The government is now giving startups a green light to participate in its $670 billion small-business loan program, but at least some advocates are urging caution
The federal government seems once again to be encouraging startups to participate in a multi-billion loan program aimed at helping small businesses during the coronavirus crisis.
The Small Business Administration, which runs the program, issued new guidance on Wednesday that seemingly addressed a big concern startups founders and their backers had about it — advising companies that the agency would consider any loan applications for amounts less than $2 million to have been made in good faith, with regards for their necessity.
Many startups were dissuaded from participating in the program by guidance the agency issued late last month that indicated it would look critically at whether applicants, particularly those backed by venture capital and other private equity firms, really needed it.
While many startups may now consider applying, Ed Zimmerman, a lawyer who advises VC firms and their portfolio companies, is warning clients to be cautious, because companies who get loans could still be audited or prosecuted.
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After a series of mixed messages that confused and frightened venture-funded startups, the federal government is flashing the green light to let them know it's safe to borrow money from the small business loan program.
But the effort may not be enough to overcome misgivings among the startups who are grappling with the coronavirus pandemic's economic shocks that the nearly $700 billion loan program is supposed to mitigate.
On Wednesday the Small Business Association and the Treasury Department updated the guidelines around the Paycheck Protection Program. In an update to a list of frequently asked questions, the SBA said it would now deem all loan applications for less than $2 million to have been made in good faith. At least at first glance, that move seems to have addressed a big reservation many venture-backed startups have had about the program — that the government could and would determine after the fact that they didn't actually need the money and might even prosecute them for taking it.
Many startups who may have been on the fence about the program or may have already even returned money they received under it for fear that they didn't qualify may see the new guidance as the government's stamp of approval for them to participate in the program, as long as they borrow something less than $2 million, said Ed Zimmerman, chair of the tech group at the law firm Lowenstein Sandler, who has been closely following developments in the PPP.
"I think lot of lawyers are telling their clients, 'It's now free money. Go for it,'" he said.
The SBA's guidance has gone back and forth
Congress created the PPP as part of the $2 trillion stimulus package it passed in March. As part of that law, government set aside $349 billion for loans to small businesses to use on payroll, rent or mortgage payments,...
