Startup Survival: Can I still get SBA loans for my company?
Yes, you can still get SBA loans for your company even if you missed Friday’s opening day. But this week may be your last big chance for now.
What is available?
Last week, the federal government made $350 billion available for small businesses in the form of forgivable Paycheck Protection Loans. The application window opened Friday.
As much of the business community gnashed its teeth on snafus and setbacks, NEXT business lending lawyer Paul O’Reilly helped many of the first-day applicants successfully submit applications for paycheck protection for their employees. With a trusted network from 30 years of business finance advising, Paul helped applicants select and execute their application strategy, in some cases with high-stakes PE and VC financing transactions occurring in parallel.
We’re here to share 3 insights from this past week.
- You may need to renegotiate some of your investor’s control rights. Use a term sheet to present a specific and actionable proposal.
Paycheck Protection Loans loans are for companies that have under 500 employees or otherwise qualify as “small business” under federal regulations. If your startup has venture capital investors, your VC’s other portfolio companies may count toward that 500-person limit. This “affiliation” rule can trigger if the investor owns 50% of your company OR if they have certain control rights. Control rights are the big topic in SBA loans. If the control rights trigger affiliation, the investor’s other portfolio companies’ headcount may disqualify you. There are a few types of control to look for.Let’s say you’re like Next.io, an imaginary company representing a composite of the in-real-life clients we advise here at NEXT.
Let’s say you raised a Series A financing with venture capital backers, just like NEXT.io. As part of that deal you probably give your VC a board seat. If you can’t achieve a board-level quorum without the Series A investor, the investor likely controls your company in a way that triggers affiliation.
That’s one way to trigger ‘affiliation’ and be forced to count your investor’s other companies toward the 500 person limit.
Here’s another way ‘affiliation’ gets triggered:
If it was a typical Series A financing, you probably also gave the investor the right to approve decisions on a dozen or so topics such as office leases, employee compensation, stock issuances, charter amendments, new financings and sale of the company. The National Venture Capital Association has published a list of control provisions (called “negative covenants”) that are and are not likely to trigger ‘affiliation’. Here we’ll focus on what your company can do if you have those disqualifying control provisions.
Many of our investor-backed clients have at least one provision likely to create affiliation. If a single investor controls those decisions — which is often the case at Series A — then consider modifying those provisions in connection with your SBA loan application.
You need to be smart about renegotiating control provisions. Get advice on your legal documents and make a specific proposal to your investor. For example, if you ask your investor to give up the right to approve changes to your office lease specifically, it will be much easier for the investor to agree than if you vaguely ask them to reduce their control over the company generally. Consult with an experienced venture capital lawyer and propose a limited and pragmatic change.
Also be sure to keep the request proportional to the size of loan you’re applying for. It certainly makes sense for an investor to give up veto rights on amending a $10k/mo lease to help the company apply for a $1 million PPP loan that is forgivable and will keep the company running. But don’t ask for freedom to sell the company without approval just for a $100k PPP loan.
Collect your last-round financing documents and consult with an experienced venture capital lawyer and the SBA loan expert at their firm. (This won’t be the same person.)
- It really matters which lenders you submit your applications to.
Here’s another lesson from the first week of SBA applications. It really matters which lenders you submit your applications to.Take a moment to reflect on how quickly this truy massive loan program came together. If you’ve ever launched a product, you know how hard it is to push the exact same product message out to all of your partners, employees and customers. It’s really hard. Now imagine doing that with a $350 billion loan program that will be distributed through armies of independent banks across the country. Don’t be surprised if the rules evolve week to week. Don’t be surprised if banks interpret the rules differently. Also don’t be surprised if some banks postpone applications until the rules settle. In other words, things are changing quickly. So it’s incredibly important to work with an experienced SBA lending bank where you can speak with a human being who is experienced with SBA loans and is motivated to help your application succeed. Robo-lenders can be great for low-budget customers seeking highly commoditized debt products that are well established and don’t change frequently. But that’s not today’s situation.
You should also avoid banks that are working with other intermediary banks. The situation is evolving quickly. You don’t have time for “telephone game” misinformation.
- It’s not too late to apply. But this week could be your last good chance for now.
It’s not too late to apply. Many lending banks haven’t even started accepting applications yet. Others opened last week but rejected many ineligible and incomplete applications. We’re also seeing reliable reports that more money is coming soon, but the details aren’t clear yet. This week could be the last big chance for now.
- How can NEXT help me?
Most companies have never applied for SBA loans before and need to figure it out quickly as the world changes around them.At NEXT we make this easy for companies two ways. First, we’ve launched what may be country’s only fixed-price legal service package for this situation. The pre-scoped, pre-priced package is designed to help companies assess and apply for SBA loans with the guidance of very senior business lending lawyers, at reasonable fixed-fee pricing. You can read more here.
Second, we’ve pre-selected specific lenders to work with our clients. We’ve chosen them from a network of lender banks that we’ve cultivated over 25 years of advising on federal loans.
If you’d like to consult with NEXT about the SBA’s Paycheck Protection Program, email us at firstname.lastname@example.org. You can watch our webinar with NEXT lending lawyer Paul O’Reilly, or download the deck. You can also sign up for a consultation.
Be prepared. Collect the financing documents from your last-round financing, and any additional side letters and agreements with your investors. Also have your payroll information since January 2019, your most detailed financials, and a solid plan to retain employees through and after the SBA support period.
Sign up for our Startup Survival newsletter by emailing us email@example.com. We will answer the most popular questions in our next SBA / PPP newsletter, so send us your questions.