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Small business owners have not faced lending costs reaching into the double-digit percentages in decades.
Small Business Administration loans could rise to above 9% by year-end if the Federal Reserve continues to raise rates in its battle against inflation.
Rates should never be the sole determinant of business growth strategy and a decision to source new capital, but lending costs are nearing a point where monthly cash flow may not be enough to cover debt repayment in a softer economy.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, July 27, 2022.
Elizabeth Frantz | Reuters

The Federal Reserve’s decision to raise interest rates by 0.75%, or 75 basis points, for the third-consecutive time at the Federal Open Market Committee meeting, is a step being taken to cool the economy and bring down inflation, but it is also putting small business owners across the country in a lending fix they have not experienced since the 1990s.
If the Federal Reserve’s FOMC next moves match the market’s expectation for two more interest rate hikes by the end of the year, small business loans will reach at least 9%, maybe higher, and that will bring business owners to a difficult set of decisions. Businesses are healthy today, especially those in the rebounding services sector, and credit performance remains good throughout the small business community, according to lenders, but the Fed’s more aggressive turn against inflation will lead more business owners to think twice about taking out new debt for expansion.

Partly, it is psychological: with many business owners never having operated in anything but a low interest rate environment, the sticker shock on debt stands out more even if their business cash flow remains healthy enough to cover the monthly repayment. But there will also be more businesses finding it harder to make cash flow match monthly repayment at a time of high inflation across all of their other business costs, including goods, labor, and transportation.
“Demand for lending hasn’t changed yet, but we’re getting dangerously close to where people will start to second guess,” said Chris Hurn, the founder and CEO of Fountainhead, which specializes in small business lending.
“We’re not there yet,” he said. “But we’re closer.”

Increasing interest cost

As traditional banks and credit unions tighten lending standards and businesses begin to breach debt covenants based on debt service coverage ratios — the amount of cash flow needed to cover debt — more business owners will turn to the SBA loan market in which firms like Hurn’s specialize.
“Every time we get into one of these cycles and the economy is slowing and rates are going up, one of the few places to get business credit is SBA lenders,” he said.

But even in the SBA market, business owners are beginning to pause as a result of the Fed’s rate actions, said Rohit Arora, co-founder and CEO of Biz2Credit, which also focuses on small business lending. “From a credit perspective, people are getting more cognizant about increasing interest cost, and that the Fed will keep interest rates at 4-4.50%,” Arora said.
Fed officials signaled the intention on Wednesday of continuing to hike until the funds level hits a “terminal rate,” or end point of 4.6% in 2023.
“Even a month ago, this was a ‘2022 phenomenon’ and now they will have to live with the pain for longer,” Arora said. “It’s a harder decision now because you don’t have the Fed ‘put’ behind you,” he added, referring to an environment in which you could bank on adjustable loan rates not going higher.

Fed expected to keep rates higher for longer

The big change since the summer, reflected in the stock market as well, is the acknowledgment that the Fed is not likely to quickly reverse its interest rate hikes, as inflation proves stickier than previously forecast, and key areas of the economy, like the labor market, don’t cool fast enough. As recently as the last FOMC meeting in July, many economists, traders and business owners expected the Fed to be cutting rates as soon as early 2023.
Now, according to CNBC’s surveying of economists and investment managers, the Fed is likely to reach peak rates above 4% and hold rates there throughout 2023. This outlook implies at least two more rate hikes in November and December, for a total of at least 75 basis points more, and including Wednesday’s hike, 150 basis points in all from September through the end of the year. And that is a big change for business owners.
The FOMC meeting decision reinforced this expectation of a more hawkish Fed, with the two-year treasury bond yield hitting its highest rate since 2007 and the central bank’s expectations for when it starts cutting rates again pushed out even further in time. In 2025, the fed funds rate median target is 2.9%, implying restrictive Fed policy into 2025.

