In the 10 days since the Small Business Administration authorized banks to give out loans intended to help small business owners keep employees on their payrolls, more than 70% of the $349 billion U.S. Congress gave to the program has already been allocated.

The SBA reported banks have made $247.5 billion in forgivable Paycheck Protection Program loans as of April 13, including more than 88,000 loans to Texas small businesses worth $21.8 billion.

Those loans have gone to restaurants, retail stores, auto repair shops and any other small business with fewer than 500 employees. However, because of the way the law was initially written, they were not available to startups backed by venture capital investors until days after money started flowing out from banks to businesses—crucial lost time when the loan funding is being doled out so quickly.

Experts say there are still roadblocks in place for startups that hamper any chances of accessing the loans—therefore endangering the future of those businesses as the coronavirus pandemic continues to lay waste to the local and national economy.

Fueling Austin's innovation

According to the National Venture Capital Association, startups employ 2.3 million people nationwide, and according to job site Indeed, 98% of those companies employ fewer than 100 people.

While many are located in three concentrated areas—Boston, New York and the San Francisco area—Austin has become a Mecca for startups in recent years, with local companies from Yeti to Rambler Sparkling Water starting as venture-backed endeavors.

“These are folks employing the high-skilled, high-talent labor going out of the University of Texas and St Edward’s [University]. They create opportunities for people of color in East Austin to move up the socioeconomic ladder. They are companies supporting men and women in the healthcare industry to get better qualities of service,” said Matt Glazer, co-founder and managing director of Blue Sky Partners, a consulting firm that helps companies grow and scale.

Those companies solving problems in the community have been the centerpiece of regional economic growth efforts in markets such as Austin, Houston and Dallas, said Aziz Gilani, managing director at Houston-based venture capital firm Mercury Fund.

“We’ve worked too hard to see it all disappear in a matter of weeks because startups can’t get through this,” Gilani said.

Murky direction from D.C.

The reason startups have been excluded from the PPP loans is because of the SBA’s affiliation rules, which stipulate that, when counting the number of employees at a business, all companies with the same investors must aggregate their staff numbers together.

Since many startups have more than one investor, tallying their numbers along with other, unaffiliated startups, likely pushes them above the threshold of 500 staff members, making the vast majority ineligible to apply.

In a March 29 letter to U.S. Treasury Secretary Steven Mnuchin signed by the Austin Chamber of Commerce and the Austin Tech Alliance, the NVCA wrote that “allowing the rules to exclude some of our country’s most innovative startups in this new loan program is manifestly contrary to the intent of the legislation: to help small businesses keep their lights on and their employees working despite the double financial squeeze created by the economic and financial market downturns.”

Since initially launching the PPP and other disaster relief loan programs, the SBA has since issued new guidance to companies clarifying its policies, but the affiliation rules have not been waived completely.

Donna Zinsmeyer, a consultant with Austin-based VCFO—a company that works with thousands of firms to provide financial guidance—said she worked with a client backed by a venture firm and pushed over the 500-employee capacity due to that investment, even though the company only employs 20 people. She advised the client to look into a deferral of its payroll taxes as an alternative to conserve cash. However, since clients who do not pay payroll taxes on time face significant penalties, Zinsmeyer recommended the client seek the advice of legal counsel and the company's board of directors beforehand."

Russell Naisbitt of VCFO said there is still ambiguity regarding the new standards for the affiliation rules, and he is advising venture-backed clients to apply for the PPP loans. The NVCA said in its letter startup access to PPP loans hinge on the SBA's definition of the word "control"—and Naisbitt advised his client to contend that control of the company is local, not in outside firms who may invest only a small percentage.

“We went ahead and applied anyway and let the chips fall where they may,” Naisbitt said.

Mercury Fund has investments in about 30 companies in its portfolio, and Gilani said just one has been successful in receiving PPP funding. Austin-based companies in the Mercury portfolio such as Datical and GameSalad have applied for the loans but have not yet received approval as of April 14.

Blue Sky Partners has applied itself for a PPP loan, a process Glazer said has been marked by frustration as he and his partners are “stuck in the process” waiting on the bank. However, Blue Sky Partners is still recommending its clients put in their applications.

“Everybody we consult with, we say apply. It may be hard and you may not get it, but get in line,” Glazer said.

Finding a path to approval

VCFO’s consultants said establishing a strong connection with a lender is important for any business—in a crisis or not—but the pandemic and the financial fallout has made that necessity even more clear.

"It's something for all businesses to reassess going forward, 'What should we do to prepare for the next [crisis]?' Hopefully there won’t be one as severe as this. We want to make sure every business understands, having a solid relationship is super important," Zinsmeyer said.

In some cases, small businesses have found more success going to small banks, which can be more nimble and flexible than their larger counterparts, according to VCFO consultant Kendall Pace. The Austin Chamber has a list of lenders authorized to make SBA loan payments on its website, and VCFO is updating PPP guidance for companies as news changes.

While time is short for startups or any other business to apply for the initial $349 billion in PPP funding, lawmakers in Washington are discussing further funding opportunities. On April 7, Mnuchin tweeted that, at the direction of President Donald Trump, he had spoken with lawmakers about securing an additional $250 billion "to make sure small businesses get the money they need."

As for the first round of funding, Gilani said it won't become clear until later how badly the lost time being shut out of the PPP loan program will affect small businesses.

"What we do know is the early uncertainty trimmed about a week from startups to be able to participate in the program," he said. "It's cut down on the amount of time we've had to make decisions."

Meanwhile, like other small business owners across the country, startups are doing their best to hang on as long as they can and weather the continued economic downturn caused by the coronavirus. Without further help from the federal government, Glazer, who is also a member of the Austin Tech Alliance's advisory board, worries some of those companies that make Austin thrive will never be able to recover.

“They are making our community better," he said. "We may lose some of these brands and companies, which will devastate our local economy—and we don’t need to do that.”

Editor's Note: This story has been updated to reflect that VCFO financial consultant Donna ZInsmeyer recommended a client seek legal counsel and advice from the company's board of directors before making a decision to defer payroll taxes as a cash-saving measure.