Latest Guidance from Rev1 for Startup Survival
Things are quickly changing during the COVID-19 pandemic. Federal, state, and local governments, banks, and private institutions are working to react to the needs of startups and small businesses. Over the next few weeks, we will continue to discuss the unique concerns our community is facing amidst COVID-19. Most recently, the CARES ACT provides, in part, relief to small businesses through loan and tax programs. The legislation requires loans to be administered and distributed using the Small Business Administration’s (SBA) existing 7(a) program and the related network of commercial bank partners. The SBA currently guarantees approximately $25 billion in loans.
Small Business Administration Loan Programs
- Economic Injury Disaster Loans: The Economic Injury Disaster Loan is a low-interest, fixed-rate loan, with extended terms purposed to offset a lack of working capital for small businesses. This would be used to pay for operational costs such as rent, utilities, and payroll based on lost revenue directly related to the COVID-19 outbreak.
- Unsecured loans are available up to $25,000. Loans over that amount will require collateral with real estate preferred.
- The loans feature a reduced interest rate of 3.75% on loans to for-profit businesses and 2.75% to private, non-profit companies.
- Payments are deferred for 11 months, which means there are no payments due for a year.
- More information is at https://covid19relief.sba.gov/#/
- Paychecks Protection Program: The CARES ACT provides small businesses (fewer than 500 employees) access to $350 billion of new capital through the Paychecks Protection Program (PPP). The PPP program is designed to provide capital to cover the cost of retaining employees.
- There are no SBA fees, and no prepayment penalties.
- The amount available is for 2.5X’s the average monthly payroll, one year prior to the loan date.
- Interest is at 4% with a max term of 10 years.
- Deferral of monthly payments from 6 to 12 months.
- Loan forgiveness is available if certain payroll and other obligation payments are met for the next two-month period.
- The Emergency Economic Injury Grant: Available through the CARES ACT, this provides capital to small businesses through the Emergency Economic Injury Grant. This grant may provide a quick infusion of smaller amounts of capital.
- Grants of up to $10K
- More information available at https://www.sba.gov/page/disaster-loan-applications#section-header-0
Important notes on these loan programs:
- The SBA currently guarantees about $25B in loans through its banking network. The 7(a) network is now going to try and push $350B on capital into the market very quickly. In a matter of months. Look for other ways the SBA will make this capital available.
- Concerning the SBA Loans, companies must generally have fewer than 500 employees as defined by SBA rules. A venture fund may be an affiliate to the applicant if the venture fund has certain control rights. If the venture fund has certain control rights in place, the employee count may be expanded to include employees of the fund and some or all employees of the venture funds portfolio companies.
- The National Venture Capital Association (NVCA) is making “encouraging” progress in revising the SBA’s affiliate rules to enable a larger group of venture-backed companies access to these loan programs.
Small Business Tax Provisions Available
Please note that these tax provisions are not available to employers already receiving benefits through the PPP programs above.
- Employee Retention Tax Credit: This credit provides a tax credit to the employer for wages and benefits for the first $10K paid to an eligible employee. The credit is available to companies who have suspended operations as a result of the government order and to those companies that have experienced a greater than 50% reduction in quarterly receipts (year over year). Credit is provided through 12/31/2020.
- Employer Payroll Tax Deferral: This allows taxpayers to defer paying their portion of FICA taxes through the end of 2020. The deferred payments are due in Dec 2021 (50%) and Dec 2022 (50%).
Recommendations for Startups
- Contact your bank rep responsible for handling SBA loans and begin a dialogue with your banking rep about applying for the best program.
- Specific information on what the SBA will require for this loan is not currently available. However, we suggest companies begin collecting the documents required under existing 7(a) loan programs to prepare for the PPP program application: Quarterly payroll reports (941’s), federal tax returns, payroll reports, and financial statements.
- Since companies may seek relief from one but not both, it will be necessary for each company to analyze their specific circumstances and determine whether the loan or tax provides the most significant benefit.
- Draw on a line of credit.
- Consider all expenditures and which can be cut to help survive this crisis.
- Get assurance from suppliers/distribution channels.