By Scott Lewis, CPA, MSA
Last week, the Federal Reserve announced the details of the new Main Street Lending Program, a package that provides up to $600 billion in loans to small and midsize businesses with up to 10,000 employees and less than $2.5 billion in revenues in 2019. This program was designed to fill the need for liquidity in the middle market; for those companies that are too large for the Paycheck Protection Program (PPP).
Eligible Lenders include any United States insured depository institution, bank holding company or U.S. savings and loan holding company. Borrowers who have already received approval for their PPP loans, if applicable, are not precluded from participating in these loans as well.
The loan terms for a borrower under a new loan are for no less than $1 million and no more than the lesser of $25 million, or four times the 2019 EBITDA (earnings before interest, taxes, depreciation, and amortization) plus the borrower’s existing outstanding and committed but undrawn bank debt.
For pre-existing loans, the Main Street loans are added to these existing loans, and must be at least $1 million and no more than the lesser of $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.
The general terms for these non-forgivable loans will be 4 years, with principal and interest deferred for one year, with an adjustable interest rate on the Secured Overnight Funds Rate (SOFR) plus 250-400 basis points, and no prepayment penalties. There are also fees involved which would also be charged to the borrower.
There are many loan requirements to secure these Main Street loans and we can provide a bullet point list of these requirements upon request. These loans, like the PPP loans, were designed to keep people employed. Some of the key items of note, which must be certified by the borrower include:
- During the term of the loan, “reasonable efforts” will be made to maintain payroll and retain its employees,
- The loan proceeds may not be used to repay other previous loans or lines of credit.
- The borrower may not pay dividends during the loan period and for 12 months after the loan has been paid off. It is unclear at the present time whether this applies to pass thru entities such as partnerships and S corporations that typically make distributions to owners for individual taxes and other uses. We believe this will be clarified in future guidance.
We strongly advise that borrowers should be working with their financial advisors, CPA’s, and lenders to start the process on these loan applications if they are a viable option.
