On April 9, 2020, the Department of the Treasury and the Federal Reserve Board announced additional incentives geared toward promoting maximum employment and stabilizing the economy, including a $600 billion low-interest loan program designed to fill in gaps in the recently enacted Small Business Administration's Paycheck Protection Program (PPP). This program, called the Main Street Lending Program, provides for low interest loans to small and midsize businesses and is designed to fill a need for middle-market business funding not covered by the PPP.
The PPP (authorized under the CARES Act) makes $349 billion in forgivable loans available to businesses with up to 500 employees, providing certain conditions are met. The Main Street Lending Program is available to businesses with up to 10,000 employees or a maximum amount of $2.5 billion in annual revenue. Other eligibility criteria include: the business is a U.S. business with significant operations in and a majority of employees in the U.S., the business was in good financial standing before the crisis, and the business has not otherwise received adequate economic relief in the form of loans or loan guarantees under the CARES Act.
As with PPP loans, businesses seeking Main Street funding will need to apply through banks and other lenders authorized to process the loans. The Main Street Lending Program as announced does not specify a minimum number of employees for borrowers. In addition, the Federal Reserve announcement states that companies that utilize the Small Business Administration's PPP may also participate in the Main Street Lending Program. The Program will make loans available through two facilities: (1) The Main Street New Loan Facility (MSNLF) will provide for newly originated loans to eligible businesses, and (2) The Main Street Expanded Loan Facility (MSELF) will allow companies to upsize existing loans.
New Main Street loans must be for at least $1 million, and no more than the lesser of $25 million or an amount, when added to the borrower's existing outstanding and committed but undrawn debt, four times the borrower's 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA). Upsized Main Street loans (loans added to existing loans) must be at least $1 million and no more than the lesser of $150 million, 30% of the borrower's existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower's existing outstanding and committed but undrawn debt, does not exceed six times the borrower's 2019 EBITDA.
Loan terms will be four years, with principal and interest payments deferred for one year. Prepayment of the loans is permitted without penalty, so if a business does not need the full $1 million minimum loan, theoretically it could immediately pay back the portion of the loan that is not needed. Fees for the loans include 1% paid to the government, 1% paid to the bank, and an annual cost of 0.25% for servicing fees.
Unlike loans under the PPP, loans under the Main Street Program are not forgivable. New loans under the MSNLF will be unsecured, while existing collateral on upsized loans under the MSELF will secure the upsized loan on a pro rata basis.
Specific timing and other details about the application process have not yet been released, as the Federal Reserve is soliciting comments through April 16, 2020 from lenders, borrowers, and other stakeholders "to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds." It is expected that additional details regarding the application process will be forthcoming after April 16. In the meantime, taxpayers may wish to contact their lender to discuss their company's financial position, potential funding needs, existing debt structure, and which Federal Reserve program might best satisfy their specific needs.
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