Startups Need More Than Current Relief Loans
TLDR: Congress is set to allocate additional funding to the U.S. Small Business Administration’s Paycheck Protection Program to aid small businesses coping with the economic fallout of the coronavirus pandemic, but available loan programs are not doing enough to support startups that are in desperate need of financial assistance. As policymakers continue to evaluate legislative and regulatory responses to the ongoing outbreak, it’s imperative that they pursue policies—such as public-private equity investments, R&D tax credits, and forgivable loans beyond payroll expenses—that can adequately support the nation’s startup ecosystem.
What’s Happening This Week: Lawmakers are preparing to vote as soon as today on a new COVID-19 relief package that would allocate an additional $310 billion to the U.S. Small Business Administration’s Paycheck Protection Program (PPP) and another $50 billion for the agency’s Economic Injury Disaster Loan (EIDL) program. The funding push comes after the SBA exhausted the $350 billion in PPP loans that Congress included in last month’s $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As Democrats and Republicans continue to negotiate the details of the legislative agreement, one key issue that appears to remain unaddressed is the SBA’s affiliation rule, which would require venture capital-backed startups to count the employees of their “affiliates” as their own employees—likely pushing them over the 500 employee limit to qualify for the available funding. As we previously noted, the startup community is seeking clarity on the agency’s guidelines in order to ensure that VC-backed firms can qualify for the emergency loans.
Why it Matters to Startups: Allocating additional funding to the SBA’s PPP loans and EDIL programs does not adequately address the startup community’s underlying concerns about the affiliation rule and existing limitations on emergency funding. Policymakers from across the political spectrum have already voiced concerns about the affiliation rule and the distribution of loans, but these issues still remain unaddressed in the current legislative package.
Existing issues with PPP loan access and distribution already present difficult roadblocks for many startups. Small business owners have sued several U.S. banks for allegedly prioritizing applications from larger companies, while burger chain Shake Shack recently returned $10 million in PPP loans it received from the SBA following complaints about the uneven distribution of funds.
Startups are at an even greater disadvantage if larger companies receive priority access to the limited amount of available PPP loans. Banks have already warned small businesses that the new round of funding could be quickly exhausted with hundreds of thousands of applications for PPP loans already pending. And because of the SBA’s affiliation rule, many at-risk startups in need of emergency funding are still not able to apply for PPP loans because of a lack of guidance from lawmakers and the SBA.
Beyond access concerns, PPP loans are only forgivable if companies use at least 75 percent of the funds on payroll costs. This means that early-stage startups with few employees are less likely to benefit from the available funding. A startup with a small staff—or an early-stage company that is still looking to hire its first employees—needs options beyond payroll loan forgiveness.
Startups need more diverse economic relief options. For example, startups have fundamental operating expenses and equipment needs that they must cover to stay afloat—servers, cloud computing services, accounting software, rent, etc. Those startups would greatly benefit from forgivable loans or grants focused on basic operating and infrastructure costs.
Besides clarifying the PPP loan program and addressing the affiliation rule, lawmakers can take a variety of additional steps in the coming weeks to strengthen the U.S. startup community during this difficult period. Engine recently conducted a survey of startups in our network and found that almost two-thirds of founders said they need emergency financial support at this time. Outside of fixing concerns with the SBA’s affiliation rule, entrepreneurs said that lawmakers should ease restrictions on Regulation Crowdfunding, provide other interest-free loan and grant opportunities for startups, and consider additional relief options—such as R&D tax credits or forgivable loans that can provide benefits outside of payroll expenses.
Congress should also consider incentivizing direct investments into startups across the country. The New Business Preservation Act—introduced in the House by Rep. Dean Phillips (D-Minn.) and in the Senate by Sen. Amy Klobuchar (D-Minn.)—would create an equity investment program at the Treasury Department to allocate funding to states to help support the growth of new startups and small businesses. This type of investment program would help startups navigate the economic unrest caused by the pandemic, while also securing the development of the nation’s next wave of innovative companies.
The United Kingdom this week also unveiled a new £250 million (roughly $311 million) Future Fund to support U.K.-based startups affected by the pandemic. To qualify for the program, startups must be registered in the U.K., receive an equal or greater amount of private funding, and have raised at least £250,000 in private equity within the past five years. While there are some lingering concerns as to whether the funding converts to equity or includes a repayment option, the program shows how other countries are prioritizing the viability and long-term survival of their startups.
While we hope Congress will dramatically increase startup-focused funding and address the SBA’s affiliation rule in the near future, policymakers have a variety of other steps that they can—and should—take to support startups through the current crisis and beyond.
On the Horizon.
The Federal Communications Commission is holding its next open meeting at 10:30 a.m. this Thursday. Among the items to be discussed is a proposal that would open up 1,200 MHz in the 6 GHz band for unlicensed use. As Kate Tummarello, Engine’s Policy Director, previously noted in a Morning Consult op-ed earlier this year, unlicensed spectrum is “an invaluable asset for the thriving startup ecosystem in the United States.”
