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Venture-Backed Start-Ups to Get Small Biz Loans

Investing monitor

(Lorenzo Cafaro, Pixabay)

6 Apr. 2020. An industry group says rules for loans to small companies hard-hit by Covid-19 are changed to allow these loans for more start-ups funded by venture capital. National Venture Capital Association, or NVCA, in Washington, D.C. says the first rules for easy-term loans under the recently enacted CARES Act, a disaster-relief law to help small businesses protect their payrolls affected by Covid-19 lockdowns, would have excluded many new technology companies.

The CARES Act, short for Coronavirus Aid, Relief, and Economic Security Act, passed by Congress and enacted into law at the end of March aims to cushion the abrupt loss of business to large segments of the economy from Covid-19 lockdowns. One part of the law, called the Paycheck Protection Program, extends loans to small businesses to help small businesses keep employees on their payrolls until conditions improve. If companies keep all workers on the payroll until the end of June, the loans are forgiven.

The CARES Act gives the U.S. Treasury Department and Small Business Administration responsibility for carrying out the law’s provisions, including rules to determine eligibility for the $350 billion Paycheck Protection Program. Among the eligibility rules set by the agencies were a maximum of 500 employees, but also affiliations with larger enterprises, to avoid extending these loans to subsidiaries controlled big businesses. Wording of the initial rules, however, defined these controlling affiliations to include small business like start-ups, where venture investors sit on the board and can affect company decisions, even if these investors own a minority of shares in a company.

In a letter to the Treasury Department and SBA on 1 April, NVCA president Bobby Franklin urged the agencies to change the rules and loan application form to allow venture-based start-ups more access to the Paycheck Protection Program. Franklin wrote, “Start-ups are as vulnerable as other small businesses to this economic crisis,” noting that many of these new companies have just a handful of employees, which make up the bulk of their operating expenses.

Franklin also pointed out …

The questions, representations, and certification requirements for minority investors with more than 20 percent ownership included in the loan application do not accurately reflect the authority that minority investors have in a company ownership structure. Moreover, some of them are virtually impossible for companies to confirm with respect to their 20 percent owners, on the one hand, and 20 percent owners to confirm about their companies, on the other hand, at least in an timely way to permit loan applications to be submitted. Without changes, these application requirements will render many startups ineligible for the program as a practical matter.

By 3 April, according to NVCA, Treasury Department and SBA changed the rules and application form to make it easier for start-ups to qualify for the program. The group said that day on Twitter …

NVCA’s guidance for venture-based start-ups now says the affiliation rules apply for paycheck protection loans where the venture fund has certain control rights or owns half or more of the company’s shares, where “control” means influence over day-to-day activities rather than extraordinary conditions. Companies still need to identify affiliates and make eligibility certifications on their loan applications.

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