Can startups qualify for SBA loans?

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I got an email from an entrepreneur over the weekend who was looking for an SBA startup loan. He had heard of the various loan programs that are included in the recently passed CARES Act and wanted to get his share of inexpensive or free capital.

Does the Economic Injury Disaster Loan (EIDL) program include an SBA startup loan provision?

Unfortunately, it does not specifically. In fact, if you look at the requirements for the EIDL program borrowers will have to be able to demonstrate that their financial difficulties are the the result of the coronavirus.

The SBA analyzes that by looking at your company’s historical revenue. Many startups are pre-revenue so they don’t have any historical revenue. Therein lies the rub for startups that are pre-revenue. Like the startup founder that reached out to me this weekend.

Does any kind of SBA startup loan exist right now?

Startups do have the opportunity to qualify for the Payroll Protection Program. The program includes up to eight weeks of loan forgiveness for capital that is used to fund payroll expenses. Those expenses include paid leave, group health benefits, retirement benefits, state and local payroll taxes, and compensation to sole proprietors and independent contractors.

These loans are being made through financial institutions, such as banks and credit union, that are already part of the SBA’s 7(a) program.

There are a few pieces of the Payroll Protection Program to note.

First, these loans are only available for companies that have less than 500 employees. Also, the amount of the loan is based on the lesser of 2.5x your company’s average monthly payroll or $10,000,000. Finally, the amount of the loan forgiven can be reduced based on a formula that compares your average full-time employee head count to pre-coronavirus times.

What if I don’t qualify for any of those programs?

There are a few avenues you can pursue if your business doesn’t qualify for the SBA’s Economic Injury Disaster Loan program or the payroll loan forgiveness under the CARES Act.

Don’t forget that you can always seek a traditional SBA loan through the 7(a) program. You will still be asked to provide historical financial documentation. But, if that is something you don’t have don’t worry. The SBA still makes loans to some startups that are pre-revenue. I know because I lead the top SBA lender in my state. We made plenty of SBA startup loan awards to entrepreneur with pre-revenue businesses. In those instances we had to lean on the financial strength of the founder.

Finally, if an SBA startup loan seems entirely out of the question for you, there is always the option of seeking loans through alternative lenders. I will talk more about those loan resources in my next article.

Let me know if you have any questions. If I can be of any assistance feel free to reach out to me at jmp@jonathanmillspatrick.com.

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