How SBA loans work and why rate hikes are a big issue

SBA loans are floating rate loans, meaning they re-adjust based on changes in the prime rate, and that has not been an issue for business owners during the low interest rate environment, but it is suddenly becoming a prominent concern. With SBA loans based on the prime rate, currently at 5.50%, the interest rates are already between 7%-8%. With the prime rate poised to reach 6.25% after the Fed’s latest 75 basis point hike, SBA loans are heading to as high as the 9%-9.5% range.
“Most of the business owners today, because they have lived in such a low rate environment, while they have floating interest rate loans they didn’t even realize that on existing loans it could go up,” Arora said. “Everyone expected with gas prices coming down to what I would call ‘pre-high inflation levels’ that things looked a lot better. Now people are realizing that oil prices don’t solve the problem and that’s new for lots of business owners who thought inflation would taper off and the Fed not be so hawkish.”
He stressed, like Hurn, that demand for business loans is still healthy, and unlike deteriorating consumer credit, small business credit performance is still strong because many firms were underleveraged pre-Covid and then supported by the multiple government programs during the pandemic, including the PPP and SBA EIDL loans. “They are well capitalized and are seeing strong growth because the economy is still doing pretty well,” Arora said, and he added that the majority of small businesses are in the service economy, which is the strongest part of the economy right now.
But many business owners were waiting for the Fed to cut in early 2023 before making new loan decisions. Now, they’ve been caught flatfooted by adjustable loan rates that went up, and an interest rate environment poised to go higher still.
“Lots of business owners look at gas prices first and that was true for most of the year, and now it’s broken down. Wage inflation and rent inflation are running amok, so we’re not seeing inflation coming down anytime soon,” Arora said.
That’s leading to more interest in fixed-rate products.

Fixed versus adjustable rate debt

Demand for fixed-rate loans is going up because businesses can lock in rates, from a year to three years. “Though it’s pretty late to the game, they feel like maybe the next 14 to 15 months, before rates start coming down, they can at least lock in a rate,” Arora said. “The expectation is, in the short term, SBA loans will adjust up and non-SBA loans are shorter tenure,” he said.
SBA loans range from three years to as long as 10 years.
A fixed rate loan, even if it is a little higher than an SBA loan today, may be the better option given the change in interest rate outlook. But there’s considerable potential downside. Trying to time the Fed’s policy has proven difficult. The change from the summer to now is proof of that. So if there is a significant recession and the Fed starts cutting rates earlier than the current expectation, then the fixed-rate loan becomes more expensive and getting out of it, though an option, would entail prepayment penalties.
“That’s the one big risk you run if taking a fixed-rate loan in this environment,” Arora said.
The other tradeoff in choosing a fixed-rate loan: the shorter duration means a higher monthly repayment amount. The amount a business can afford to pay back every month depends on the amount of income coming in, and a fixed rate loan with a higher monthly repayment amount requires a business to have more income to devote to servicing the loan.
“After 2008, business owners never experienced a jumped in SBA loans and now they see monthly interest payments increasing, and are feeling the pinch and starting to plan for it … get adjusted to the new reality,” Arora said. “Demand is still healthy but they are worried about the increased interest cost while they are still battling inflation, even as lower oil prices have helped them.”

SBA loan guaranty waiver ending

Another cost that is suddenly influencing the SBA loan decision is the end of a waiver this month on SBA loan guaranty fees that are traditionally charged to borrowers so that in the event of a default, the SBA pays the portion of the loan that was guaranteed.
With that waiver ending in September, the cost of guaranteeing a loan can be significant. For example, a 3% SBA guaranty fee on a $500,000 loan would cost the business borrowing the money $15,000.
“It’s adding to the costs,” Arora said.

It’s still a mistake to wait too long to access credit

While oil prices are coming down, food and other inventory costs remain high, as do rent and labor costs, and that means the need for working capital isn’t changing. And business owners who have been through downturns before know that the time to access credit is before the economy and cash flow start to deteriorate. At some point, in the most severe downturns, “you won’t get money at any cost,” Arora said.
“If you have a reasonably calculated growth plan, no one is going to say keep your head in the sand and wait until Q2 of next year and see where rates are,” Hurn said. “Banks don’t like to lend when the economy is slowing and there are higher rates, which translate to higher risk of defaults.”
Hurn said loan covenants are being “tripped” more frequently now in deteriorating sectors of the economy, though that by no means typifies the credit profile on Main Street.
“Once interest rates go up, and if inflation does not go down, we will see more debt service coverage ratios getting violated,” Arora said. This has to be taken into account because here is a lag between Fed policy decisions and economic impact, and this implies that sticker forms of inflation will last for longer even as sectors like housing and construction are deteriorating.
Much of the surplus liquidity businesses are sitting on due to government support is being eroded, even amid healthy customer demand, because of high inflation. And even if this economic downturn may not be anything like the severe liquidity crisis of 2008, business owners are in a better position when they have the access to credit before the economic situation spirals.

