My startup repaid our PPP loan

Obtaining a PPP loan was one of the most stressful experiences I’ve had as a startup founder. Not because it had to be, but because banks, the government, and my brain all have serious problems (in increasing order of severity). Read more about that drama in my previous post.

So it shocked my employees, friends, and banker when on the same day I received the funding I’d obsessed over for weeks, I announced that I was giving it all back.

My company is small, and the six-figure loan would have given us financial stability for the first time in… ever? But the exhilaration I felt from having received the loan quickly dissipated, replaced by unease. I had focused so much on what could we GET, and barely at all on what was truly NECESSARY.

We needed money by the same standard almost any small startup needs money, regardless of the economic times. We’re bootstrapped, and I think VCs started quarantining early just to avoid meeting me.

But there was a new standard for necessity posted by the SBA: “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

At first that sounded like we’d still qualify. I ran up $100,000 in credit card debt to fund the business since we failed to raise money AND got turned down for bank loans last November. We finally reached cash-flow positive again in March, only because 2 people left and another voluntarily reduced their role.

Then I listened to a startup law firm’s webinar on how they anticipated the government would interpret necessity, and a few key points were made:

• Necessity does not mean convenience. It means without it, we will NOT be able to support current business operations without significant burden.
• Ability to support ongoing operations implies availability of short-term funds, either from existing cash or anticipated revenue, sufficient to run the business through the immediate months. In other words broad claims, such as lack of guaranteed revenue or funds for an indefinite period, would be invalid.
• The necessity claim is judged in hindsight, so any changes should be considered before applying for forgiveness (e.g. if we get new funding, or our revenue grows to the point we can sustain our business). If the loan was initially necessary, but a change in fortune deemed the loan unnecessary over the next two months, we should return the money instead of seeking forgiveness.
• Contemporaneous documentation is key, and not knowing something we should’ve reasonably known is not an excuse. There is no putting our head in the sand. We should immediately document exactly why this loan was our only option (besides those significantly detrimental to the business) to support ongoing operations. And we should show that documentation to our lawyers and make sure they think what we have is sufficient if we ever need to defend our claim.It’s not yet clear how hard the government will investigate smaller loans, but enforcement is likely to be significant. And even if it’s unlikely a well-intentioned small company will be investigated, if one clearly takes advantage of the system there’s a reasonable chance that an internal or external factor will bring that to light and get the government’s attention.
• There’s a safe harbor to return the money by May 7th, if we do so it is assumed our certification was in good faith.

So I closed my eyes and imagined what our company would look like without the money.

• Would we anticipate laying anyone off simply because we couldn’t afford them? Absolutely not.
• Would we be able to hire additional staff to replace 2.4 who left last month, as required to support our current business? Yes, though possibly slower.
• Would I rather NOT be thinking about this for the next several years, wondering if I did the right thing? That would probably be more detrimental than refusing the loan!

I did NOT ask the question I was really asking the entire time before:

• Would the money be super-helpful, make life better for our entire team and customers, and give us a significantly better chance to be successful long term? Of course.

Because that is NOT the standard being applied, and I should’ve realized that even before the new SBA guidance came out. I was looking out for an opportunity to make things easy, in a time when many small businesses literally need this money to survive.

So it was a slam dunk; I gave the money back. I’m disappointed about having wasted others and my own time, but know that I had to given the amount of money being distributed and the ambiguity in the law and initial guidance.

I had to appreciate the company I’ve helped build, and the opportunity we have to give instead of take. I remembered that I’m not in this for the money, though that’s an excellent by-product which will hopefully allow me to do even more cool things in the future. I made a mistake in requesting something that was never meant for me, and feel blessed to have the opportunity to make it right.