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Round 2: How federal loan programs can keep your startup afloat

In the wake of the coronavirus pandemic and its catastrophic economic impact on the country, Congress passed the Coronavirus Aid, Relief, and Economic Security Act with bipartisan support. President Donald J. Trump signed it into law March 27.

While the funds designated in that legislation to help businesses survive have dried up, Congress expects to pass a second round of emergency funding of more than $400 billion in the coming days. A portion of those funds is intended to replenish funds in two different small business loan programs. So if you didn’t receive money for your business during the first round of funding, you still have a chance to receive financial assistance.

The first program entrepreneurs should look into is the Paycheck Protection Program, said Andrew H. Hogenson, an attorney in corporate and general business practice with Lathrop GPM. 

“The amount [business owners] can borrow is based on payroll costs, which is in line with the intent of the program,” he said. “For startups, given their costs and where they are in the process, it might not be a good measure of their need.”

Andrew Hogenson

Hogenson

Hogenson concentrates his practice in the areas of general corporate and business representation and transactions, mergers and acquisitions, and formation and structuring of business entities and relationships. He has helped clients throughout Missouri, Minnesota and elsewhere in the Midwest access those funds to stay afloat while most of the country is on lockdown in an attempt to slow the spread of coronavirus.

Unlike some other programs, a business owner must apply through a bank for the federal Paycheck Protection Program loan, Hogenson noted.

“One issue that’s become apparent, at least in the first round, is [that] having a close relationship with a bank or banker is extremely important. When you’re dealing with finite funds, it’s important to have a relationship with a banker that involves prompt communication and action by the banker to get the application submitted,” he said.

Hogenson said this particular program is intended solely to help smaller businesses. The full loan is forgivable if at least 75 percent of the money is used for payroll purposes — including paychecks, employee health insurance and other benefits. The remaining 25 percent of the loan can be used for such expenses as paying rent, mortgages and utilities.

“One of the key factors of this program is that if the proceeds are used appropriately, the balance is subject to forgiveness — in that sense, if handled correctly it’s not a loan at all. It’s a grant, for a startup company can be very helpful and necessary to sustain it,” Hogenson said.

The amount available to any given company is factored through an equation that multiplies a company’s monthly average payroll (determined by reviewing expenses during a specific time period) by 2.5. That should give a company the money to cover two months of payroll plus additional expenses, Hogenson said. 

The second program Missouri companies can look to for financial assistance existed before the pandemic, but it has been modified to address the country’s current circumstances — the Economic Injury Disaster Loan Emergency Advance. It is intended to help companies with fewer than 500 employees and that have been affected by a disaster — in this case, coronavirus.

“The changes to the program include the ability to get a loan up to $200,000 without requiring a personal guarantee, so you don’t have to show that you can obtain credit somewhere else, which is generally applicable to these kinds of loans,” Hogenson said. “These loans involve a $10,000 emergency grant, so if you merely apply for one of these loans you are supposed to receive that $10,000 within three days.”

This loan program allows borrowers to use the funds for a broader range of purposes, but the government does require the company to pay back the money with interest, Hogenson said. Unlike the Paycheck Protection Program, this program calls for applicants to apply directly to the Small Business Administration for loans.

At least anecdotally, Hogenson said, he’s noticed these loans are taking quite a bit longer to process and disburse, compared to the Paycheck Protection Program.

“I think entrepreneurs are exactly the kind of people who should look into these loan programs — we need the startups to stay alive, too,” he said. “Generally, they have a smaller number of employees, and they have less of a [financial] impact on the program.”

He said it’s also important that Missouri businesses look elsewhere for financial assistance during this time.

“Spend some time to look around to see what’s out there because there are a lot of organizations in Missouri and around the country that want to help,” he added. 

 

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