Politics

'Kick in the teeth': Startups pivoting again after warning on SBA loans

If businesses already applied for a loan through the PPP but believe they don't fit the bill anymore, they have until May 7 to return the money.

Steven Mnuchin

Steven Mnuchin's Treasury Department released stricter guidance for businesses seeking emergency loans.

Photo: Yuri Gripas/Abaca Press/Bloomberg via Getty Images

Venture capital-backed startups are once again recalibrating their stances in applying for coronavirus stimulus loans after the Treasury Department sent out new guidance.

The guidance, released late Thursday, places stark parameters around how startups should assess whether they need loans from the Small Business Administration, putting the onus on individual companies and their lawyers to take a hard look at whether they could obtain money from investors rather than the government.

"It's important that startups show evidence that they did a thorough, good-faith evaluation of their access to other sources of liquidity before they apply," said Trevor Loy, an investor at FlyWheel VC. "Even if the answer is no, you need to show evidence that you asked the question and got the answer."

The Treasury Department also clarified that businesses must prove they need the money because of struggles related to COVID-19. And there's a warning: If you already applied for a loan through the PPP but feel like you don't fit the bill anymore, you have until May 7 to return the money.

Ed Zimmerman, a lawyer who specializes in venture capital and startups at Lowenstein Sandler LLP, called the new guidance a "kick in the teeth."

"We've previously begged @USTreasury @SBAgov for more guidance on what the certification of need means & Treasury has now given us RETROACTIVE GUIDANCE," Zimmerman tweeted. "The Goal Posts Have MOVED after the game was played!"

Cooley, a law firm that has been advising VC-backed firms on government aid, responded to the guidance with urgent advice: "To the extent that applicants did not specifically consider alternate sources of liquidity in connection with their initial application, it is clear from the FAQs that they should."

The new guidance could result in a slew of VC-backed startups retracting applications or even returning the money. One industry source told Protocol that it's not entirely clear what the guidance means in practice, but noted that many venture capital firms don't have money set aside to help out existing companies.

"A lot of times, when a venture fund raises money, it's not all for existing companies — it's for money in the future," the source said. "You can look at this and ask, 'Wow, your venture firm has a lot of money, why can't you get that?' But … that money may only be for growth milestones, that money may only be available for new companies. … All those factors can mean that the funds may not be available to the company to sustain ongoing operations."

The PPP ran out of money last week, but it is expected to begin accepting applications again on Monday after receiving a $310 billion infusion from Congress. President Trump signed a relief package freeing up $484 billion in additional funding, part of trillions in spending designed to rescue the battered economy.

"Consequences of new guidance seem clear," tweeted Mark Suster, the managing partner at Upfront Ventures. "If you believe you have other sources of capital not detrimental to your business, you should not accept PPP loan. … I believe founders should consider re-discussing with board calls to discuss whether the board still agrees [to] accepting PPP."

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