A chat with the co-founder of Newity, a Chicago-based adviser to small businesses and an administrator of government-backed loan programs.
July 18, 2022 | H. Lee Murphy – Staff Writer
The U.S. Small Business Administration’s 7(a) loan program has helped small companies raise money for decades. But Luke LaHaie says not enough private companies are taking advantage of the government support.
LaHaie is co-founder and co-CEO of Newity, a Chicago-based adviser to small businesses and an administrator of government-backed loan programs. The firm was born out of the COVID-19 pandemic in summer 2020 as a facilitator of the Paycheck Protection Program sponsored by the SBA. It ended more than a year ago, and since then Newity has switched gears to matching clients with 7(a) assistance.
The 37-year-old LaHaie is a native of northern Michigan with an undergraduate degree in finance from Michigan State University and a master’s in accounting from Notre Dame. He’s a certified public accountant (he also has a Chartered Financial Analyst certification) who has worked with big-company clients as an accountant at Ernst & Young and PricewaterhouseCoopers as well as RedRidge of Chicago, a due-diligence specialist. His partner at Newity is David Cody, 53, a former asset manager in New York.
The pair started Newity as a virtual firm two years ago, but more recently have opened offices in the West Loop, though only a fraction of their 80 full-time staffers commute to work there. A condensed and edited interview follows:
Crain’s: Why start as a virtual firm?
LaHaie: It certainly breaks down one of the barriers to starting a business. Taking on even short-term rental costs can be a big investment for a small firm. Last year we signed a lease for 5,000 square feet of space, but a year earlier that would have seemed risky to us. What we have learned is that Zoom is an amazing tool.
The PPP program was not started as a giveaway. Now it seems that most borrowers have had their PPP loans forgiven by the government. What are you seeing?
At our peak, we were servicing 115,000 PPP loans through 150 different banks. Early on, I figured that 75% of PPP loans would be forgiven by the government and that 25% would be repaid. But more recently, my estimate is that close to 95% of loans have been forgiven. Of what remains, I would say that about 20% to 25% are in default. So, of the entire portfolio, about 3% to 4% of the loans are actually being repaid by borrowers.
Critics are suggesting the government poured too much money into companies, helping ignite the inflation that has followed.
The times were so uncertain two years ago that it seemed like the government had to do it. Put too little money into PPP and other programs and you ran the risk of a deep recession, with far worse consequences than what we’re dealing with now. Without assistance, most restaurants would have been crushed, absolutely going out of business.
I own a gym in River North called Mag Mile CrossFit that had to close for awhile. We got $20,000 in PPP money that allowed us to keep our two employees working. There were 10 million PPP loans put out in total, but my guess is that close to 40 million more U.S. businesses got no money. Many of them could have been eligible.
So now you’ve taken on a new identity as a servicer of 7(a) loans backed by the SBA. But you aren’t working with bigger companies and big banks there?
We’re concentrating on clients with less than $1 million in annual revenue. There is a niche within 7(a) that makes microloans up to $25,000 for working capital available to these small companies. There are very few of these loans being processed, however. Too many business owners are getting by with credit card loans carrying interest rates well over 20%.
The SBA offers loans at closer to 6%. The difference is huge. But this program doesn’t get much notice and many people don’t know it even exists. We’ve gone back to our PPP clients—80% of whom took loans of less than $100,000 from the government—to promote this. We think many of them qualify.
What else is your firm doing?
Later this summer, we are moving on to market working capital loans of up to $250,000, also guaranteed under SBA 7(a). The rules are a little different from the smaller program, but we think this is a market that isn’t being served right now.
With inflation raging and a potential recession looming, is this a good time for small business to be taking on debt?
Business owners should focus on shoring up their balance sheets with longer-term, lower-cost debt. At the same time, they ought to reduce their cost structure where they can.
Companies are finding they need money—more capital—to pay their workers more. At our gym, we gave out employee raises but also raised our prices for the first time in three years by 10%. Nobody has complained.