This is not 2008, or 1998

The systemic issues in the financial sector, and the liquidity crisis, were much bigger in 2008. Today, unemployment is much lower, lender balance sheets are much stronger, and corporate balance sheets are stronger too.
“We’re just running into a slowing economy,” Hurn said.
When he started in small business lending back in 1998, business loans reached as high as 12% to 12.5%. But telling a business owner that today, like telling a mortgage borrower that rates used to be much higher, doesn’t help after an artificially low interest rate era.
“Psychologically, people set their expectations for borrowing costs … ‘they will be this cheap forever,'” Hurn said. “It’s changing radically now.”
“If rates go close to 10%, psychologically, businesses will start hesitating to borrow,” Arora said.  
And with a peak Fed rate level of 4% or higher reached by late this year, that is where SBA loan rates are heading.

The problem of higher interest rates and recession

Another 150-175 basis points in total from the Fed, if it has its intended effect of bringing inflation down, would leave many businesses in a stable condition because all of the other costs they are facing outside of debt would be more manageable. But the key question is how quickly the interest rate actions bring down inflation, because the higher rates will impact the cash flow of businesses and their monthly loan payments.
Lower inflation in stickier parts of the economy, like labor, combined with energy costs remaining lower, would allow small businesses to effectively manage cash flow. But if those things don’t happen as quickly as people are expecting, “then there will be pain, and consumer spending will be down too, and that will have a bigger impact,” Arora said. “The challenge is recession and high interest rates together that they have to handle and haven’t seen in 40 years,” he said.
Rates are not ordinarily considered the determining factor in a business’s decision to take out a loan. It should be the business opportunity. But rates can become a determining factor based on the monthly repayment amount, and if a business is looking at cash flow against monthly costs like payroll being harder to make, expansion may have to wait. If rates go up enough, and inflation doesn’t fall off fast enough, all borrowing may need to be applied to working capital.
One thing that won’t change, though, is that the U.S. economy is based on credit. “People will continue to borrow, but whether they can borrow at inexpensive rates, or even get capital trying to borrow form traditional sources, remains to be seen,” Hurn said. More

Phoenix Suns and Mercury owner Robert Sarver said he would begin the process to sell both professional basketball teams.
Last week, the NBA suspended Sarver for a year after an independent probe found that he had used racist and sexist language at work while also verbally abusing employees.
NBA Commissioner Adam Silver said he supported Sarver’s decision.

Phoenix Suns and Mercury owner Robert Sarver attends Game Two of the 2021 WNBA Finals at Footprint Center on October 13, 2021 in Phoenix, Arizona.
Christian Petersen | Getty Images

Phoenix Suns and Mercury owner Robert Sarver said he would begin the process to sell both professional basketball teams after a damning report detailed nearly two decades’ worth of workplace harassment and inappropriate behavior by the executive.
Blaming an “unforgiving climate,” Sarver said in a statement Wednesday that he is unable to separate his “personal” controversy from the NBA and WNBA teams.

“Whatever good I have done, or could still do, is outweighed by things I have said in the past. For those reasons, I am beginning the process of seeking buyers for the Suns and Mercury,” he wrote.
Forbes values the Suns, who appeared lost to the Milwaukee Bucks in the 2021 NBA Finals, at $1.8 billion. The Mercury have won four WNBA titles.
Last week, the NBA suspended Sarver for a year after an independent investigation corroborated details of a November ESPN report that alleged the owner used racist language, made sex-related comments to and about women, and mistreated employees. The league also fined him $10 million.
“The statements and conduct described in the findings of the independent investigation are troubling and disappointing,” NBA Commissioner Adam Silver said last week. “We believe the outcome is the right one, taking into account all the facts, circumstances and context brought to light by the comprehensive investigation of this 18-year period.”
Silver on Wednesday said he supported Sarver’s decision to sell the franchises. “This is the right next step for the organization and community,” the commissioner said in a statement issued by the NBA.

