Main Street Lending Program: Everything You Need to Know
The Main Street Lending Program: What is it?
The coronavirus pandemic has effectively changed the way the world does business, and while some industries are doing relatively well despite stay at home orders and mandatory business closures, there are a lot of local businesses out there that have suffered a big hit to their cash flow. Even with federal restrictions being lifted paired with government relief programs like the Paycheck Protection Program (PPP), individual state mandates and requirements have made it difficult for smaller operations to conduct business as usual, and thus difficult to meet business expenses as usual.
Thankfully, another program called the Main Street Lending Program has been recently put into place by the Federal Reserve Bank of Boston in order to provide further aid to small and medium sized businesses that were doing well before the pandemic. Please note that unlike some of the other federally-funded financial aid that has been provided, the Main Street Lending Program Loans are not grants and cannot be forgiven. The gist of the program is that the Federal Reserve has committed to actually purchasing a portion of the loans given by banks, ranging anywhere from 85% to 95% of the loan, depending on the loan option. This incentivizes banks to be more lenient with their lending requirements while also still urging responsible lending decisions since there is still a portion of the loan retained by the lender, providing loans ranging from $500,000 through $200,000,000.
Source: Federal Reserve Bank of Boston Website
Eligibility is relatively cut-and-dry, and will be outlined in just a bit in this article, with the most difficult requirements being that the business needed to have been in good financial standing before the pandemic, that the business needs to be small to medium sized (no more than 15,000 employees or no more than a 2019 annual revenue of $5 billion USD), and that it cannot be on the list of businesses that are ineligible for SBA loans anyway, which you can check out here.
To sweeten the deal, the Main Street Lending Program has also expanded and revised the types of loans available, now including Main Street New Loans, Main Street Priority Loans, and Main Street Expanded loans, all 4-year terms with a few differences in the details such as borrower origination fees and repayment structure, which will also be explained in just a bit!
Let’s jump into what everyone needs to know first: are you eligible? As mentioned earlier, eligibility is relatively lenient, and has been structured this way in order to make sure that the businesses taking advantage of the Main Street Lending Program are the businesses that actually need it.
Below is a list of eligibility requirements as well as a quick explanation of what that requirement means:
- The business must have been established before March 13, 2020
- Why, you might ask? This was around the time that COVID-19 began to truly affect the United States economy, so again, while we are all grateful for COVID-inspired business pop-ups like seamstresses and delivery services, the Main Street Lending Program is really meant for those who were already up and running before the economy took a hit
- The business must not be on the list of businesses that aren’t eligible for Small Business Administration (SBA) loans
- You can click here to get directly to the list of business types that are ineligible for the Main Street Lending Program loans, as well as for other SBA loans in general. Some examples of ineligible businesses include but are not limited to: non-profits, life insurance companies, private clubs and businesses which limit the number of memberships for reasons other than capacity, and businesses principally engaged in teaching, instructing, counseling or indoctrinating religion or religious beliefs.
- Remember, this is an either/or situation--the business only needs to meet ONE of these criteria. If you’re unsure how to officially count your employees, you can refer to the SBA’s regulations and affiliation rules, found here. Also keep in mind that “employees” includes not only full-time workers, but also counts part-time and seasonal (though it will generally exclude independent contractors and volunteers).
- The business needs to have been created or organized in the United States, and a majority of its operations and employees must also be located in the United States. Generally, “majority” means at least 50% assets, annual net income, annual net operating revenues, and annual consolidated operating expenses.
- As mentioned earlier, there are three loan programs the business can participate in, called “facilities,” including the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The business also becomes ineligible if they participate in the Primary Market Corporate Credit Facility, also known as PMCCF, which is another federal program meant to support credit to employers via bonds and loans.
- This refers to the provisions specifically set for airline carriers, air cargo, and businesses essential to national security. A majority of businesses that meet all the requirements listed thus far will usually not be classified under this provision, but it’s always a good idea to double check--you can reference the CARES Act here.
In addition to the primary requirements above, there is one additional criteria in particular to also keep in mind:
- If you already have outstanding loans with that lender, they need to have an internal risk rating of “pass” in the Federal Financial Institutions Examination Council’s supervisory rating system as of December 31, 2019: basically, if you’ve already taken out a loan from the lender with whom you’re applying for a Main Street Lending Program loan, your loan has to be in good status according to federal financial guidelines in order to take out a new loan
- Please keep in mind that while these are the eligibility requirements set forth by the Federal Reserve, it is still ultimately up to the lender you choose to consider the rest of your financial condition and determine whether or not they want to approve your application. Under eligible lender requirements, they are obligated to perform an assessment of your business’s finances at the time of the application, including the consideration of other debts and loans you may already be obligated to.
