Startups that received loans through the Paycheck Protection Program last year and are looking to apply again face more stringent requirements this time around to qualify for another loan.
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The $900 billion stimulus package President Donald Trump signed into law on Dec. 27 included $284 billion for the Paycheck Protection Program. Businesses that didn’t receive a forgivable loan the first time around or need additional help can again apply for assistance.
The new round of PPP loans come with additional guidelines, which were released by the Small Business Administration on Wednesday night.
Showing revenue decline
Among the most significant changes: Businesses that already received a PPP loan and are applying for a loan a second time must show a specific decline in quarterly revenue year over year.
“The second round of PPP actually makes it a little bit trickier for startups,” Stephen Nunes, director of small business capital services provider Next Street, said in an interview with Crunchbase News. “Because to access another PPP loan for businesses that have benefited from a PPP loan in the first round you have to show a 25 percent reduction in revenue in a quarter, in any quarter (of 2020). And that’s one of the key changes.”
The second draw of PPP loans is designed for businesses that had “decent revenue” in 2019 and saw a significant drop in 2020 year over year, Nunes said. Businesses must also have 300 or fewer employees and have used up their first PPP loan or expect to use it up by the time they receive the second loan. A second loan can be up to $2 million.
Nunes said he expects this round of PPP loans to run out within weeks, not months. The previous round of loans was a larger amount: $525 billion compared to the $284 billion available now.
Harder for pre-revenue startups
Healy Jones, vice president of Kruze Consulting, an accounting, tax and HR firm that works with startups, said the more specific requirements for loans is a good thing, and it alleviates confusion by clearly defining what economic distress a company needs to experience to qualify for a loan. The new revenue requirement does make it harder for pre-revenue startups to access capital, but they’re more friendly for companies that had their growth negatively impacted, Jones said.
“It’s pretty helpful to a certain group of startups that were growing and are not because of this (pandemic),” Jones said.
One aspect of the new PPP loan legislation that’s more favorable to businesses is the loan forgiveness process, Jones said. Companies that received loans of less than $150,000 in the first round can request forgiveness–up from $50,000–through a simpler process with minimal paperwork.
For Kruze Consulting, which helped many startups with their PPP loan applications, that means rather than 10 percent of VC-backed startups it works with being able to fill out the form for loan forgiveness, now more than 50 percent can. Companies with larger loans can also have their debt forgiven, but the process is more paperwork-heavy and requires the company to show they used the PPP loan as intended, according to Jones.
Also, while the original forgiveness was centered around payroll, the new legislation increases the expenses that are eligible for forgiveness, like cloud-based software for remote teams and protective equipment, Jones said.
Employee retention credits
The new legislation also changes the rules for employee retention credits (ERC), so that companies no longer have to choose between ERC or a PPP loan, and can retroactively apply for ERC. To qualify, a company must have fewer than 100 employees and have experienced a quarter with a significant decline in revenue.
“Basically for every employee you retained, it can be up to a $7,000 to $10,000 payroll credit per quarter per employee,” Jones said. For a 10-person company, that could be another $70,000 in free tax credits per quarter.
But the relief package also includes other programs that are more startup friendly, Nunes said. He pointed to the community advantage program, a program within the SBA’s working capital program. The community advantage program will be expanded through the relief package, and is one of the few SBA loan programs that’s eligible for startups, Nunes said. It’s administered through the Community Development Financial Institutions Fund and would allow startups to receive a working capital loan that they don’t need to make payments on for six to nine months.
“I think it’s a silver lining within the legislation that while PPP is harder for startups to access, there are other programs that the federal government is providing support to like the community advantage (for more growth capital),” Nunes said.
Illustration: Dom Guzman
Clarification: This article has been updated to more accurately reflect why the loan forgiveness aspect of PPP loans is now more favorable to businesses.
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