from the profesisonals
The United States Congress recently passed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and it includes several initiatives that provide financial relief for startups and small businesses — but there are a few things these companies should know about the programs.
Houston Exponential hosted a virtual panel with Carolyn Rodz, CEO of Hello Alice, and Aziz Gilani, managing director of Mercury Fund. They broke down some of the concerns with some of the most popular programs.
The Payroll Tax Deferral stipulation allows you to push back paying your payroll tax, which is 6.2 percent of payroll, Gilani says in the livestream. Companies will be required to pay back half that tax in a year's time and the other half in two year's time.
Small businesses can also apply for emergency Economic Injury Disaster Loans, or EIDL loans, that won't require the first payment for a full year. The interest rate is 3.75 percent for for-profit businesses and 2.75 percent for nonprofits with up to a 30-year term. Businesses could even submit to receive a $10,000 grant on their application.
Then, there's the Paycheck Protection Program, or PPP.
"The PPP program is probably the most lucrative of the three programs for startups," says Gilani, "It's the one that has the largest financial impact."
To submit for PPP, business owners look at their last year's worth of payroll and utility expenses, then average out their monthly expenses, and multiply that by 2.5. Small businesses can submit for that amount or up to $10 million. If the loan is spent on their employees and utilities, it's turned into a grant and not required to be paid back. Gilani recommends checking with the SBA for the specific details, but notes that contract workers can't benefit from PPP and must submit individually for aid.
Regarding these programs, Rodz and Gilani shared some other advice as it pertains to Houston's small businesses and tech startups.
Banks are already overwhelmed with applications, and some have paused accepting new applications from some entities. Plus, you have no excuse, Rodz says, since the application is simple and can be completed in one sitting.
"Compared to what a normal government loan application looks like, it is light years better in terms of simplicity," says Rodz.
Go to your own bank
Banks are giving priority to existing customers, Rodz explains.
"Go talk to your banker, and really take the time," Rodz says. "They are prioritizing the clients they have relationships with."
There's a technical reason too, Gilani adds. It's easier for banks to submit for a pre-existing customer, and new customers require more paperwork.
Currently, Gilani says, the way the program is working right now is it relies on good-faith self-certification of the business owner. The banks, based on approval, will just put the federal money into your bank account. However, there are people put in roles for this act that will come back to verify that everything was honest.
"Lying to the federal government about money they grant you is a felony that comes with jail time," Gilani says. "It's very important that — after all this craziness passes by and the government comes back to audit what happened — you have a lot of documentation in place in order to show that you were fulfilling your good-faith requirement of answering these questions honestly."
Gilani recommends keeping track of how you calculated your payroll, as well as being able to show the effect of the crisis is key. Then, after you receive the funds, you need to be able to show that you used the funds on your employees.
Consult a lawyer if you have questions on eligibility
There's been a lot of discussion on whether or not venture-backed startups qualify for PPP.
"One of the challenges of the program is that it is being administered by the Small Business Administration, which traditionally hasn't worked with venture-backed and angel-backed companies," Gilani says.
Usually, the SBA requires startups to indicate their employee count, which is not to exceed 500. However, if the company is venture-backed, the SBA requires the inclusion of all the employees of all the portfolio companies. Certain legislators have expressed that this wasn't the intention of the program and are working to provide solutions, Gilani explains, and he and Mercury Fund have been working with a legal team to find immediate work arounds.
"There have been lots of lawyers who have been working really hard on trying to solve this problem," Aziz "If anything, we've now created the lawyer stimulus act in the amount of billable hours we've had trying to figure out this problem."
Gilani also recommends getting your lawyer to sign a document confirming that, especially if you are a venture-backed company, that you intended to adhere to the rules of the program.