Article last updated: April 28, 2020 @ 10:45am EST
Update: An additional $310 billion was infused into the Paycheck Protection Program, with applications reopening on Monday, April 27.
Startups and small businesses impacted by the COVID-19 crisis may qualify for federal aid as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
A number of programs and resources have been introduced and expanded for small businesses via the United States Small Business Administration (SBA) under the CARES Act. Based on types of support and eligibility requirements, The Paycheck Protection Program (PPP) has been identified as the most relevant fit for startups looking for financial support from the stimulus package.
We created Zeni to help startups manage every aspect of their finances and we are actively helping our customers prepare information and documentation to apply for the PPP loans, which became available on Friday, April 3. You can find the application here.
In this article, you'll find an overview of the CARES Act stimulus package as it relates to startups, common questions we are addressing with customers, and a checklist of the steps we are taking to help our customers prepare their PPP loan applications.
We will keep this post updated as additional information arises.
CARES Act for Startups
The CARES Act provides an array of financial support to help startups and small business owners alleviate financial stress and support ongoing operations during the Coronavirus crisis. Programs are managed by the U.S. Small Business Administration (SBA) and include the following financial aid options for businesses affected by COVID-19:
For the purpose of our core customer base, startups, we've identified the Paycheck Protection Program (PPP) as the best fit for those looking to the CARES Act for financial assistance during this time.
The Paycheck Protection Program
The Paycheck Protection Program (PPP) was introduced as part of the CARES Act with the goal of keeping Americans employed during the COVID-19 crisis by offering small businesses financial support to cover baseline payroll costs and operational costs.
Administered by the U.S. Small Business Administration (SBA), the $349 billion PPP loans and loan guarantees program expands the existing SBA 7(a) lending program in order to accommodate a greater number of businesses.
Why the Paycheck Protection Program?
Employee salaries and operational overhead are two of the largest categories of expenses for startups. Moreover, there are two distinct elements of the PPP loan that make it an attractive option for startups looking to the bill for support:
- the loan can be forgiven (as in, repayment is not required), and
- no personal guarantee or collateral is required from founders.
Does my startup qualify for the Paycheck Protection Program?
There are two key criteria to determine borrower eligibility of your business for a PPP loan:
- My company has fewer than 500 employees
- My company has been operating and paying employee salaries and payroll taxes, or independent contractors, as of February 15, 2020
However, there is still some uncertainty regarding the eligibility of venture capital-funded startups based on the SBA Affiliation rule 13 CFR §121.301 which governs Section 7(a) loans (that, you'll recall, the PPP was "built on top of"). On April 3, the Treasury Department issued a document to help clarify the affiliation rules applicable to determining PPP eligibility, found here.
Tech industry VC and Lawyer Ed Zimmerman, who co-founded and Chairs Lowenstein Sandler's Tech Group and VentureCrush, laid out the following three-question test to help determine if your VC-backed startup’s eligibility in Forbes:
- does your VC hold 50% or more of your startup’s equity (calculated per Section 301(f)); or
- even absent that, does any single VC control a majority of the startup’s board; or
- even absent that, does any single VC control significant protective provisions, enabling that VC to block meaningful corporate action so that the VC controls the startup?
If you answer yes to ANY one of the above questions, seek guidance from counsel, because you may then need to add together your employee headcount with that of your VC and all of that VC’s other “affiliates.”
If you answered no, to all three questions, that’s likely good news (still talk to counsel). Many U.S.-based startups WILL qualify for SBA Section 7(a) loans, despite the negative early guidance announced on this topic.
How can I be positive my startup meets the SBA ownership guidelines?
As the SBA ownership and affiliation guidelines governing the PPP loans are broad (federal regulation code 13 CFR §121.301), prior to applying, we suggest contacting your legal counsel to confirm/obtain the following pertaining specifically to your PPP application:
- List of entities holding 20% of more of the company's equity
- Confirmation your investor(s) are not considered "Affiliates" (If deemed "affiliates," employees of your investor(s) and their affiliates are included when calculating your company's total employees)
Determined your company is not eligible? Check out this helpful round-up of small business loans which may be more suitable for your business.
What financial support is available via the Paycheck Protection Program?
- Access to loans of up to $10M to spend during the eight-week "covered period," February 15 through June 30, 2020, no personal guarantee or collateral required.
- Loan value is determined by the sum of 2.5 times your average monthly payroll costs in the prior year, 2019 (including employee wages, sick leave expenses, health care and other benefits), up to $10 million. Importantly, any employees salaries greater than $100K must be capped at $100K in this calculation.
