Startups, VCs making last-ditch effort to waive some rules for new SBA loans

CARY – The U.S. House of Representatives is expected to vote on a $2 trillion stimulus package today that includes roughly $350 billion for small business loans.

However, startups backed by private equity and venture capital fear they might not benefit.

According to draft legislation, businesses and non-profits with fewer than 500 employees would generally be eligible for loans guaranteed under the Small Business Administration (SBA), which is overseeing the vast lending program. Entrepreneurs and investors are also worried about possible SBA requirements for “personal guarantees” from founders and other restrictions.

Here’s the employee hitch: Under SBA’s “affiliation rules,” companies with minority investors, such as venture capitalists, are required to count employees of fellow portfolio companies.

That puts many venture-backed startups above the 500-person cutoff and ineligible.

The National Venture Capital Association (NVCA) is lobbying Congress to waive these rules, but it’s still unclear how it will all shake out.

“We are waiting for guidelines from [headquarters] on how the recently passed bill would impact on the disaster loan program,” SBA’s Office of Disaster Assistance public affairs supervisor Mark C. Ihenacho told WRAL TechWire via email.

“We will let you know as soon as we find out.”

Local VC-backed startups remain hopeful

Tobi Walter is a principal at Cofounders Capital, one of the most active early-stage startup investors in the southeast.

The Cary-based firm, founded and led by veteran investor David Gardner, is currently investing out of its second $31 million early-stage seed fund focused on B2B software ventures in North Carolina. Among its recent investments: ecobot, AutomationIntellect and CareNexis.

Walter says he’s monitoring the situation closely and working with partners such as NVCA.

“We are keeping our portfolio CEOs abreast closely,” he said.

Already, the firm has had one portfolio company apply for the disaster loan and is waiting to get a response.

“[We] are hopeful that Congress will continue to make and approve the right changes to the act to make it useful for venture-backed, or in general likely all technology-based startups,” he said.

Initially, he added, the biggest concern centered on the personal guarantees that SBA loans require.

Scot Wingo, a serial investor and CEO of Get Spiffy in the Triangle, also expressed concerns about personal guarantees during a Capitol Broadcasting virtual event to discuss the impact of the coronavirus.

Brian Reid, President of TowneBank, called changes for SBA loans in the Senate bill “very attractive,” citing factors such as no guarantees, no collateral, a low interest rate and others.

Is that changing?

Guarantees may not be as big a problem going forward, according to a summary by Clark Schaefer Hackett, a CPA firm monitoring the draft legislation.

“Luckily, it seems in the last iteration that Congress took that piece out and has now drafted the bill to go away with that requirement for loans under $200,000,” Walter said.

“We are continuing to lobby that it stays that way, that the limit might even get raised, and that the SBA loan administration grant these in the same spirit.

“We expect to follow this bill through early or mid next week; we are working with the first portfolio companies now to apply to then share final outcomes of the bill and their experiences with the full portfolio.”