As of this morning, banks and small business administration lenders including organizations like Stripe and Square officially reopened applications to help small businesses and startups cover US and US domiciled employee salaries between now and June 30, 2020. The PPP loan covers salary, PTO, insurance premiums, retirement and health benefits, and 25% of funds may also be used for mortgage interest, rent, or utilities. If you keep all your employees on the payroll for 8 weeks and spend your loan on qualifying expenses, your loan may be forgiven.
The Payroll Protection Program released a second round of funding this week. While it will likely run out soon, many believe that additional funding will be available in the future.
What’s the TL;DR of the Payroll Protection Program?
A forgiven PPP loan is free money to maintain headcount through June, and even when it isn’t forgiven, the interest rate on the PPP loan is only 1%. The catch is that the final loan payment will come due within 2 years. If the loan is forgiven, you don’t pay taxes on it.
Advice from Burkland Associates
Finance and CFO-for-Hire consulting firm Burkland Associates recently published a slew of CARES Act and COVID-19-related resources, and Burkland’s Steven Lord met with Heavybit founders to better navigate their options.
More on the Payroll Protection Program Loan
Q: What additional advice do you have on applying for the PPP loan?
A: Set up a separate account for your loan in which you draw down the account and ensure you’re assigning qualified expenses. If you want to apply for loan forgiveness, this makes your proof of expenses infinitely easier to track.
The Burkland team recently published an article on Best Practices for Maximizing The PPP Loan Forgiveness, which is worth reviewing in full.
What about Affiliation?
Q: In some cases, early startup founders have been told affiliation to a VC or Private Equity firm disqualifies them from the PPP loan. Can you explain?
A: If a VC or private equity firm owns more than 20% of your company or if they have the power to prevent a quorum or otherwise veto board or stockholder actions, then you probably don’t qualify for this loan. In this case, your startup would be deemed an affiliate of the fund and of any other portfolio company controlled by the fund. This means you’d have to tally your headcount plus the headcount of your controlling VC firm and their controlled portfolio. The PPP is for small businesses, and you’d likely be considered a business with more than 500 employees. More info here.
Other CARES Act Support
Q: What additional pieces of the CARES Act might apply to early-stage startups?
A: Companies can also defer the deposit and payment of their share of Social Security taxes until Dec 31, 2020. Startups who receive a PPP loan, but whose loan hasn’t yet been forgiven, may defer deposit and payment of their Social Security tax up to the date of forgiveness, and then continue deferral of up to the repayment dates (half by December 31, 2021 and the balance by December 31, 2022). The IRS put out a handy FAQ.
Q: What does the CARES Act mean for net operating losses (NOL)?
The CARES Act includes several provisions that lift certain deduction limitations imposed by the Tax Cuts and Jobs Act, such as removing the limitation that NOLs could be used to offset no more than 80% of taxable income. Learn more about the specifics here.
Q: As you work with a number of early startup clients, what advice are you offering to them to extend their runway?
A: We’ve told founders to take defensive measures to extend their runway. Some of those actions include enacting a hiring freeze, reducing rent, renegotiating contracts with vendors and landlords, extending line of credit, exploring venture debt and changing some portions of the company’s go-to-market. This might mean pre-selling enterprise product features to engaged customers. Founders with distributed and international workforces should also explore relief options in those countries where a company entity exists as well. Because COVID-19 is a global epidemic, most industrialized first world countries also offer similar support to the US-based CARES Act.
Burkland CFO Debbie Rosler recently wrote a 3-part series on how teams can approach extending their runway regardless of how recently they’ve raised funding, and what they can do to build a financial contingency plan for the future.
Key Takeaways: Focus on Scenario Planning and Shifting Towards Sustainability
During the session, Steven stressed that founders must change their mindset about the goals and targets that their teams are working towards right now. Whether you apply for the Payroll Protection Program or not, the growth goals that you had at the beginning of the year are likely irrelevant. “You will be judged not by how much you grow, but how well you manage the team through this period,” said Steven, “It’s time to shift towards sustainability, viability, and maneuverability.”
Here at Heavybit, we’ve been working with industry experts to discover how teams can adjust their priorities and processes to stay on the right track as the economy changes. Subscribe for updates to learn when we publish new resources on navigating startup management during COVID-19.