Venture-Backed Startups Can Access SBA 7(a) Loans – What The Experts Aren’t Telling You!

“Dear Ed:

I’m panicking – I’ve been reading guidance published by industry experts – they all seem to agree that venture-backed startups like my company aren’t eligible for the new SBA 7(a) loans because I’m somehow an “affiliate” of my VCs and all of their other startups. I don’t even know what that means, and I really need the $$ now to keep our startup afloat. Help!

Sasha Startup”

Before I go on – there is no actual Sasha Startup. However, Sasha is an amalgam of countless emails, texts and calls my law firm colleagues (see disclosure) and I have fielded over the last week. I’m happy to be the bearer of GOOD news in this regard. Please read on to clear up confusion about venture-backed startups being somehow almost entirely shut out of the new SBA Section 7(a) loans. Spoiler alert – they’re not! (Link to longer footnoted column my colleagues and I published earlier this week).

The CARES Act (March 27, 2020) established a new type of loan program known as the Paycheck Protection Program (the PPP) within the U.S. Small Business Administration’s (SBA’s) Section 7(a) loan program. The startup/VC community read SBA’s arcane rules about “affiliates” and concluded that pretty much every startup would be ineligible because, as one observer said (paraphrasing):

‘most lawyers I spoke to read the affiliate provision in the CARES Act to mean that any venture capital-backed startup would need to affiliate with all the other startups in that VC’s portfolio.’

To see our other material related to the pandemic, please visit the Coronavirus/COVID-19: Facts, Insights & Resources page of our website by clicking here.