Today, I’d like to talk to you about a real life example from my own life of how the Coronavirus has up-ended our economy. I’m going to change the name, but this is a true story.
I have a guy named Matt who I’ve worked with for a while. No, he hasn’t worked with me here at Distressed Loan Advisors. He’s worked with me at my side gig, or I guess more aptly, my side passion, which is a pizza truck.
Five years ago, I bought a pizza truck on a whim because I wanted to try something different. After spending my life in an office, I was ready to see how the other half lived. I was ready to make something rather than just shuffle papers and type words on a screen.
My idea was to buy a pizzeria, but I knew from my days of consulting and my years of small business lending that running a pizzeria would be no picnic. In particular, the hours that would be involved in running a pizzeria were hours that I didn’t have to give, with my wife working 12 hours a day. I was, and still am, the lead parent in my household. That meant late nights and weekends are not an option if I want to have a semblance of a family life.
So as I searched for available pizza restaurants, I started looking where everyone used to look – – on Craigslist. I typed in “pizza” in the “Business For Sale” section, and upped pop this big red, beautiful pizza truck.
Sure, it was pretty old, but the price was right. Beyond that, the thing that really attracted me was the fact that I would never have to pay rent to a landlord, and I would never have to pay utility bills.
Given that I wasn’t looking to run the business full time, it was the perfect opportunity for me to dabble without a full time commitment. That was about seven years ago when I bought that truck and I ran it for two years. And when I say I ran it, Matt actually ran it. He was my right hand man. I actually only purchased it after meeting with him, and him agreeing to run the different events for me. After a couple of years, that truck broke down once too often. So I decided it was time to let the old girl go.
One thing that I always regretted about the pizza was that I mostly did private events. What I really wanted to do was a mobile pizzeria that sold pizza, just like your regular pizza joint, but around the neighborhood.
I guess one way you could describe it would be like the ice cream man, except for pizza. In late 2019, the idea continued to roll around my head like a marble rolling across a wooden floor, back and forth and I could not get rid of it.
I decided I would feel nothing but regret if someone launched the idea instead of me, so I just had to do it. That, in conjunction with all that I was reading about the concept of ghost kitchens convinced me that I was onto something.
For those who don’t know, a ghost kitchen is a food service operation that focuses solely on delivery. Ghost kitchens typically will house multiple restaurant concepts under one roof, thereby splitting the cost of the overhead. In other words, you share the cost of a kitchen with lots of other entities, in a warehouse, where space is cheap.
I looked around where I live and was unable to find anything that resembled a ghost kitchen. So the next best thing was a trailer for one fixed cost. I would have that trailer and not be beholden to a landlord. So in late 2019, I placed the order for my first pizza trailer.
The plan at that time was for Matt to sell his pizzeria and we would run the business together. Then covid hit his business was immediately turned upside down. He owns a pizzeria that in the heart of the business district of a major city here in New Jersey. All those people who went out for lunch and got pizza, were no longer going to the office.
Not surprisingly. It was tough for him to make ends meet around that time. The government came out with options in an attempt to save small businesses In particular, the Paycheck Protection Program, otherwise known as PPP and also something called an EIDL loan, which is an economic injury disaster loan.
And what I want to talk about now is how so many business owners really didn’t know much about these programs other than money was available, and they really needed it.
The paycheck protection program was, by far, the better of the two programs as far as business owners are concerned. Why? It’s pretty simple. PPP loans in many cases are up to 100% forgivable. That’s right. If you use the money for what it was intended, then the government would not require you to pay it back. And I’ll be honest – I took one of those loans myself. As soon as the SBA announced that they were going to cover all small business loans for six months, I knew that I was not going to sign a new client for at least that long. Why would a business bother closing if the government was going to pay their loan? The answer is they wouldn’t. And so my business took a nosedive this year, just like everyone else. Lucky for me, I’m familiar with the SBA loan programs. And I was able to figure out which one was best for me. The PPP would of course be the best one because it was forgivable as long as I used it to pay my own salary, which I did.
And this is where my friend Matt comes in. He doesn’t know the difference between a PPP loan and an EIDL loan, which is a real shame. EIDL loans, you see, are not forgivable. That means if you take that loan, you have to repay it. There’s no chance that the government is simply going to tell you that you don’t need to pay it back.
Matt called me yesterday for two reasons. One, because he wants to help me run the business that we had discussed running a year ago. And two, to ask me about the details of the loan that he had taken. Matt did not understand the details of the loan that he had taken. And I bet he’s not alone.
I did a quick Google search, and read the loan documents and explained to him that the good news was that he had not personally guaranteed the loan. At first. He didn’t quite know what that meant. So I explained to him that his corporation was liable for the debt, but he was not personally responsible.
That would mean they can’t go after his personal bank accounts or any of his personal assets. That was the good news. The bad news was that he had pledged his business assets as collateral. That means that the SBA would have the right to come and take his pizza equipment and sell it to put towards the loan. While it’s not an ideal scenario for him, I explained to him that it’s fairly common. And when it came to EIDL loans, any loan over $25,000, it was a requirement to pledge the business assets but not a personal guarantee.
On the bright side, I also told him that in my experience, and given the large number of loans that had been given to business owners across the country, I thought it would be unlikely that the SBA would actually be interested in some old pizzeria equipment that was worth maybe a couple thousand dollars at most.
So what’s the point of this article? My point is that the government had to do something and noone’s going to dispute that. But talking to Matt made me realize that when people were looking for help, they signed up for things without really understanding what they were signing up for.
He could have just as easily signed a personal guarantee and got himself into a whole lot more trouble. Luckily, the program didn’t require it, and I was able to explain to him the best way out.
I’m going to guess that many business owners out there don’t know a guy like me, who just happens to work in this field, and may end up repaying these loans because they think they are personally responsible.
I’m not saying it’s a bad thing to repay your loan. What I’m saying is that it’s a shame that many people who are desperate for help sign up for things without fully understanding what they’re signing up for.
The next couple of years are going to be busy for me. That’s my guess. There’s going to be a tidal wave of SBA loan defaults coming my way. And I’m going to bet dollars to donuts that are good portion of them will tell me they had no idea what they were signing.
I just hope that most of them signed up for the same terms that my friend Matt did. So they don’t get left on the hook personally, after losing their business.