- Loan forgiveness may be granted when the loan is used during the eight-week period of coverage to pay payroll, utilities, rent and/or mortgage interest. Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount maybe for non-payroll costs.
- For any loan amount that is not forgiven, borrowers can defer loan payments for 6 months; however interest will continue to accrue over this period. The loan has a maximum term of 2 years and a fixed 1 percent interest rate.
What do I need to certify when applying for a PPP loan?
According to a fact sheet issued by the U.S. Treasury Department regarding the Paycheck Protection Act, as part of your application startups and small businesses must certify in good faith that:
- Current economic uncertainty makes the loan necessary to support your ongoing operations.
- The funds will be used to retain workers and maintain payroll, or to make mortgage interest, lease and utility payments.
- You have and will not receive another loan under the program.
- You will provide the lender documentation that verifies the number of full-time equivalent employees on payroll, and the dollar amounts of payroll costs, cover mortgage interest payments, covered rent payments, and covered utilities for the eight-weeks after getting this loan.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered monthly mortgage interest payments, covered rent payments and covered utilities.
- You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted.
Paycheck Protection Program Application Checklist
Once you've decided to apply for the PPP, follow the checklist below to help you prepare and organize your application:
What information do I need to prepare for the application?
The PPP application was made available on Friday, April 3 and can be found online here. However, most banks are not yet accepting applications as they await final guidelines regarding the application requirements and verification process.
Based on the application, the following information must be provided by startups or small businesses in the application:
- Business Type (select one): Sole proprietor, Partnership, C-Corp, S-Corp, LLC, Independent contractor, Eligible self-employed individual, 501(c)(3) nonprofit, 501 (c)(3) veterans organization, Tribal business (sec. 31(b)(2)(C) of Small Business Act), Other
- Business Legal Name
- DBA or Tradename if Applicable
- Business Address, Primary Contact, Phone Number, Email
- Business TIN (EIN, SSN)
- Average Monthly Payroll for 2019
- EIDL, Net of Advance (if applicable)
- Number of Employees
- Purpose of the loan (select all that apply): Payroll, Rent/Mortgage Interest, Utilities, Other
- Applicant Ownership: List of all business owners with greater than 20% ownership stakes (Name, Title, Ownership %, TIN (EIN, SSN), Address
What documentation will I need to support my application?
During the application process, borrowers will be required to share documentation to back up the claims made in the application, which will likely include:
- Verification of full-time employees and salaries: Offer letters and W-2s of full-time employees
- Payroll taxes reported to the IRS in 2019: Form 940 from 2019
- State income, payroll and unemployment insurance taxes in 2019: Employer Payroll Tax Return from 2019. This form varies state-by-state, California: Form DE9; New York: Form NYS-45; Massachusetts: Quarterly wage report (Mass.gov database)
- Documentation of mortgage, rent and ongoing utility bills initiated prior to February 15, 2020: Lease Agreements, Mortgage Statements and Utility Bills/Statements (electric, gas, internet)
- Clearly demonstrate why, due to the uncertainty of current economic conditions, your business requires additional financial support: Depending on the type of business you operate, this may take many forms. Businesses who offer in-person services may cite the inability to physically interact with customers. Businesses serving the travel industry may cite shelter in place orders. etc.
When can I apply?
PPP applications went live on Friday, April 3, 2020 and businesses can apply for the loans through June 30, 2020, or until the $349 billion fund has been exhausted.
How can I apply?
The loans are facilitated by third-party banks, credit unions and other lenders, and guaranteed by the SBA. The application was made available on Friday, April 3 and can be found online here.
Many banks are offering online applications, so check with your existing bank or lender to understand if they are participating in the PPP and their method of applying first. As of Friday, April 3 many banks have yet to open their application process as they await final guidelines from the Treasury Department regarding the application requirements and verification process.
If your existing bank or lender are not participating in the PPP, then you should find one of the approximately 1,800 private lenders are currently approved to issue the loans (the same lenders currently processing SBA 7(a) loans). Additionally, the Treasury Department plans to issue new regulations making it possible for nearly all FDIC-insured banks to make SBA loans during this time, stay tuned for updates.
How long after filing my application will I receive the funds?
Within 1-3 weeks of your application being accepted.
New information regarding the SBA's Payroll Protection Program is being shared by government officials daily. We'll be updating this blog post with information as it becomes available. Please check back, and sign up to receive updates directly to your inbox here.
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Understanding the (literal) in's and out's of your business finances is critical for leading your business through an economic downturn like we're experiencing with the Coronavirus crisis.
To help startups through this tough time, Zeni is offering startups who've raised up to $1 Million 2 months free, plus 20% off for the next 4 months of a Full-Service or Bookkeeping plan.