Business Loans

Main Street Lending Program: How Does It Work?

Main Street Lending Program

Small business owners now have another borrowing option to help staunch the losses caused by the coronavirus pandemic. After first announcing the program on April 9, the Federal Reserve has been tweaking the Main Street Lending Program ever since, preparing for when banks can provide loans starting at $250,000 to small- and medium-sized companies.

Main Street Lending Program: The basics

  • One program, three loans to choose from:
    • New loans: Up to $25 million
    • Priority loans: Up to $50 million
    • Expanded loans: Up to $300 million
  • Maximum interest rate: LIBOR plus 3%
  • Terms: Five-year repayment terms with two years of deferred principal payments and one year of deferred interest payments

The Main Street loan program grew out of the Coronavirus Aid, Relief, and Economic Security Act (CARES), which also produced the Paycheck Protection Program and other emergency federal relief for small businesses. Business owners who have received a PPP loan are allowed to borrow through the Main Street Lending Program, as long as they meet eligibility criteria.

Here’s how the Main Street program works: The Fed provides funding to eligible lenders, such as banks and credit unions, that in turn issue loans to eligible business owners. Banks and the Federal Reserve share the risk since the Fed will buy back up to 95% of a loan. Lenders will retain the remaining percentage of Main Street loans on their books.  Business owners interested in applying for these loans should reach out to their banks now to see if they plan to participate.

KEY POINT:While borrowers don’t have to make payments for the first year, Main Street loans are not forgivable like PPP loans. The Fed is also unable to give grants like the U.S. Small Business Administration (SBA) did through its Economic Injury Disaster Loan (EIDL). Businesses may only receive one type of Main Street loan, though it’s possible to receive multiple loans of the same type. Fed Chairman Jerome Powell said in a press conference that the program will not run out of money, a problem that plagued both the PPP and EIDL.

A closer look at the three types of loans

As we mentioned earlier, there are three financing options within the program: New loans, Priority loans and Expanded loans. The business loans share similar features, including the same rates and terms, including two years of deferred principal payments and one year of deferred interest payments, plus no prepayment penalties. They also have the same eligibility requirements:

  • Businesses must have been established in the U.S. before March 13, 2020; and
  • Businesses must meet one of two conditions: 15,000 or fewer employees, or $5 billion or less in 2019 revenues

The differences primarily come down to loan minimums and maximums and how they interact with a borrower’s existing outstanding debt.

New loans

This loan option may be the best fit for most small businesses, based on the minimum amount. It’s also the most comparable to the amount businesses received in PPP loans. The average PPP loan size was $206,000 in the first round of financing and $79,000 so far in the second round, after Congress injected more money into the program.

Minimum amount: $250,000

Maximum amount: The lesser of $35 million or four times your adjusted 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA) when added to any outstanding, unused debt.

Terms: Borrowers will repay 15% of the loan balance in years 3 and 4 and 70% in year 5.

Fees: Lenders owe the Fed a transaction fee of 1% of the principal amount, which may be passed on to borrowers. Borrowers may owe lenders an origination fee of 1% of the principal amount. The Fed would cover the lender’s servicing fees up to 0.25% of the principal amount.

Banks retain 5% of each loan, as the Fed will purchase the other 95%.

Priority loans

Priority loans are similar to New loans but have expanded EBITDA limits for loan amounts. Banks must retain 5% of each Priority loan, the same percentage as what New loans require.

Minimum amount: $250,000

Maximum amount: The lesser of $50 million, or six times your adjusted 2019 EBITDA when added to any outstanding, unused debt.

Terms: Priority loans have the same amortization schedule as New loans:

  • Year 3: 15% of principal due
  • Year 4: 15% of principal due
  • Year 5: 70% balloon payment due at maturity

Fees: Lenders owe the Fed a transaction fee of 1% of the principal amount, which may be passed on to borrowers. Borrower may owe lenders an origination fee of 1% of the principal amount.

Expanded loans

Expanded loans are available to businesses with large financing needs. Minimum and maximum loan amounts are higher for Expanded loans than they are for New and Priority loans.

Expanded loans can act as an “upsize” to a borrower’s existing term loan or line of credit. Rather than issuing a new loan, lenders would increase existing debt through the program. Lenders will need to retain 5% of the upsized amount.

Minimum amount: $10 million

Maximum amount: The lesser of $300 million or six times your outstanding, undrawn debt or six times your adjusted 2019 EBITDA when added to outstanding, undrawn debt.

Terms: Expanded loans have a similar amortization schedule as Priority loans:

  • Year 3: 15% of principal due
  • Year 4: 15% of principal due
  • Year 5: 70% balloon payment due at maturity

Fees: Lenders owe the Fed a transaction fee of 0.75% of the principal amount, which could be passed to borrowers. Borrowers may owe lenders an origination fee of 0.75% of the principal amount. The Fed would cover the lender’s servicing fees up to 0.25% of the principal amount.

Main Street Lending Program FAQs

How do Main Street loans compare to PPP loans?

Both loan programs were designed to help businesses negatively affected by the coronavirus pandemic. PPP loans include a forgiveness feature for borrowers that meet the requirements to support payroll. PPP loans are also issued through the U.S. Small Business Administration. Main Street loans are not forgivable and do not involve the SBA. However, Main Street loans do require borrowers to make reasonable efforts to maintain payroll, though the guidance is not as strict as it is for PPP loans.

Can I get multiple Main Street loans?

Yes, you can receive more than one of the same type of loan, as long as the loans collectively do not exceed $25 million or $200 million, depending on the loan type. Eligible businesses may not participate in more than one of Main Street lending facilities, meaning you may only be approved for one type of Main Street loan.

How do I apply for the Main Street Lending Program?

You can now submit an application with an eligible lender, as the Main Street Lending Program opened June 15. Monitor the Fed’s Main Street page to find out more information.

Will lenders have additional eligibility requirements?

Yes, lenders may require additional information and documentation beyond the minimum Main Street requirements. Lenders will apply their own underwriting standards when evaluating and approving borrowers.

Am I eligible for a Main Street loan if I laid off employees?

Yes, you may still be eligible for a Main Street loan if you have already laid off or furloughed workers because of COVID-19 precautions. If approved for a loan, you would need to make good-faith efforts to retain employees and keep up with payroll expenses.

 

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