The Sarver controversy is reminiscent of when former Los Angeles Clippers owner Donald Sterling was fined $2.5 million and banned for life from the NBA after he was caught making racist comments on recordings. He was forced to sell the team for $2 billion to former Microsoft CEO Steve Ballmer after 33 years of ownership. Sterling sued the NBA, but the suit was settled in 2016.
Here is Sarver’s full statement:

Words that I deeply regret now overshadow nearly two decades of building organizations that brought people together – and strengthened the Phoenix area – through the unifying power of professional men’s and women’s basketball.
As a man of faith, I believe in atonement and the path to forgiveness. I expected that the commissioner’s one-year suspension would provide the time for me to focus, make amends and remove my personal controversy from the teams that I and so many fans love.
But in our current unforgiving climate, it has become painfully clear that that is no longer possible – that whatever good I have done, or could still do, is outweighed by things I have said in the past. For those reasons, I am beginning the process of seeking buyers for the Suns and Mercury.
I do not want to be a distraction to these two teams and the fine people who work so hard to bring the joy and excitement of basketball to fans around the world. I want what’s best for these two organizations, the players, the employees, the fans, the community, my fellow owners, the NBA and the WNBA. This is the best course of action for everyone.
In the meantime, I will continue to work on becoming a better person, and continuing to support the community in meaningful ways. Thank you for continuing to root for the Suns and the Mercury, embracing the power that sports has to bring us together.

– CNBC’s Lillian Rizzo and Jessica Golden contributed to this report.

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Twitch announced a policy update prohibiting streaming of sites that include slots, roulette or dice games that aren’t licensed in the U.S. or other markets with robust consumer protections. 
The move goes into effect Oct. 18.

Twitch logo displayed on a laptop screen and a gamepad are seen in this illustration photo taken in Krakow, Poland on August 23, 2022.
Jakub Porzycki | Nurphoto | Getty Images

Twitch said it is planning to ban the streaming of certain crypto gambling websites in an effort to protect users from potential harm.
The livestreaming platform, owned by Amazon.com Inc., announced the update to its gambling policies in a statement posted on Twitter Tuesday. The ban will prohibit streaming of sites including slots, roulette and dice websites that aren’t licensed in the U.S. or “other jurisdictions that provide sufficient consumer protection”. It said the ban takes effect Oct. 18.

The policy change comes after some of the platform’s top streamers threatened to stop using the platform if Twitch didn’t change its policy on gambling streams.
Twitch did not immediately respond to a request for comment.
Gambling across the platform has long been controversial, with the company facing backlash from streamers and users for not reigning in popular gambling categories that could have harmful effects, particularly on young users.
Twitch said the ban applies to sites including Stake.com, Rollbit.com and Duelbits.com and that it “may identify others as we move forward.” The company added it would not ban sports betting, fantasy sports such as fantasy football or poker.
“Gambling content on Twitch has been a big topic of discussion in the community, and something we’ve been actively reviewing since our last policy update in this area,” the statement read. “While we prohibit sharing links or referral codes to all sites that include slots, roulette or dice games, we’ve seen some people circumvent those rules and expose our community to potential harm.”
Twitch’s current community guidelines already prohibit streamers from referring viewers to sites that include slots, roulette or dice games or sharing affiliate links or referral codes to such sites.

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Visa, Mastercard and American Express are facing calls from Republican attorneys general not to move forward with plans to adopt a new code for gun retailers.
Gun rights groups say the code would undermine the constitutional rights of law-abiding people seeking to make legal gun purchases.
Visa, Mastercard and American Express have said the new code won’t inhibit legal commerce.

