There is a debate on whether or not startups should be raising SBA money. Is it moral? (I’m leaving out any of the “are they legally allowed to stuff.” I’m not a lawyer and don’t want to make any reps that I am).
I think they should if they can. Below is my logic as written to one of our companies this morning and slightly modified.
The reasons not to, from my perspective, are:
(1) If a startup gets an SBA loan, another small business that didn’t have financial backers/who needed the money more badly might otherwise not get one.
(2) If everyone were to get an SBA loan, it would contribute to inflation due to excess stimulus/money printing
(3) The gov’t may audit you later and decide you didn’t need one
(4) The money shouldn’t be used to help rich people get richer
I don’t totally buy any of these. For one, the program will expand to however many businesses actually need the money. So the $350B will likely go up. I don’t think it’s an either/or problem (maybe in terms of speed of application getting approved, but not otherwise).
Secondly, there are so many deflationary events occurring, that inflation doesn’t seem to be a big concern right now. And relative to how much cash is being put into other parts of our stimulus program, it doesn’t move the needle much.
It’s honestly too hard to tell right now who needs the money, and who doesn’t. As a CEO, do you really think you’re smarter than a virus? Or smarter than all the unintended consequences it may create? Plus, everyone is basically being affected. You may have to raise money sooner in a worse environment, sales will slow down, consumer demand will slow down — and less revenues means you can hire less people. If you have more money you can hire someone else who was laid off. The point is, new cash is meant to stimulate you, and your business, and protect the downside. Helping mitigate a lack of sales growth seems just as good as pumping money into high yield markets to make sure big companies can keep issuing new debt.
Taking an SBA loan is no less noble than the gov’t buying up bonds to keep markets liquid so large companies can keep issuing bonds. The money isn’t JUST to make sure bars and restaurants don’t go bankrupt. It’s to keep the economy going.
Yes — it’s MORE important a restaurant gets the money. But it’s not UNIMPORTANT for a startup to get the money too.
And finally — the money going into startups is not just a bunch of rich people trying to get richer. As said many places, the LPs themselves are often institutions who need you to do well. Our LPs include a hospital, multiple school endowments, foundations and other noble causes. If startups choose not to take the money, it could cause them to perform less well, and these pools of capital need their high risk part of their book to do okay and generate returns in times like these.
In short, I think the intention is good. Yes, it’s more important for a small business to get the loan if they are in hospitality etc. and if they don’t have alternative funding sources. But it doesn’t mean it’s not also important for startups to get access to.
The stimulus package is not built to “save the world from exploding” (although that’s part of it). But it’s also used to keep the world going, closer to where it was before.
If it turns out a business gets a loan that didn’t need one and its forgiven… keep the cash aside, and donate it to a good cause later.