On April 23, 2020, the federal government passed a $484 billion package to re-fund the SBA PPP.
We’ve been reading and hearing a lot of talk about whether startups are eligible for the Paycheck Protection Program (PPP) established by the CARES Act. There seems to be a sweeping fear that startups will not be eligible because of the rules around affiliations and investor control.
But that isn’t necessarily true. Many startups, especially those in the earlier stages of the growth cycle, should be eligible. And because of the benefits of the PPP — from forgivable loans, to low interest rates, to zero tax consequences — it’s worth pursuing an application.
But it’s also worth doing so in the smartest, most efficient way. Because the PPP has $349 billion in funding —which will be distributed on a first-come-first-served basis — startups in any stage of the growth cycle must understand the regulations, as well as what they need in order to quickly apply and get approved by the banks who are ultimately the gatekeepers for moving the applications forward to the SBA.
These three steps can set you up for success:
1. Talk to your legal counsel
One of your initial steps in applying for a PPP loan should be to bring in legal counsel right away. Your startup’s legal counsel is extremely familiar with your operating and partnership agreements, ownership structure, and financing, so they are an essential resource to help vet your eligibility.
Because there is limited guidance on affiliations for the PPP, given it’s so new, eligibility is a gray area. Management and influence play a role alongside ownership interest and control. Lawyers can work with your accountant to more quickly vet your eligibility and ensure your application process goes much faster.
It’s worth it for all startups — but especially those in the later stages of growth and/or funded by private equity or venture capital — to have conversations with legal counsel at the beginning of the application process. This sets you up to have a prepared and confident conversation with your bank.
2. Obtain and review your current cap table
Your capitalization table is critical to the application process because it provides information on your startup’s ownership, control, convertible instruments, equity features, loans and other financing, and it tracks this information through each round of financing and investment. It is an important tool in helping legal counsel and accountants get aligned on eligibility for the PPP.
When you have yours ready to go, it also makes conversations with your bank much more efficient and thorough. The last thing you want is a vague conversation with your bank on whether your company actually qualifies. Instead, you want to get in, present your documentation and get approved.
3. Work with an experienced accountant
Accountants are the bridge between your legal counsel and the bank that is approving your PPP loan. Your accountant can assist with gathering documentation, calculating the ideal loan amount and working with your bank to get the loan approved and signed on the dotted line.
They are also a valuable asset to vet your eligibility. An accountant experienced with SBA loans and PPP regulations knows which rules could potentially apply to your company, and they can help evaluate your relationships with your investors, review your cap table and ensure you’re comfortable moving forward with an application. This is especially critical for later-growth-stage startups that are unsure of their eligibility. The rules are not as black and white as they may seem, so having an experienced accountant work through this process with you is the key.
Startups with foreign ownership are also eligible
One last thing we’ve gotten questions about here at Wipfli is whether U.S.-based companies with foreign ownership are eligible to apply for PPP loans.
As we said earlier, the guidance on PPP is not extensive. However, when guidance is lacking, you look to prior guidance. Based on previous guidance, the SBA has determined that such companies are entitled to SBA program benefits. While the PPP application does not prohibit this, it is most likely a conversation that you will need to clarify with the bank.
Applying for a Paycheck Protection Program loan
The response to the PPP has been so positive that many financial institutions have had to stop accepting new applications or limit them to current customers. As you read this, Congress is discussing increasing the funding for this popular SBA program.
Regardless, if your startup technology company could benefit from a PPP loan, start looking into the process immediately. Time is of the essence in securing one. Following the three tips above can help ensure your company gets its application completed, accepted and in line to receive those much-needed funds.
If you have questions about the process or are interested in getting assistance with your application, click here to learn more about how Wipfli can help you.
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