Now that you’ve determined your eligibility, let’s take a look at the differences between the three loan types available under this program. The table below gives a quick overview of the differences--and similarities--between the three loans.
|Main Street New Loan||Main Street Existing Loan||Main Street Expanded Loan|
|Term||4 years||4 years||4 years|
|Minimum loan amount||$500,000||$500,000||$10,000,000|
|Maximum loan amount||Lesser of $25M or 4x 2019 adjusted EBITDA||Lesser of $25M or 6x 2019 adjusted EBITDA||Lesser of $200M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA|
|Repayment||33.33% per year||15% first year, 15% next year, then 70% in the final year||15% first year, 15% next year, then 70% in the final year|
|Rate||LIBOR + 3%||LIBOR + 3%||LIBOR + 3%|
|Lender Transaction Fee||100 basis points of principal loan amount||100 basis points of principal loan amount||75 basis points of principal loan amount|
|Borrower Origination Fee||100 basis points of principal loan amount||100 basis points of principal loan amount||75 basis points of principal loan amount|
These numbers and acronyms are great and all, but what do they actually mean? Let’s take a quick look and go over what each of these terms implies for your business:
- Term: 4 years
- All three loan types are 4-year loans, and can either be secured or unsecured
- Minimum loan amount: $500,000 for New and Priority, $10,000,000 for Expanded
- Unfortunately the Federal Reserve will not issue loans less for these minimums under any condition. You may want to check out other available SBA loans if your needs call for lower lending amounts.
- Maximum loan amount:
- New: Lesser of $25M or 4x 2019 adjusted EBITDA for New
- Priority: Lesser of $25M or 6x 2019 adjusted EBITDA for Priority
- Expanded: Lesser of $200M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA
- Okay, this seems like a ton of numbers and phrases you may be unfamiliar with, but your accountant and other financial officers should be able to get this information for you. In summary, EBITDA stands for “Earnings before interest, tax, depreciation and amortization,” so it essentially counts your earnings before a bunch of it gets deducted for one reason or another, meaning that your maximum loan amount is based on a value centered around how much you earn because the EBITDA is a helpful way for lenders to use your profitability as measure of your business’s performance.
- Risk Retention by Lender: 5% for New and Expanded, 15% for Priority
- Risk retention just refers to how much the lender needs to reserve for unexpected financial claims. The bigger loan you take out, the more the institution needs to set aside to safeguard unexpected loss.
- Payment: 33.33% per year for New; 15% first year, 15% next year, then 70% in the final year for Priority and Expanded
- If it’s a four-year term, why are you only repaying for three years? Luckily, payment is actually deferred for the first 12 months of the loan, both for payments that go toward principal as well as payments going toward interest, but take note that unpaid interest will be capitalized.
- If you’re brand new to loans, “principal” refers to the actual amount you’re taking out, or the actual dollar value of the loan you’re requesting. “Interest” is the same as it typically is: it’s essentially the cost of you having the loan, and is typically charged on a recurring basis while you have the loan out. This is why you’re generally encouraged to pay off loans and other debts more quickly--the sooner you pay off, the less interest you ultimately pay.
- One last thing that’s good to know if you’re new to loans: “amortization” is a common term used in financial documents and by lending institutions to describe repayment. You’ll most often see phrases like “amortization table” and “amortization rate.”
- Rate: LIBOR + 3%
- LIBOR stands for London Interbank Offer Rate, which is a common benchmark interest rate index. These rates can change as frequently as every day and are announced every day, early morning, U.S. time.
- Lender Transaction Fee: 100 basis points of principal loan amount of New and Priority, 75 basis points of principal loan amount for Expanded
- Here’s another set of words that may not make any sense if you aren’t familiar with loans and the points process. In summary, basis points are commonly used when measuring interest or other financial figures. For the purposes of these loans, you can think of it this way: the lender transaction fee is a fee that your lender will pay to the Main Street Lending Program, and it will be based on how much of a loan you take out. Keep in mind that the lender does have the option to pass this fee onto you instead.
- Borrower Origination Fee: 100 basis points of principal loan amount of New and Priority, 75 basis points of principal loan amount for Expanded
- Don’t worry, this is the last loan term we’ll throw at you for a little while. The Borrower Origination Fee is essentially the fee that the lender charges you for going through the whole application process and actually providing you with a loan. This is a loan term you’ll see in almost every loan you take out, both business and personal, unless the lender is specifically offering a promotion like $0 Origination Fee. This term is also calculated as a percentage of the amount you’re taking out, and also measured with basis points like the Lender Transaction Fee.
Aside from these primary loan terms, there are also a few other provisions set forth by the Federal Reserve that are good to know.
