Looking Beyond PPP Loans for Startup Relief
TLDR: Although the U.S. Small Business Administration is once again accepting applications from small businesses for Paycheck Protection Program loans, many startups still remain ineligible for the emergency funding that they need to survive the economic downturn caused by the coronavirus pandemic. It’s critical for lawmakers to pursue other policy proposals that will help startups and small businesses weather the current uncertainty.
What’s Happening This Week: The U.S. Small Business Administration began accepting applications yesterday for the latest round of Paycheck Protection Program (PPP) loans for small businesses, but the agency’s E-Tran application portal was hampered by technical glitches throughout the day. The latest emergency funding round comes after Congress passed another coronavirus relief package last week that allocated an additional $310 billion for the SBA’s PPP program after the initial $350 billion in funding included in last month’s Coronavirus Aid, Relief, and Economic Security (CARES) Act ran out in just 13 days.
Lawmakers, startups, and federal officials have expressed concerns about the uneven distribution of PPP loans, from allegations that large banks are prioritizing applications from large companies over those from smaller firms, to worries that public companies and franchises are unnecessarily receiving the taxpayer-backed loans. The Trump administration warned large well-off companies last week to refrain from applying for emergency funding.
The Senate is expected to return next Monday and begin work on the fifth coronavirus relief package—also known as the phase-four bill—to continue supporting American workers affected by the pandemic. With the startup community continuing to seek clarity from the SBA and Treasury Department about access to critical emergency funding, the next economic relief effort presents an opportunity for policymakers to address unresolved concerns about the current funding programs and pursue alternative relief options to better support entrepreneurs across the country.
Why it Matters to Startups: The fact that policymakers from both sides of the aisle have spoken out in support of the startup community demonstrates that the current lack of financial support is a serious concern for U.S. startups. But it’s time for lawmakers to take action, and the upcoming phase-four coronavirus relief package presents a ready opportunity for policymakers to do so on behalf of the startup community.
While the financial needs of entrepreneurs across the United States are immediate and pressing, the funding opportunities currently available to small businesses do not adequately address the unique situations and on-the-ground realities of many startups. While PPP loans have received a lot of focus, they are not the financial salve that early-stage startups need to survive the pandemic’s economic fallout. The program’s focus on loan forgiveness for firms that use the money for payroll expenses—as well as the competitive and allegedly biased application process—means that most startups are not likely to fully benefit from PPP loans. The program is a good first step for small businesses, but other steps must be taken in order to support startups through the economic downturn.
As lawmakers return to Congress and begin crafting a phase-four coronavirus relief package next week, it’s critical that they take the time to address the dearth of financial resources available to the startup community. We previously noted that startups are in desperate need of emergency relief that extends beyond PPP loans, and congressional leaders—particularly those who have been vocal in recent weeks about the plight of U.S. startups—now have the opportunity to clarify and address these funding gaps.
Policymakers already have legislation in the House and Senate—The New Business Preservation Act—that would incentivize state-level investments in startups. This type of proposal would shore up startup activity across the country by creating an equity investment program at the Treasury Department to provide states with funding to support the growth and development of new startups. Proposals like this would support startups through the COVID-19 outbreak, incentivize sustained VC investment during the country’s economic recovery, and ensure that startup innovation and growth continues after the pandemic has abated.
Other existing economic relief programs need to be clarified in order to ensure that they are actually supporting startups in need of financial assistance. The phase-four relief discussions present an opportunity for lawmakers to examine what is working and what isn’t.
We have previously spoken at great length about how the SBA’s affiliation rule unfairly prevented venture capital-backed startups from receiving loans, but it’s also unclear whether the Federal Reserve’s $600 billion Main Street Lending Program will benefit startups. The lending program is open to larger firms that aren’t eligible for PPP funds, although it charges a higher interest rate and limits the minimum loan size to $1 million. The Fed also calculates loans based on whether firms were profitable—or “EBITDA-positive”—in 2019, but many startups that prioritize growth investments over raw profits would likely be ineligible for funding from the program by being given a negative EBITDA rating. A bipartisan group of 41 House lawmakers, led by Rep. Anna Eshoo (D-Calif.), sent a letter last week urging the Federal Reserve and Treasury Department to clarify the program by noting that “Lending to midsized startups does not pose a moral hazard or constitute a bailout because a negative EBITDA does not reflect on whether the business would have been viable had the pandemic never occurred.”
Startups also need much more diverse and more targeted economic support, a point that was highlighted in a survey Engine conducted of startups earlier this month. Respondents—64 percent of whom said they need emergency relief at this time—said lawmakers should pursue other options for supporting startups, such as easing existing crowdfunding regulations, providing more direct funding options, and offering R&D tax credits. Given the concerns of policymakers about the lack of direct startup support, these proposals to strengthen the startup community could be taken up with wide bipartisan support. It’s critical for lawmakers to discuss these types of steps as part of the deliberations for the phase-four coronavirus relief package.
Lawmakers don’t need to reinvent the wheel when it comes to supporting startups. Taking concrete legislative steps as part of the phase-four coronavirus relief package—such as offering alternative funding opportunities, tweaking current guidelines and regulations, and providing a more holistic approach to supporting entrepreneurial activity—would encourage startup growth and promote continued innovation. These steps would provide short-term and long-term benefits for the startup community, and would also ensure that the firms that actually need emergency relief at this difficult time are receiving it.
On the Horizon.
The U.S. Copyright Office is holding its eighth public modernization webinar this Thursday at noon to discuss the agency’s ongoing efforts to develop a new online application for registration, recordation, and research purposes. The webinar will feature a presentation from the Copyright Office’s user design team about how their design and research methods will impact the copyright community.
