As startups may be left out of COVID-19 bailout, investors step up lobbying – TechCrunch


The massive bailout the US government enacted last week to stave off an economic collapse of measures put in place to mitigate the spread of the COVID-19 outbreak is giving billions to US small businesses. But startups that have received venture capital might be left out.

So, investment organizations and lobbying firms across the country are stepping up their efforts to seek clarification on the specifics of the loan programs established under the CARES (Coronavirus Aid, Relief, and Economic Security) Act.

Their efforts could mean the difference between some of those billions in small business loans going to start-ups or a whole swathe of companies falling through the cracks.

There seem to be two issues for start-up entrepreneurs with the different types of loans businesses can receive.

The first concerns the “affiliate rules” that the Small Business Administration (SBA) uses to determine who is eligible for loans. Under the rules, companies could be required to count all employees of each company that their investors have backed as part of their employee count, pushing individual companies above the employee size threshold.

“Regardless of the purpose of these rules for traditional 7(a) loans, allowing the rules to exclude some of our nation’s most innovative startups from this new loan program is blatantly contrary to the intent of the legislation: to help small businesses to keep their lights on and their employees working despite the dual financial pressures created by economic and financial downturns,” according to a letter sent to Treasury Secretary Steve Mnuchin and SBA Administrator Jovita Carranza by the NVCA and other start-up investment organizations. “Without clear guidelines for startups and small businesses backed by equity investments to access the loan facility, many of these startups could be rendered ineligible.”

These 7(a) lending and affiliate issues aren’t the only ones that startups can face. Startups could also be eligible for Economic Disaster Loans (EIDLs). These loans are part of a $10 billion program under the CARES Act that is also overseen by the SBA. However, these loans must come with a personal guarantee if they exceed $200,000. And this requirement can be too onerous for startups.

EIDLs under $200,000 do not require a personal guarantee, nor real estate as collateral, and will take general security over company assets, according to a Forbes article. EIDL borrowers are eligible for a $10,000 emergency cash grant that can be reversed if spent on things like vacation pay, maintaining payroll, increased costs due to supply chain disruptions, mortgage or lease payments, or repayment of obligations that cannot be met due to loss of income, according to Forbes.

These loans apply to sole proprietors and independent contractors and employee stock plans with fewer than 500 employees, Forbes wrote. Emergency loans are available to businesses that are not eligible for additional funds – and are based on self-certification and a basic credit score, said Alex Contreras, director of preparedness, communications and coordination at the Office of Disaster Assistance for the SBA. Forbes.

While EIDLs can be great, the biggest problem is the lack of clarity around membership rules, Justin Field, NVCA’s senior vice president of government affairs, tells me.

“These rules will make it harder for small businesses with equity investors to even understand whether they can access the program,” he says. “It’s a difficult situation… If you have these unclear rules, it will be difficult for anyone who has a company that has minority investors.

There could be significant implications for the US economy if these startups are not eligible for loans, the NVCA wrote. Venture-backed companies are involved in the development of technologies of strategic interest to the United States in the long term and are currently working on tools to diagnose, track, monitor and mitigate the spread of COVID-19 in short term.

“Bottom Line: Failing to provide this essential support to startups now will result in both short-term pain and long-term consequences that will linger for years,” the organizations wrote. “In 2019 alone, 2.27 million jobs were created in the United States by startups across our country. According to the job site Indeed, 98% of companies have fewer than 100 employees and between small and medium-sized businesses, they jointly employ 55% of employees.As we implement the CARES Act, we urge the SBA to issue guidance indicating that clear membership rules do not arbitrarily exclude our most innovative startups.


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