- Prepayment is permitted without penalty: in other words, borrowers won’t be punished for paying off their loans early. Believe it or not, some lenders actually charge a fee, known as a prepayment penalty, if borrowers pay off their loans in a lesser time than the original terms of the loan. Think about the interest we discussed earlier: lenders actually make money from borrowers taking longer to pay because of the profits made from loan interest. Thankfully, you won’t have to worry about that here.
- Reasonable efforts to retain employees: one of the biggest purposes of the Main Street Lending program is pretty similar to the goals of the Paycheck Protection Program: to ensure that businesses are able to retain employees that they would have had to otherwise furlough or lay off because of coronavirus. One of the terms of the loan is that the business needs to make a reasonable effort to use the funds for the purposes of retaining their employees despite the financial hardships they’re facing due to altered operations stemming from the pandemic.
- The program will stop purchasing loans on September 30, 2020: unless of course there is an expansion or extension of the program by the Department of the Treasury.
Lastly, each loan will also have an agreement called Required Borrower Certifications and Covenants. These essentially are promises that the business makes to the lender and to the program regarding the loan and their own finances. Usually, the Chief Executive Officer (CEO), Chief Financial Officer (CFO), or some other officer who performs similar functions within the company will be responsible for reviewing and signing the document. The document is the generally the same across all three loan types and contains the following provisions, taken straight from the documents themselves with a brief explanation to give you some insight on what the clause actually means:
- The Eligible Borrower must commit to refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due
- In other words: the business promises to prioritize this loan when it comes to paying back debt, with the exception of debt that is mandatory and due. However, if the business sees an influx of profit and is looking to pay down some of their debts, this clause states that the Main Street Eligible Loan should be the priority to pay down
- The Eligible Borrower must commit that it will not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender or any other lender
- In other words: the business promises to maintain whatever lines of credit it already has, both with the lender they’re seeking the Main Street loan from, or from any other lender they already have lines of credit with
- The Eligible Borrower must certify that it has a reasonable basis to believe that, as of the date of origination of the Eligible Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at least the next 90 days and does not expect to file for bankruptcy during that time period.
- This is just asking the business to acknowledge that, as of the origination date on the loan, they don’t expect to file bankruptcy or go out of business within the next 90 days; in other words, if you are using the loan as a last-ditch effort and are already severely in debt or anticipate to be severely in debt to the point of bankruptcy anytime soon, you may violate the terms of the loan
- The Eligible Borrower must commit that it will follow compensation, stock repurchase, and capital distribution restrictions that apply to direct loan programs under section 4003(c)(3)(A)(ii) of the CARES Act, except that an S corporation or other tax pass-through entity that is an Eligible Borrower may make distributions to the extent reasonably required to cover its owners’ tax obligations in respect of the entity’s earnings.
- This just asks that the business follows its compensation, stock repurchase, and capital distribution as it usually does under direct loans. The exception noted is for pass-through entities like partnership limited liability companies whose financials generally “pass through” the business and apply directly to the members or owners of the business.
- The Eligible Borrower must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- As we’ve mentioned many, many times: you as a business are responsible for doing your due diligence to ensure you’re even eligible for the loan. You are responsible for making sure that you meet all of the eligibility requirements we’ve listed above, and also that you don’t meet ineligibility requirements. To refresh your memory, this includes but is not limited to: already participating in a Main Street Lending Program loan, participating in a Primary Market Corporate Credit Facility, or already having received dedicated aid from the CARES Act as referenced above.
If you’ve made it here, congratulations on your dedication thus far--that was a heck of a lot of information to process! The next step, and arguably the most important step, is the application process. Keep in mind that the federal government guidance steps down here and
hands the decision power over to lenders, so even if you meet all of the above requirements and even if you took out a Paycheck Protection Loan, you still may not qualify for a Main Street Lending Program loan under the discretion of the lender you choose.
When it comes to actually choosing a lender, remember that there are lenders out there that aren’t actually eligible to participate in this program. For now, eligible lenders are federally insured depository institutions like banks and credit unions
as well as U.S. banks that are affiliates of foreign banks. One option to help you choose a bank is to go through a company likeLendzi, where you canfill out a single application and they’ll actually match you to over 75 lenders they’ve partnered with in order to give you a wide range of small business loan options that you can compare and contrast in order to find just the right one for you. The best part about using Lendzi is that getting started won’t hurt your credit score and there’s no obligation.
When you find your lender, you’ll go through a fairly typical loan application process from there, submitting the documents as required by the lender in order for them to determine your financial condition and lending credibility.
