The Federal Reserve program will provide additional coronavirus relief for small and midsize businesses with deferred loan payments and low-interest loans for the first year.
If you’re like most small businesses out there facing the current economic downturn, government stimulus plans like the $2 trillion CARES Act can be a lifeline. Unfortunately, many small businesses missed out on the popular Paycheck Protection Program (PPP). Though the start date has yet to be released, the Main Street Lending Program will provide additional relief to small and midsize businesses affected by the pandemic in the form of low-interest business loans.
How is the Main Street Lending Program Different Than PPP?
Unlike PPP, which was administered by the Small Business Administration (SBA), the Federal Reserve’s Main Street Lending Program is not a grant — you’ll have to pay it back. The program will function more like a traditional loan. However, interest rates will be low and payments and interest will be deferred for the first year. There will also be fewer restrictions on what you can use the money for. Better yet, the money won’t run out.
Federal Reserve Chairman, Jerome Powell, describes the program: “These are not grants, these are loans. The second thing is, [the Federal Reserve] won’t run out of money. It’s not a limited pot, so there won’t be this incentive to try to get there first.” While the Federal Reserve is enabling an initial $600 billion in loans, additional funding may be available as necessary.
The loan terms and interest rate are also different than PPP loans, which feature a fixed 1% interest rate and two-year term. Main Street loans will have a four-year term, and an interest rate equal to LIBOR +3%.
Who is Eligible for Main Street Lending?
Did you secure a PPP loan? Good news! If your business is eligible, you can still apply for a Main Street loan.
For-profit U.S. businesses with 15,000 or fewer employees — or revenues of $5 billion or less — can apply for Main Street loans (an increase from initial caps of 10,000 employees or $2.5 billion in annual revenue). There is no minimum size for a business to be eligible. Your business must have been established before March 13, 2020.
Borrowers will also face more traditional eligibility criteria than PPP. Lenders will apply their own underwriting standards to evaluate the creditworthiness of borrowers, which may mean additional information and documentation requirements. While the SBA guaranteed 100% of PPP loans, Main Street lenders will retain either a 5% or 15% share of the loan, depending on loan type (see chart below), while the Fed will purchase the balance.
Other key differences between the PPP and the Main Street Lending Program are the size of the loans and businesses who are likely to qualify. Unlike the PPP, which didn’t have a minimum loan amount, Main Street loans start at $500,000. And while PPP was only open to smaller businesses, the Main Street Lending Program is open to midsize businesses as well.
What are Permitted Uses for a Main Street Loan?
Main Street loans can be used to ease any financial hardship caused by coronavirus. While there are less stringent use requirements than the PPP, guidelines state that you must use the loan to make “reasonable efforts” to maintain payroll and retain employees.
You may not use Main street loans to pay off existing debt (including a PPP loan). You may not refinance, or pay dividends or distributions to pay yourself during the loan term, or for 12 months after it’s paid off. As a business owner, you may pay distributions to make tax payments.
How Can I Apply for a Main Street Loan?
The start date of the loan program has yet to be announced. The Federal Reserve released the initial term sheet on April 9, 2020, followed by revised term sheets and additional guidance on April 30, 2020.
In light of the challenges with the PPP, the Fed is trying to avoid similar issues with the Main Street program, hence the revised terms and additional guidance mentioned above. The Fed responded to feedback and significantly expanded the program to offer more loan options to more businesses.
Once applications are being accepted, eligible borrowers can apply through an eligible lender, which currently includes banks, savings associations and credit unions. Application requirements will vary by lender. You do not technically need to have an existing relationship with the lender in order to apply, but it remains to be seen how many institutions will offer this type of credit to businesses with whom they have no history.
Main Street Loan Details
The Main Street Lending Program consists of three secured or unsecured loan facilities: the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF).
All three types of loans will have a four-year term and a variable interest rate equal to LIBOR +3%. Payments of principal and interest are deferred for one year. Borrowers can prepay without penalty. Loan amounts range from $500,000 to $200 million.
The three loans are different when it comes to origination fees, the level of guarantee by the federal government, and the loan’s relationship with existing debt.
Assess Your Loan Options Now
The Main Street Lending Program is expected to start in a matter of weeks. While there shouldn’t be a rush to apply before the money runs out, as with the PPP, it’s a good idea to assess your options now so you’re prepared to apply once funding is available. Start by checking with your lender (and others) to find out if they plan to offer Main Street loans.