The Main Street Lending Program is a new economic security initiative sponsored by the Federal Reserve. It offers four-year loans to eligible business borrowers. The interest rate for the loans is the London Inter Bank Offered Rate (LIBOR) plus three percent, or 300 basis points. Interest and principal payments are deferred for one year. And there is no prepayment penalty.
Under the program, a lending facility (a financial institution approved to make loans under the program) is able to provide new loans to qualified businesses, or increase existing loans.
The purpose of the program is to keep credit flowing to small and mid-sized companies that were in good financial condition before the coronavirus pandemic started, but are now under stress because of the COVID-19 crisis.
Benefits to business owners
Business owners may find Main Street Loan Program attractive because:
- They could qualify for one if they did not qualify for a Paycheck Protection Program (PPP) loan.
- They can apply for one even if they have a PPP loan.
- The loan term is longer than PPP and other similar loans.
- There are fewer limits on what loan money can be used for than other stimulus loans.
- Interest rates are lower than certain types of business loans.
Your loan provider can help you decide if a Main Street Lending option is a good for you.
How the Main Street Lending Program works
The program allows the Federal Reserve to purchase loans that lenders provide to businesses. This is the vehicle the Fed is using to make more coronavirus aid money available to eligible lenders. The Fed purchases between 85 and 95 percent of each loan. The actual amount depends on the loan type. By purchasing these loans, the Fed is making more cash available to lending facilities so they are able to provide more loans to businesses with solid track records.
Under this program, a financial institution must keep five or 15 percent of a loan on its books. The reason is to keep lenders actively involved in the loan approval process and discourage irresponsible lending.
Businesses that have had their loans purchased by the Federal Reserve as part of the Main Street Program may be able to take advantage of other emergency lending options, including Paycheck Protection Program (PPP) loans. Your loan provider will let you know if you can have a PPP loan, economic injury disaster loan or participate in other programs.
Total loan purchases by the Fed are limited to $600 billion under the new loan program. Of this total, $75 billion of the funding comes from the original CARES Act.
To qualify for the Main Street Program, you must be able to prove your business:
- Was established before March 13, 2020
- Is eligible for Small Business Administration (SBA) loans
- Has fewer than 15,000 employees
- Earned an annual revenue of less than $5 billion in 2019
- Was created or organized in the United States or under U.S. laws
- Has a significant portion of its operations in the United States
- Has a majority of its employees based in the United States
- Has not participated in the Primary Market Corporate Credit Facility (PMCCF)
- Has not received support from the Coronavirus Economic Stabilization Act of 2020.
In addition, if your business receives loan funds through the Main Street Lending Program, you must make good faith efforts to maintain payroll and retain workers.
Main Street Lending Program structure and organization
The program is divided into three parts:
- The Main Street New Loan Facility (MSNLF). Under this part of the program, the Fed is allowed to purchase unsecured term loans originated on or after April 24, 2020. The minimum loan size starts at $500,000 and goes up to $25 million or an amount that, when added to current debt, doesn’t exceed four times the 2019 earnings before interest, taxes, depreciation and amortization (EBITDA) of your business.
- The Main Street Priority Loan Facility (MSPLF). Under this part of the program, the Fed may purchase unsecured term loans originated on or after April 24, 2020. The minimum loan amount is $500,000 and goes up to $25 million or an amount that, when added to current debt, doesn’t exceed six times your business’s 2019 earnings before EBITDA. For these loans, the lending facility is required to retain 15 (not five) percent of the loan on their books.
- The Main Street Expanded Loan Facility (MSELF). Under this part of the program, the Fed can purchase term loans originated before April 24, 2020, valued between $10 million and $200 million or 35 percent of outstanding and available debt, or an amount that when added to outstanding and available debt, doesn’t exceed six times your business’s 2019 earnings before EBITDA.
Eligible businesses can only participate in one of the program’s three loan options.
The fine print: Main Street Lending Program
The Main Street Lending Program will be administered through a single Special Purpose Vehicle (SPV). The SPV will stop purchasing loans on September 30, 2020, unless the Federal Reserve Board of Governors and the Treasury Department extend the program. The Federal Reserve Bank will continue to fund the SPV until the underlying assets of it mature or are sold.
If you apply for a Main Street Lending Program loan, you must:
- Not pay the principal balance of, or pay any interest on, other loans until the Main Street loan (or an increase in another loan provided through the program) is repaid in full, unless the debt or interest payment on other loans is mandatory and due. You are committing to making prioritizing repayment of loan money from the Main Street Lending Program over other debt.
- Not cancel or reduce any of your other lines of credit with your Main Street Lending Program lender or any other financial institution. Simply put, loan dollars from the program shouldn’t be used to pay off other loans.
- Certify that when you accept a Main Street loan, or increase an existing loan through the program, you have a reasonable ability to meet your financial obligations for at least 90 days and do not expect to file for bankruptcy during that time. This is to ensure your business is financially sound.
- Certify that you are eligible to participate in the program and have no conflicts of interest.
- Follow the compensation, stock repurchase and capital distribution restrictions that apply to direct loan programs under the CARES Act. (The only exception is if your business is an S corporation or other type of tax pass-though entity. If so, you‘re allowed to make reasonable distributions to cover tax obligations related to business earnings. Consult with a financial expert to learn more about this.)
Important note: The CARES Act related provisions of the Main Street Lending Program apply starting on the date of loan origination, through the duration of the loan and for 12 months after the date on which the loan is no longer outstanding.
Here is a summary of CARES Act loan use limitations. Most do not apply to the typical small business, but it’s important to check for sure.
- You are not allowed to repurchase an equity security for your business — or of your parent holding company — that’s listed on a national securities exchange. (The only exception is if you are required to do so because of a contractual obligation in effect on March 27, 2020, the date the CARES Act was enacted. This prevents use of loan money for stock buy-backs.
- You can not pay dividends or make other capital distributions related to the common stock of your business. The dividend restrictions prevent the loan dollars to inflate stock-related payouts.
- Officers or employees of your business that earned total compensation greater than $425,000 in 2019 are not allowed to earn total compensation greater than what they received in 2019. You cannot increase the compensation of highly paid employees while receiving Main Street Loan Program financing.
- Any pay or other benefits related to the termination of highly compensated employees can not exceed twice the total compensation they received in 2019. This discourages using Main Street Loan Program funds for excessive buy out packages.
- Officers or employees of your business who earned total compensation greater than $3 million in 2019 aren‘t allowed to receive total compensation over $3 million plus 50 percent of the amount earned over $3 million. This prevents the use of loan dollars to inflate executive pay.
The Main Street Lending Program is one of the more complex economic stimulus initiatives for businesses. Contact your financial institution to find out about loan terms and whether applying for one is a smart move for you.