What The $2T Stimulus Deal Does for Small Business & Startups

Part of the Startup Guide to the Apocalypse 

If like me, you’ve been staying away from the news due to the vitriol and panic, you might have missed that the House and Senate passed the CARES Act – at $2.2 trillion dollars for economic stimulus, it is the largest economic rescue package ever.

This article will be a fluff-free, panic-free, Frankenstein of a resource guide for employers on surviving the panic-pocalypse. If you’re an employee feel free to keep reading because this is also important or just click here to read the Employee Guide.

Our purpose was to get this out quickly so we’ll update this as we have more information, feel free to access more of the Startup Guide to the “Apocalypse” at the bottom.

[Last updated 03/27/20])

*BONUS* Guide to Stimulus & Disaster Loans + Resources *BONUS*
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– Employee Paycheck Protection Program

What is it?
$349 billion is being loaned to small businesses to cover their payroll. Most (if not all) of this loan will be forgiven if payroll does not decrease. In other words, this is free money to cover your payroll for revenue-generating businesses and startups.

Do I qualify?
You are eligible if you have under 500 employees and are a “small business concern” (as defined by the SBA) and this includes most startups. Each industry has different criteria for what a small business concern is. You can use this SBA form to find out.

There has been some concern that having a VC as an investor would disqualify a startup, however, that restriction is focused on Private Equity (PE) owned startups (very few of you), you can read more here in the Perkins Coie brief.

What is the maximum loan?

Take your average monthly payroll expense over the last 12 months and multiply it by 2.5 (that is, 2.5 months). That is the maximum loan you are eligible for.  However, it can’t exceed $10 million.

How do I apply?
Loans are made through the SBA 7(a) program. Over 800 SBA-approved lenders are expected to be able to distribute loans. The application does not yet exist and we’ll update this when it goes live (gotta move fast people).

Access the checklist here for SBA Lenders

When can I apply? 

Today, Treasury Secretary Steven Mnuchin said banks should be able to issue small business loans by the end of next week, April 3rd.

That’s an aggressive timeline. We wouldn’t be surprised if there are delays. The SBA distributed $28 billion in 2019, and they are being asked to deploy over $400 billion in April.

Expect growing pains and technology issues- see the checklist to start prepping above.

Do I need to personally guarantee the loan?
No. That means you’re likely okay if you have less than perfect credit like most founders and business owners.

Do I need collateral to get the loan?
No. That means you don’t have to put up your imaginary equity from your pseudo-SoftBank valuation up for collateral!

How can I use the money?
You can only use the money for payroll, health care, rent/mortgage/utilities, and interest on debt. That means don’t lay off your teams right now for no reason.

How much of the loan is forgiven?
The actual equation is complex; Congress tried hard to make sure there were no loopholes. Put simply, the money used for payroll, mortgage interest, and rent and utility payments from February 15th through June 30th is forgiven, as long as you have the same number of employees on June 25th, and everyone receives at least 75% of their prior pay.

The devil is in the details.  If you lay off people, it gets a little more complex (forgiveness is ratio of payroll reduction).  The payroll of employees that earn over $100,000 also does not count for loan forgiveness (i.e., engineers in San Francisco!).

What is the interest rate and maturity date?
The legislation mandates that the interest rate cannot exceed 4% and the term cannot go over 10 years.  SBA lenders may offer terms within those limits. Google “Top SBA Lenders in STATE-NAME”.

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-Other Helpful Programs

The CARES Act also has other sections that help small businesses.

SBA Debt Relief

If you have an SBA loan, the CARES Act allocates $17 billion dollars to cover your payments (principal + interest + fees) over the next 6 months.

Emergency Disaster Loans

The CARES Act allocates another $10 billion (in addition to $7 billion authorized in another bill last week) to the SBA Emergency Disaster Loans.

Most states now qualify as a disaster area.  Max loans are $2 million.  3.75% interest.  Loan period up to 30 years.  Personal guarantee required.  If you have any collateral, it must be pledged.

The process to apply for these loans is cumbersome and long.  The SBA web site has currently crashed under the load. For more details, refer to: https://betterfin.com/faq

Employee Retention Credit

The CARES Act gives businesses a tax credit for the 6.2% Social Security payroll taxes paid for employees kept on payroll during the crisis. It’s equal to 50% of what you spent, capped at $5,000 per employee.  Some businesses may also defer their payroll tax due in December 2020 to December 2021.

You may qualify if you do not have an SBA loan and had a 50% loss compared to the prior quarter.

