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The CARES Act for Small Businesses Explained

April 6, 2020 6 min read


The CARES Act for Small Businesses Explained

As the Coronavirus pandemic continues to challenge our economy, the legislature in Washington has begun taking measures to help. On March 27th, Congress passed the CARES Act (short for the Coronavirus Aid, Relief, and Economic Security Act).

Part of that Act includes $349 billion in loans for small businesses. The question now is who will receive them?

With the CARES Act, Congress has enacted the largest financial bailout for small businesses ever. The idea is to provide funds for small businesses to cover payroll and operations over the next 8 weeks. It is great for most small businesses with under 500 employees, but unfortunately, these loans are not useful for many other companies that also need this capital.

Let’s break down this loan program, so we can understand how it works, though of course it’s worth noting that you should also review the Small Business Association’s site on Coronavirus Relief, read the Act in detail yourself and contact your local SBA office and your bank to discuss further.

Which businesses are eligible?

Small companies with fewer than 500 employees are eligible for a loan if they have suffered a significant disruption due to Coronavirus.

However, there is one big caveat: if the company has an institutional investor, and the collective number of employees across the investor’s portfolio is over 500 employees, then these loans are not available.

What does this really mean? Companies that have previously raised money from VCs will probably not qualify. If the venture capital firm is active and has a lot of companies in its portfolio, there’s a good chance there are more than 500 people employed across all of those companies. Companies will also be ineligible if the VC has any form of control over the business.

However, companies that have thousands of individual investors by means of equity crowdfunding do qualify for these loans. +1 for crowdfunding!

What the Small Business Administration (SBA) is really saying through this caveat is that they will help small businesses that are self-funded or funded by the crowd, but they will not help small businesses with impossibly high valuations and millions of dollars of backing from VCs and institutional investors.

There are tens of thousands of VC-backed companies who may need additional funding, and without access to these loans, they will have to go back to their institutional investors. However, it is unlikely that all of them will get more capital.

Venture capital firms will have tough decisions to make in the coming months. Which companies in their portfolio will receive another round of investment, so that they can survive Coronavirus?

The companies that burn a lot of money will have to drastically cut costs. Those that pay $150 to acquire a customer online that will earn them $30 with a presumed lifetime value of $500 are probably dead. Growth at all costs will no longer work.

How do the CARES Act loans work?

While this is a difficult position for VC-backed startups, this is great news for equity crowdfunded companies.

The Basics of the Paycheck Protection Program

  • A small company can borrow up to 2.5 times their average monthly payments for payroll (averaged over the period Feb 2019 to Jan 2020) or $10M, whichever is the lesser of the two amounts, and with annual salaries capped at $100,000 for the calculation. Read this for more information.
  • The loans carry a 1% interest rate, with deferred interest payment for the first 6 months and may be up to a full year.
  • There is a 10-year maturity to the unforgiven portion of the loan.
  • There is no personal guarantee.
  • The loans are unsecured, so businesses do not have to pledge assets, such as a home.
  • Some or all of the loan can be forgiven if the company meets some clear criteria.
  • The timeline for getting the loan is promised to be fast.

Who will be loaning the money? Today, the SBA has a list of lenders, which include banks that will lend pursuant to their existing programs. The SBA also has the intention to expand this program to many more lenders, including Fintech companies that are able to reach small businesses across our country.

If a company wants to apply for a loan through the Paycheck Protection Program, they can find their local lender here to begin the application process.

Alternatively, companies can also visit the SBA website and apply for an advance loan of up to $10,000. The process is pretty straightforward, and business owners should be able to get a rapid response. The deadline to apply for Small Business Interruption Loans is June 30, 2020.

One of the centerpieces of this new program is the loan forgiveness component. Adding more debt to a business is not always the best solution because then you are saddling them with interest payments that they may not be able to pay.

On the other hand, getting money for free is a great solution. Just ask any entrepreneur. This is why this program is offering to forgive any loans which are used for paying people, rent and utilities. You can calculate the maximum loan amount you could receive with this spreadsheet.

This also means that companies cannot get the loan and then fire people. If they did, then the loan would not be forgiven. The payroll costs must be maintained, which means rehiring people who were laid off or furloughed.

The rules around how this will work are complex and still being ironed out, so please discuss specifics related to your business with your local SBA District Office. You can find your local office here.


The CARES Act is an opportunity for small businesses to find support during this crisis. It’s a great help to businesses in need, but the loans are capped at $349B. Once those loans fill up, that’s it, and entrepreneurs will be back to looking to other sources of capital.

Companies who borrow money should also consider raising capital on funding portals. If you’re an entrepreneur who is thinking about applying for a loan, think about this: offering equity to customers, fans, the community and the general public can be a testament to the viability and quality of your business.

People want in, and they care. Why not reward them with the chance to share in future profits and possibly the eventual sale of the business? Why not grow your business with fresh capital and a fresh army of brand ambassadors behind you to strengthen your brand? Best of all, raising capital on platforms like StartEngine is CARES Act compatible!

Learn more about raising capital on StartEngine here.

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