Fire arms are seen at the Bobâs Little Sport Gun Shop in the town of Glassboro, New Jersey, United States on May 26, 2022. 
Tayfun Coskun | Anadolu Agency | Getty Images

Two dozen Republican attorneys general are urging Visa, MasterCard, and American Express to drop their plans to adopt a new merchant category code for gun retailers, saying the move would infringe on consumers’ privacy.
In a letter sent to the companies Tuesday, the attorneys general warn the credit card companies that they could face legal action if they move forward with the code adopted by the International Organization for Standardization.

“Categorizing the constitutionally protected right to purchase firearms unfairly singles out law-abiding merchants and consumers alike,” said the letter, led by Tennessee Attorney General Jonathan Skrmetti and Montana Attorney General Austin Knudsen.
“Be advised that we will marshal the full scope of our lawful authority to protect our citizens and consumers from unlawful attempts to undermine their constitutional rights,” says the letter, which was first reported by The Wall Street Journal.
Visa, MasterCard and American Express did not immediately respond to requests for comment.
On Saturday, Senate Republicans sent a similar letter to the three credit card companies. The letter said the companies are “bowing to international and activist pressure,” and that the codes are “the first step towards backdoor gun control on law abiding Americans.”
The letters come after the credit card companies announced plans to start applying the new sales code to transactions made at gun stores. Gun law advocates have said such a code is a critical first step toward giving banks and credit card companies the tools they need to recognize dangerous firearm purchasing trends — such as a domestic extremist building up an arsenal — and report them to law enforcement.

A merchant category code indicates the types of services or goods sold to consumers. Previously, gun store sales were categorized as “general merchandise.”
Visa, MasterCard and American Express have previously said the new codes won’t inhibit legal commerce.
“A fundamental principle for Visa is protecting all legal commerce throughout our network and around the world and upholding the privacy of cardholders who choose to use Visa,” Visa said in a statement last week. “That has always been our commitment, and it will not change with ISO’s decision.”

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Tom Hardy isn’t just an action star on the big screen: He can throw down in real life, too.
The 45-year-old actor made a surprise appearance at the 2022 Brazilian Jiu-Jitsu Open Championship in Milton Keynes, England over the weekend and ultimately walked away with the top prize, The Guardian reports.

The “Venom” and “Mad Max: Fury Road” star entered the tournament under his real name, Edward Hardy, and according to tournament organizers was a “real pleasure” to have participate.

“Everyone recognized him but he was very humble and was happy to take time out for people to take photographs with him,” a spokesperson told The Guardian. “It was a real pleasure to have him compete at our event.”
In an interview with local media, one of Hardy’s opponents said he was “shell shocked” to come face to face with the Academy Award-nominated actor.
“I recognized him straightaway. Everyone knows who Tom Hardy is, don’t they?” competitor Danny Appleby told Teesside Live. “I was shell-shocked. He said, ‘Just forget it’s me and do what you would normally do’.”
Hardy has been involved in the world of mixed martial arts for years and is a blue belt. In 2011’s hit film “Warrior,” he played an MMA fighter and put on 28 pounds of muscle for the role.

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Ahead of news from the Federal Reserve on Wednesday, the 2-year Treasury yield climbed to 4.006%, the highest level since October 2007, and the 10-year Treasury reached 3.561% after hitting an 11-year high this week.
When shorter-term government bonds have higher yields than long-term, which is known as yield curve inversions, it’s viewed as a warning sign for a future recession.
“Higher bond yields are bad news for the stock market and its investors,” said certified financial planner Paul Winter, owner of Five Seasons Financial Planning.

Morsa Images | E+ | Getty Images

As investors digest another 0.75 percentage point interest rate hike by the Federal Reserve, government bonds may be signaling distress in the markets.
Ahead of news from the Fed, the policy-sensitive 2-year Treasury yield climbed to 4.006% on Wednesday, the highest level since October 2007, and the benchmark 10-year Treasury reached 3.561% after hitting an 11-year high this week.

