How to Get That … Elusive … SBA Loan for Your Business

Summary:

  • On Friday, the Small Business Administration began to allow small businesses to apply for the Paycheck Protection Program (PPP), created as part of the $2 trillion COVID-19 relief package.
  • Here is how to apply for a loan (and some tips and tricks on how to navigate), if you are a small business that has been affected by the government response to the COVID-19 outbreak
  • These are some of the most frequent questions that I’ve been seeing this week, and I hope that this helps some of you to avoid some of the most common traps that small businesses are falling into, as they apply for relief

The $2 trillion COVID-19 relief package, known as the CARES Act, contains a number of provisions for small businesses that want to apply for loans through the Paycheck Protection Program (PPP).

The spread of the virus has led businesses across the country to either cut hours or shut down entirely. These few weeks could be critical for many of us, and getting access to these funds during this time could be make or break for many small business owners.

Unfortunately, the roll-out and the communication of this program has been challenging so far, to say the least. The government intended to make these loans available via federally regulated banks last Friday, but as of the end of the day only Bank of America and Chase are accepting appications … more on this below.

Here are some other helpful details of the Paycheck Protection Program:

Eligibility

Companies domiciled in the US with up to 500 employees will be eligible to apply for loans of up to $10 million with a 1% interest rate. Loan amounts will be forgiven if they’re used to cover payroll costs, most mortgage interest, rent and utility costs during an eight-week period after the loan is granted.

The loans will have a two year term at 1.0% per annum (on April 3rd, Treasury raised the rate from 0.5%). All payments are deferred for 6 months; however, interest will continue to accrue over this period.

First of all, at least 75% of the loan proceeds must be used for “payroll costs.” There are confusing and conflicting points on what these means in the legislation, but it currently appears that “payroll costs” do not include benefits, withholding taxes , or independent contractors. So to be safe, count only a) salaries, bonuses and commissions for b) W2 employees. There is a maximum per employee of $100,000 per year … or $8,333 per month.

Owners count! … that is, any compensation aid to an owner (>20% of the equity of the business) counts towards the loan amount and towards forgiveness later.

Second, small business owners will owe money when their loan is due if they use the loan amount for anything other than those items. Forgiveness will also be reduced if they decrease their full-time employee headcount or if they decrease salaries and wages by more than 25% for any employee that made less than $100,000 in 2019.

Be carefu here … note that any terminations or reductions in salary of over 25% will be reduced from loan forgiveness, unless the employee is reinstated by 6/30/20. Moreover, Payroll Tax Deferrals must be paid back before any PPP loans may be forgiven, and the Employee Retention Credit is disallowed.

Finally, the “affiliation rules” might affect your application. Basically, if your business owner also owns other businesses, beware! You should determine who your owners are … specifically, who owns ore than 20% of your equity. For purposes of this calculation, you should calculate this on a “fully diluted basis,” include issued/unvested options but EXCLUDING unissued options. If one of these owners also “owns” other businesses, then the SBA may aggregate the employee count of those other businesses and you may not qualify as a “small business” if the total employee count of “affiliated businesses” is over 500. The purpose is to prevent subsidiaries and branch offices of major corporations from taking advantage of a program designed to help new businesses and neighborhood restaurants. However, many startup companies have asked if they qualify as affiliates of venture capital firms, which invest in many businesses at a time and may push their portfolio companies beyond the 500-employee limit.

Under this interpretation, many of these startups would be disqualified from small business relief under the PPP and under provisions of the CARES Act.

<Sigh>

Let’s see what the SBA eventually does, but for now here’s the latest:

On March 31st, Treasury began paring this rule back. They issued guidance that SBA’s affiliation standards are waived for small businesses (1) in the hotel and food services industries (NAICS code 72); or (2) that are franchises in the SBA’s Franchise Directory; or (3) for recipients of financial assistance from small business investment companies licensed by the SBA.

On April 3rd, The affiliate question was removed from the PPP application.But the application does ask: Is the applicant or any owner of the applicant and owner of any other business, or have common management with, any other business? If yes, list all such businesses and describe the relationship on a separate sheet.

For now, be aware of these rules, talk to your board and lawyers, report all of your owners of more than 20% and hope for the best.

Who is not eligible: Independent contractors and freelancers can not get a loan … yet. They will be able to apply for these loans starting next Friday, April 10th.

According to the rules, borrowers cannot receive more than one PPP loan.\

Where You Can Apply

The program is designed to run through the banking system. You can submit a loan application to any SBA lender or any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. If you have multiple relationships with SBA-approved lenders, it is NOT a good idea to submit parallel applications, and hat could actually jeopardize your application.

As of now, among the big banks, only Bank of America and JP Morgan Chase are accepting applications.

Beware that Bank of America reportedly denied applicants for not having credit cards with them. Florida Senator Marco Rubio said that such a rule was not written by Congress. Banks have a legitimate concern, because they are liable if a business lies on its loan application. Banks are supposed to verify that businesses have been up and running for the last few months, paying their employees.

So I am sympathetic to what banks are dealing with, and remember that they are as overwhelmed as you are. The guidance to them from Treasury is changing literally daily.

I suspect that every bank will end up implementing its own KYC practice next week, so just work with your favorite banker as best as you can.

Finally, this is the application form:

Former C-suite at PayPal, Sonos, eBay. Now general partner & founder at Practical VC, a secondary venture capital fund.