Main Street Lending Program:

Everything You Need To Know

As COVID-19 continues to change the way the world does business, some industries are doing relatively well despite stay at home orders and mandatory business closures; however, 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 and 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.

Thankfully, another program called the Main Street Lending Program has recently been 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. Unlike some of the other federally-funded financial aid provided, the Main Street Lending Program Loans are not grants and cannot be forgiven. 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 still urging responsible lending decisions since there is still a portion of the loan retained by the lender. Banks are now providing loans ranging from $250,000 through $300,000,000.

Source: Federal Reserve Bank of Boston

Here’s what we’ll cover:

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What type of Main Street loan are you looking for?

Are You Eligible?

Eligibility is relatively cut-and-dry and will be outlined in just a bit in this article, with the most difficult requirements being:

  • the business needs to have been in good financial standing before the pandemic
  • 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)
  • it cannot be on the list of businesses that are ineligible for SBA loans anyway

To sweeten the deal, the Main Street Lending Program has also expanded and revised the types of loans available. They now include:

  • Main Street New Loans
  • Main Street Priority Loans
  • Main Street Expanded loans

All types of Main Street Lending Program loans include 5-year terms with a few differences in the details, such as borrower origination fees and repayment structure.

Eligibility is considerably 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.

Here is a list of eligibility requirements as well as a quick explanation of what that requirement means:

01  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 pandemic-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.

02  The business must not be on the list of businesses that aren’t eligible for Small Business Administration (SBA) 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.

A note for non-profits: the reason non-profit organizations are ineligible is because the metrics used to underwrite the Main Street Lending Program loans aren’t set up to be able to properly evaluate the finances of non-profit organizations. The good news is that the federal government does acknowledge the hard work that a lot of non-profit organizations have been involved in during the pandemic and are reportedly working on a non-profit-specific aid program.

03  The business must either have 15,000 employees or fewer OR must have 2019 annual revenues of $5 billion USD or less.

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. 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).

04  The business must be a U.S.-based business.

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.

05  The business can only participate in one of the three Main Street Lending Program facilities as mentioned above, and cannot participate in the Primary Market Corporate Credit Facility.

As mentioned earlier, there are three loan programs businesses 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 (PMCCF), which is another federal program meant to support credit to employers via bonds and loans.

06 The business must not be part of the group of businesses that received specific support from the 2020 Coronavirus Economic Stabilization Act (CARES Act)

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.

In addition to these primary requirements, there is one additional criteria in particular to 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: If you’ve already taken out a loan from the lender with whom you’re applying via the Main Street Lending Program, 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.

The Different Loans Available:

Main Street New Loans, Main Street Existing Loans, and Main Street Expanded Loans

Now that you’ve determined your eligibility, let’s take a look at the differences between the three loan types available under this program. Here’s a quick overview of the similarities and differences between the three loans.

Main Street New LoanMain Street Existing LoanMain Street Expanded Loan
Term5 years5 years5 years
Minimum Loan Amount$250,000$250,000$10,000,000
Maximum Loan AmountLesser of $35M or 4x 2019 adjusted EBITDALesser of $50M or 6x 2019 adjusted EBITDALesser of $300M, 35% of outstanding and undrawn available debt, or 6x 2019 adjusted EBITDA
Risk Retention5%15%5%
Repayment33.33% per year15% first year, 15% next year, then 70% in the final year 15% first year, 15% next year, then 70% in the final year
RateLIBOR + 3%LIBOR + 3%LIBOR + 3%
Lender Transaction Fee 100 basis points of principal loan amount100 basis points of principal loan amount75 basis points of principal loan amount
Borrower Origination Fee100 basis points of principal loan amount100 basis points of principal loan amount75 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 at what each of these terms could imply for your business:

All three loan types are 5-year loans, and can either be secured or unsecured

Unfortunately, the Federal Reserve will not issue loans less than these minimums under any condition. You may want to check out other available SBA loans if your needs call for lower lending amounts.

This may seem like a jumble of unfamiliar numbers and phrases, but your accountant and other financial officers should be able to get this information for you. EBITDA stands for “Earnings before interest, tax, depreciation and amortization,” so it essentially counts your earnings before they get deducted for one reason or another. This means that your maximum loan amount is based on a value centered around how much you earn. The EBITDA is a helpful way for lenders to use your profitability as a measure of your business’s performance.

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.

If it’s a five-year term, why are you only repaying for three years? Luckily, payment is actually deferred for the first 24 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 essentially the cost of you having the loan, and it 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 quickly. Afterall, the sooner you pay off, the less interest you ultimately pay.

 

A final note for those of you who are 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.”

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.

If you aren’t familiar with loans and the points process, consider that 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.

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 a $0 Origination Fee. This term is also calculated as a percentage of the amount you’re taking out and 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 Borrowers won’t be punished for paying off their loans early. Believe it or not, some lenders actually charge a prepayment penalty fee 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 COVID-19. 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.

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 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:

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

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 with whom they already have lines of credit.

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

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.

Again, 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 listed and 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
  • Already having received dedicated aid from the CARES Act

The Application 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 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. To help you choose a bank, you can go through a company like Lendzi, where you can fill out a single application and match with over 75 lenders, giving you a wide range of small business loan options to 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.

Resources for Borrowers and Lenders Alike

If you’re a lender or if you’re interested in the requirements on the eligible lender side of things, consider these 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:

  • 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 on the Federal Reserve’s official Main Street Lending Program page.
  • 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. Check out the Main Street Lending Program page or get in touch with us for more information at [email protected].
  • 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 $250,000 are a bit higher than what you’re looking for.

Information for Eligible Lenders (and Curious Borrowers)

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, just like the requirements to become an eligible lender are fairly lenient, so are the requirements for borrowers:

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.

Just as with borrowers, lenders 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:

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.

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.

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.

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.

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