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When shorter-term government bonds have higher yields than long-term bonds, which is known as yield curve inversions, it’s viewed as a warning sign for a future recession. And the closely-watched spread between the 2-year and 10-year Treasurys continues to be inverted.  
More from Personal Finance:Here’s how high inflation may affect your tax bracketWhat another major interest rate hike from the Fed means for youInflation is causing some millennials and Gen Zers to close investing accounts
“Higher bond yields are bad news for the stock market and its investors,” said certified financial planner Paul Winter, owner of Five Seasons Financial Planning in Salt Lake City.
Higher bond yields create more competition for funds that may otherwise go into the stock market, Winter said, and with higher Treasury yields used in the calculation to assess stocks, analysts may reduce future expected cash flows.
What’s more, it may be less attractive for companies to issue bonds for stock buybacks, a way for profitable companies to return cash to shareholders, Winter said.

How Federal Reserve rate hikes affect bond yields

Market interest rates and bond prices typically move in opposite directions, which means higher rates cause bond values to fall. There’s also an inverse relationship between bond prices and yields, which rise as bond values drop.
Fed rate hikes have somewhat contributed to higher bond yields, Winter said, with the impact varying across the Treasury yield curve. 

“The farther you move out on the yield curve and the more you go down in credit quality, the less Fed rate hikes affect interest rates,” he said.
That’s a big reason for the inverted yield curve this year, with 2-year yields rising more dramatically than 10-year or 30-year yields, he said.  

Consider these smart moves for your portfolio

It’s a good time to revisit your portfolio’s diversification to see if changes are needed, such as realigning assets to match your risk tolerance, said Jon Ulin, a CFP and CEO of Ulin & Co. Wealth Management in Boca Raton, Florida.
On the bond side, advisors watch so-called duration, measuring bonds’ sensitivity to interest rate changes. Expressed in years, duration factors in the coupon, time to maturity and yield paid through the term. 

Above all, investors must remain disciplined and patient, as always, but more specifically if they believe rates will continue to rise.

Paul Winter
owner of Five Seasons Financial Planning

While clients welcome higher bond yields, Ulin suggests keeping durations short and minimizing exposure to long-term bonds as rates climb. “Duration risk may take a bite out of your savings over the next year regardless of the sector or credit quality,” he said.
Winter suggests tilting stock allocations toward “value and quality,” typically trading for less than the asset is worth, over growth stocks, that may be expected to provide above-average returns. Often, value investors are seeking undervalued companies expected to appreciate over time. 
“Above all, investors must remain disciplined and patient, as always, but more specifically if they believe rates will continue to rise,” he added.

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The list of things that interest Elon Musk ranges from space travel to easing Los Angeles’ infamous traffic.
One thing that doesn’t make the cut? Patents.

The 51-year-old entrepreneur recently appeared on CNBC’s “Jay Leno’s Garage” to give the former “Tonight Show” host a tour around the SpaceX Starbase facility in Texas.
During the tour, Leno asked if SpaceX had a patent on the material used to build its ships. Musk replied that his spacecraft manufacturer “[doesn’t] really patent things.”
“I don’t care about patents,” Musk told Leno. “Patents are for the weak.”
In Musk’s opinion, patents are “generally used as a blocking technique” that are designed to prevent others from innovating.
“They’re used like landmines in warfare,” he says. “They don’t actually help advance things; they just stop others from following you.”

It’s not the first time Musk has spoken out against patents. In a 2014 memo to Tesla employees, Musk said that it was his company’s ability “to attract and motivate the world’s most talented engineers,” not its patents, that would make it a success.
“[Patents] serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors,” he wrote at the time.
The legal page on Tesla’s website includes a pledge that the company “will not initiate patent lawsuits against anyone who, in good faith, wants to use its technology.”
All-new episodes of “Jay Leno’s Garage” air Wednesdays at 10pm ET on CNBC.
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Patagonia’s announcement that its founder, Yvon Chouinard, and his family are giving away their ownership in the outdoor apparel maker to benefit climate change does not mean the company will become any less competitive.
“This whole thing fails if we don’t continue to run a competitive business and included in that is taking care of our people,” Patagonia CEO Ryan Gellert told CNBC’s “Squawk Box.”
Gellert said the decision to donate the company’s profits toward fighting climate change was never intended as a way to avoid paying taxes.

