Then, of course, came the pandemic and lockdown.
“It just completely destroyed the business,” McKenna says. “I was trying to make that location work and using all my resources to keep it open.” McKenna’s other bakeries were thriving, and she started using money from those locations to keep the new location afloat. “I realized I was throwing good money after bad. I said, ‘I just can’t do it anymore.’ I had to close it. I just was done.”
What wasn’t done? The loan. McKenna’s original loan for the Santa Monica store was for $800,000. When the loan reached maturity a few weeks ago, McKenna still owed about $330,000. She went to refinance her loan, but the interest rate she was offered was 15%. That would put her whole business at risk.
“I’m facing a dilemma of how to refinance my loan without bankrupting my company,” she says.
The new lease would mean McKenna would have to pay $8,000 a month in interest and fees alone.
“That was going to put me in a position where I wouldn’t be able to pay my rent. I wouldn’t be able to make payroll.”
McKenna is doing everything she can to work out a deal. But if she can’t, the lender could foreclose on her business — 20 years of her hard work and success could be gone.
When I asked her how it feels to be in this position with so much on the line, she was quiet for a moment. When she answered, she choked up.
“It’s like being fed to the vultures,” she said.
Still, McKenna said most of the small business owners she knows are struggling right now. “I know a lot of neighboring businesses are just shuttering,” she said. “Because no one can keep up really. And who wants to live with all of this debt?”
Julia Pollak, chief economist with ZipRecruiter, suspects that after years of pandemic regulations, lockdown, rising prices and rising labor costs, interest rates might be the straw breaking small businesses’ backs.
“This is small businesses going to refinance, as one does, and suddenly getting quotes that would more than double their monthly payments,” she said. “It’s turning their profitable businesses into bankrupt enterprises within two, three months.”
She pointed out that unemployment has been rising in sectors where there are a lot of small businesses, like leisure and hospitality.
This is the Federal Reserve’s plan, Pollak said: Raise interest rates, make loans more expensive so people borrow less and spend less. That means companies sell less and eventually cut their prices to try to boost sales. That is how prices fall. That is how inflation comes down.
“The problem is, the problem is, how many businesses will we lose until that happens?” said Pollak. “So far, everyone’s been saying, ‘Wow! It’s been a huge miracle! We have cooled inflation without massive job losses!’ Right? The question is, how long will this miracle continue? Will there be a point where the labor market deteriorates too much and we lose too many businesses and too many jobs?”
Meanwhile, as Erin McKenna has tried to find solutions for her bakery, an exciting offer has come up. Disney wants to serve her desserts on its cruises. It’s a game-changer for McKenna, but requires a huge investment of money and other resources. Right now, things are tight.
“It’s such a bizarre place to be standing in,” McKenna said, laughing. “I have this embarrassment of riches, all this opportunity at my feet, and yet I’m being choked by these current circumstances.”
Choked or not, McKenna is doing her best to make it work. She is pinching every penny she can: paring down her menu, getting rid of takeaway bag, ordering fewer cake boxes.
“We’re low on boxes because we had to use the money to pay the loan this month, and then rent gets pushed back another week, and then you’re paying late fees. It creates this domino effect,” she said.
Still, McKenna is hopeful that she’ll find a way forward. After all, she’s steered her business through two decades of economic ups and downs, and she’s always found a way to keep the cupcakes coming.