You now know everything you need to know as a borrower. If you’re a lender (or if you’re interested in the requirements on the eligible lender side of things), there’s just a little bit more to know, which is one section ahead. But, for now, let’s wrap with some conclusive pieces of information as well as a list of resources you may find helpful in your venture toward a Main Street Lending Program Loan (though, we’re confident that we’ve covered everything you should need to know in this article alone!):
- The Federal Reserve has promised to publicly publish reports on the Main Street Lending Program on a monthly basis, including the names and details of participants, the amounts borrowed and interest rates charged, and the overall costs, revenues, and fees for each facility (remember, “facility” refers to a sort-of sub-program, representing each type of loan). Reports to Congress are already available for the first month of the program since it started back in early April, and you can access the reports as well as PDFs of Term Sheets, FAQs, and Press Releases at the Federal Reserve’s official Main Street Lending Program page here: https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.
- The Federal Reserve Bank of Boston, being the Federal Reserve Bank essentially in charge of the Main Street Lending Program, has ample resources on their website, and even offers an e-newsletter to provide updates about the program. You can check out their Main Street Lending Program page here: https://www.bostonfed.org/supervision-and-regulation/supervision/special-facilities/main-street-lending-program.aspx. If you have general questions about the program, you can also email them at [email protected].
- The U.S. Chamber of Commerce also has a resource page for the Main Street Lending Program, and has even put together a guide, similar to this article, that walks businesses through the process. You can access their Main Street Lending Program resource page, as well as the guide, here: https://www.uschamber.com/report/guide-the-main-street-lending-program.
- The Small Business Administration is a central hub for all of America’s small to even medium-sized businesses, and provides extensive resources for small businesses amidst the coronavirus pandemic. You may want to consider checking out their COVID-19 small business loan resource page if the Main Street Lending Program Loans’ minimums of at least $500,000 are a bit higher than what you’re looking for: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources.
Similar to the small business loans mentioned above, the U.S. Department of the Treasury also has the Community Development Financial Institutions Fund resource page that lists current certified CDFIs that also make loans to small businesses: https://www.cdfifund.gov/pages/tools-resources.aspx. 4
As a lender, the thousands of words of information up to this point should have given you a solid idea on how the Main Street Lending Program works, but there are quite a few requirements and certifications that you must also meet in order to participate as an eligible lender. The good news is, as mentioned earlier, the requirements to become an eligible lender are fairly lenient just like the lenient requirements for borrowers in an effort to encourage greater participation in the program:
- An Eligible Lender is a U.S. federally insured depository institution (including a bank, savings association, or credit union), a U.S. branch or agency of a foreign bank, a U.S. bank holding company, a U.S. savings and loan holding company, a U.S. intermediate holding company of a foreign banking organization, or a U.S. subsidiary of any of the foregoing.
- There are not many financial institutions in the United States that are not insured by the Federal Deposit Insurance Corporation, also known as the FDIC. You are most likely an FDIC-insured financial institution unless you are insured by some other means, such as the Bank of North Dakota, which is state-run and also state-insured.
Also, just as with borrowers, lenders also must certify and agree to a list of provisions regarding their responsibilities in the loan process, with the section/document appropriately titled the Required Lender Certifications and Covenants:
- The Eligible Lender must commit that it will not request that the Eligible Borrower repay debt extended by the Eligible Lender to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan is repaid in full, unless the debt or interest payment is mandatory and due, or in the case of default and acceleration.
- This is sort of a mimicry to the borrower commitment earlier about prioritizing debt payoff. This states that the lender promises not to require the borrower to repay any other loans they’ve extended to the borrower until the Main Street Lending Program Loan has been repaid in full, of course with the exception that the other loan payments are mandatory
- The Eligible Lender must commit that it will not cancel or reduce any existing committed lines of credit to the Eligible Borrower, except in an event of default.
- Again, this mimics what’s in the borrower’s covenants. The lender promises not to cancel or reduce any lines of credit that the borrower has with them, unless of course the borrower defaults by not making payments.
- The Eligible Lender must certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for the leverage requirement in section 6(ii) of the Eligible Loan paragraph above is the methodology it has previously used for adjusting EBITDA when extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020.
- In other words: the lender has to use the same methods to calculate the borrower’s adjusted 2019 income (EBITDA) as they have for other loans or other borrows before the inception of the program; this is particularly important because it helps to determine the leverage requirement for the loan.
- The Eligible Lender must certify that it is eligible to participate in the Facility, including in light of the conflicts of interest prohibition in section 4019(b) of the CARES Act.
- Finally, we see the same expectation for lenders as we see for borrowers: you as the lender are responsible for doing your due diligence to determine if your institution meets eligibility requirements, especially considering potential conflicts of interest laid out in the CARES Act section noted above. While the requirements to become an eligible lender are not vastly difficult to meet, it is still your responsibility to ensure that you do meet those requirements.