A Patagonia store signage is seen on Greene Street on September 14, 2022 in New York City. Yvon Chouinard, founder of Patagonia, his spouse and two adult children announced that they will be giving away the ownership of their company which is worth about $3 billion. The company’s privately held stock will be now be owned by a climate-focused trust and group of nonprofit organizations, called the Patagonia Purpose Trust and the Holdfast Collective, and all the profits that are not reinvested into the business will be used to fight climate change.
Michael M. Santiago | Getty Images News | Getty Images

Patagonia founder Yvon Chouinard and his family are giving away their ownership in the outdoor apparel maker they started five decades ago to benefit climate change. But that does not mean the company is going to become any less competitive or aggressive in meeting its business objectives.
“I think what people fail to understand about Patagonia, both the past and today and the future, is that we are unapologetically a for-profit business,” CEO Ryan Gellert told CNBC’s “Squawk Box” on Wednesday. 

“We are extremely competitive. The Chouinards are extremely competitive about the business. We focus on making high-quality products, standing behind that product for the usable life of it. We compete with every other company in our space, aggressively. I don’t think we have lost that instinct,” Gellert said.
That also means that pay and compensation of employees will not suffer, he said.
“I think this whole thing fails if we don’t continue to run a competitive business and included in that is taking care of our people,” Gellert told CNBC.

Ryan Gellert, now the CEO of Patagonia, speaking at the Copenhagen Fashion Summit 2019 at DR Koncerthuset on May 16, 2019 in Copenhagen, Denmark.
Lars Ronbog | Getty Images Entertainment | Getty Images

The conversations that led to the decision started internally a couple of years ago.
If Patagonia had decided to take the company public or sold either a majority or minority stake in the company, “we had very little confidence in meeting with quite a few potential investors that the integrity of the company would be protected,” Gellert said.

Instead, Patagonia opted to put the shares of the company into two trusts, the Patagonia Purpose Trust, which holds all the voting shares (2% of the total), and the Holdfast Collective, which holds the remaining, nonvoting shares. The Patagonia Purpose trust is dedicated to maintaining the company’s values and the Holdfast Collective is a “nonprofit dedicated to fighting the environmental crisis and defending nature,” Chouinard wrote in a statement describing the decision.
By transferring the overwhelming majority of the company to a social benefit trust, Patagonia avoids paying a large tax bill — an issue which was discussed immediately and loudly on the heels of the announcement that the Chouinard family was giving the company away.
Patagonia leadership was expecting the discussion of the tax benefit of their new structure, but tax avoidance was “never” part of the decision to give the company away, Gellert said.
“With the family, it was never a conversation in two years,” the Patagonia CEO said. “It was not lost on us the tax benefit via the 501c-4,” which is a designation of an organization that “must be operated exclusively to promote social welfare” and is therefore tax exempt, according to the Internal Revenue Service.

Yvon Chouinard, founder and owner of Patagonia, in front of a tin shed in Ventura, California, where he once forged pitons for mountaineers.
Al Seib | Los Angeles Times | Getty Images

“But with the family, it was very clear from the beginning. There were two goals that were focused on: Create a structure that could ensure the integrity and the values of Patagonia and cash flow the environment in more meaningful ways now,” Gellert said.
Gellert pointed out that the Patagonia founding family did pay $17.5 million on the 2 percent of stock that went into the Patagonia Purpose Trust.
Patagonia “has a history of always paying our taxes,” Gellert said. “We are a company that very much believes in that. We are a company that has avoided complex structures both in the U.S. and globally to sidestep taxes. We are actually one of the few companies that have lobbied consistently and publicly for higher taxes particularly in support of climate legislation.”
Patagonia’s decision to donate the majority of the company’s profits, which it expects to be approximately $100 million a year, comes amid a fierce debate about how politically and socially active businesses and business leaders should be.
Yet, Patagonia has managed to stay popular with both sides of the political divide. Its vests are the defacto uniform for many of the investment and venture capital set. In the annual Axios brand reputation poll, Patagonia does well on both sides of the political divide, “and that, candidly, is really encouraging and a little bit surprising, because we take positions with the environment at the center consistently and vocally,” Gellert said. “What I take away from that is that people respect that we are very consistent.”
“In this world, it is increasingly difficult to fake it,” Gellert said. “And so I think that companies that don’t have a deep commitment to the things they espouse, I think it falls apart pretty quickly.”

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