Out of the hundreds of pages that comprise the massive U.S. stimulus bill, only a few sections are especially pertinent to startups weathering the pandemic. Of those, the most significant is the Paycheck Protection Program, a provision in the bill providing for forgivable loans to qualifying businesses that meet goals for maintaining headcount.
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Just about a week after the bill’s passage, the U.S. Small Business Administration has begun accepting initial screening applications from companies looking to see if they might qualify for a piece of the nearly $350 billion allocated for loans. Beginning today, companies can also reach out to banks, including lenders who already process SBA loans as well as other institutions opting into the program.
The money is intended to provide eight weeks of cash-flow assistance to small business employers who maintain their payroll during the pandemic.
“The idea is to be able to start giving out those loans pretty quickly to small businesses,” said David Barron, an employment attorney with the law firm Cozen O’Connor. He expects startups will be flocking to apply over the next week.
Some requirements apply
The biggest draw, Barron said, is that it can be “free money.” If the employer maintains its payroll, then the portion of the loan used to cover payroll costs, interest on mortgage obligations, rent and utilities would be forgiven.
For startups looking to apply, it’s not a blank check. Lending is capped at the lesser of $10 million or 2.5 times the monthly annual payroll cost for the one-year period prior to the loan. Salaries are capped at $100,000 for an individual employee.
For venture-funded companies, a key point of contention for the loan program has been the so-called affiliate rule. Immediately after the bill’s passage, it was unclear whether venture-backed startups and private equity-backed companies would meet program requirements. That’s because the law as written requires “affiliates” to aggregate their employees into a total that must be below the 500-employee threshold in order to qualify for loans.
The National Venture Capital Association and other groups have been lobbying heavily for the SBA to adopt an interpretation of the affiliate language that allows startups to apply as independent entities, not affiliates of their largest backers. Per Axios, Congressional leaders have now confirmed that venture-backed startups will be eligible for the program, though we may see restrictions on private equity-owned companies.
Eligibility and ease of obtaining funds may still vary company to company. This could depend on the percentage of investor ownership, control provisions written into the term sheets, and other factors, notes Scott Orn of Kruze Consulting, a provider of financial services for startups. For now, he’s advising clients to consult with their legal advisers to see if there are extra steps they need to take to qualify for the program.
What portion of U.S. startups are likely to apply in the coming weeks? For now, that’s unclear, but certainly the COVID-19 economic slowdown is impacting all sectors, with startups in the most heavily hit categories, such as travel and hospitality, seeing some of the biggest near-term hurdles.
Illustration: Dom Guzman