Many small business owners have been hit particularly hard by the effects of the coronavirus pandemic. Most have shuttered their physical locations, either shifting to a work-from-home model wherever possible or suspending operations completely. Many small businesses have been forced to get creative to keep cash flow stable in the early weeks of a crisis that could last several more weeks to months.

“The stated goal is to keep things in check for the next eight to 12 weeks and prevent as much disruption as possible,” said Farhan Ahmad, founder, and CEO of small business expense management company Bento for Business.

The stimulus plan’s direct payments to individuals, loans for small businesses, distressed industry loans, and unemployment insurance expansion are designed to keep the economy afloat while the coronavirus pandemic is addressed. For many small business owners, the stimulus package could buy some much-needed time, but it is not a cure-all.

As details of the stimulus plan become clearer, small businesses across the country are wondering how to take advantage of it. Whether they use direct individual payments to inject their businesses with capital or accept small business loans, entrepreneurs have some strategizing to do. However, Ahmad cautioned, the stimulus is but one part of the larger equation.

“The first thing [to know] is that a stimulus package is not a solution to any problem,” Ahmad said. “This is borrowed time; that’s all we’re getting is borrowed time to get things in order.”

While $2 trillion might seem like a lot, Ahmad added, when broken down to its individual parts across all the small businesses and individuals in the country, it is not enough to carry entrepreneurs through the remainder of the pandemic.

“Best-case scenario: this is buying a little bit of time to see how bad things are or if they are beginning to recover,” he said.

So, how should small businesses spend any stimulus-related funding they receive?

“If possible, use [the stimulus] to keep the door open,” said Jonathan Dane, director of research and portfolio strategy at The Coury Firm. “If the [business] has to close, use it to pay the bills and keep staff employed. This isn’t capital to invest in the core business; it’s lifeline capital to pay the bills until they can reopen.”

“For weaker businesses, simply making payroll and keeping up with suppliers is going to be critical,” said Leigh Fatzinger, CEO of Turbine Labs. “For healthier businesses, any benefits they can realize from the stimulus should be focused on ensuring they maintain their markets and potentially grow when the crisis has subsided.”

While the stimulus package has been a long-awaited and hard-fought measure, it is far from the only thing small businesses need to bear the brunt of the coronavirus pandemic. Every small business should be actively planning today for a long-term recovery effort. At the core of that effort is understanding that even a return to normalcy won’t assuage the economic damage of the pandemic completely.

“It’ll help, but no amount of stimulus can offset the impact to the economy from the collapse of consumer in-person spending,” said Dane. “The stimulus will help prevent us from going into a deep recession that we can’t bounce out of quickly, but make no mistake – it can’t stop the recession.”

That means small business owners need to prepare for a lengthy crisis and plan for a long recovery period through less-than-ideal economic circumstances. According to Dane, that means investing in omnichannel and online sales, which can improve revenue to some degree and make it easier for small businesses to keep cash on hand.

What is critical for small business owners right now, Ahmad said, is shifting away from a “growth-first” mentality to a strategy of supporting cash flow for the midterm. This involves a reduction in expenses wherever possible, especially for businesses that have suspended operations during the coronavirus pandemic.

“It is critical right now to create a 12-month survival plan,” Ahmad said. “It’s about creating a plan that says, ‘If growth slows to this level, how much cash do I need to stay solvent?'”

Ahmad has these recommendations for small business owners:

  • Try to delay payments or establish payment plans with any landlords or creditors.
  • Renegotiate loan terms to lower payments, if possible.
  • Cancel all planned nonessential expenditures.
  • Begin daily monitoring of expenses, revenue and cash flow plans.

“The worst thing you could do is take out a loan and blow through it,” he added. “There is no help coming for 12 weeks at least, so don’t think growth first. Changing this mindset is a big deal.”

Ahmad said he ultimately expects an economic recovery, but not before economic growth slows by up to half. In that time, many businesses will face challenges they must overcome if they are to survive the coronavirus pandemic. However, Ahmad said, a simple task can help entrepreneurs begin the daunting task of crisis planning: “Keep monitoring cash flow daily.”

“I think there’s a lot of doom and gloom right now … but there is nothing structurally wrong with our economy right now – it’s the crisis,” Ahmad said. “I’m optimistic we’ll recover from this as a country and small business owner[s] generally.”

What else is included in the stimulus package?

Sources: NVCA, BusinessNewsDaily, USChamber, Axios, Wefunder, NPR

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