Main Street Lending Program serves as an alternative to PPP funds

Editor’s Note: The article below was originally published on April 27, 2020. It includes updates from the Main Street Lending Program. The Federal Reserve Board created the Main Street Lending Program as an alternative to supplement small business’ lost income due to the coronavirus.

As of December 29, 2020, the Fed extended the program’s termination date to January 8, 2021. These changes have been noted as applicable.

Coronavirus has impacted not only the health of millions of U.S. citizens — it has equally driven down the economy — especially with small businesses. So, to combat the economic demise of so many American companies, the federal government has enacted multiple financial programs under the CARES Act, like the Paycheck Protection Program, Employee Retention Credit, payroll tax postponement, and the Economic Injury Disaster Loan.

Yet, of the four financing options for small businesses, the Paycheck Protection Program, offered by the Small Business Administration (SBA), was in such high demand that initial funds were quickly depleted. While additional funds were added by the Paycheck Protection Program Flexibility Act and the Consolidated Appropriations Act 2021, there are millions of applicants nationwide and a limited amount of funds.

The Federal Reserve recently announced a new program — the Main Street Lending Program — that could be a small business owners’ next best option. This program is estimated to support up to $600 billion in new loans. Learn more about it now with these commonly asked questions and answers.

What is the Main Street Lending Program?

The Main Street Lending Program (MSLP) is a financial program sponsored by the Federal Reserve to assist small- to medium-sized businesses previously in good financial standing before the coronavirus pandemic. This program provides another option for enterprises who didn’t receive a loan through the Paycheck Protection Program. However, if you happen to be approved for both, you can receive both types of loans.

MSLP loans aren’t forgivable (i.e., it must be repaid) but offer small businesses a way to get access to money to maintain payroll and keep employees onboard their companies.

MSLP loans have a five-year maturity date, and principal payments can be deferred for two years (the previous maturity was four years, and principal deferment was one year). Interest payments may be deferred for one year (unpaid interest will be capitalized).

The Federal Reserve recently extended the MSLP’s termination date to January 8, 2021, to allow for more time on processing loans and funding those submitted on or before December 14, 2020.

Main Street Lending Program eligibility for new loans

U.S. businesses established before March 13, 2020, who meet one of these conditions may be considered eligible* for the MSLP:

1. It has 15,000 employees or fewer (a majority of which are based in the U.S.).
2. The business had 2019 revenues of $5 billion or less.

Additional criteria apply, and the minimum loan size is now $100,000 (previously, it was $250,000). It’s also noted that the maximum loan companies may take is calculated in part on 2019 earnings before interest, taxes, depreciation and amortization, and outstanding or undrawn debt. In addition, lenders will apply their underwriting standards; borrowers will not automatically qualify for the MSLP.

*The above conditions reflect expanded eligibility as of June 8, 2020.

Main Street Lending Program requirements

Interested in applying for this loan instead of the PPP loan? Here are some of the steps involved:

To start the program, a reserve bank creates a particular purpose vehicle (SPV) for the Fed to buy up to 95% of the eligible lender-originated loan. Lenders must keep the other 5% of the loan. Lenders can originate new loans or increase the size of existing loans made to eligible businesses.

Is the Main Street Lending Program a part of the CARES Act?

The MSLP was established by the Federal Reserve Board using discretion granted to it under the CARES Act. Funding from the CARES Act was used to set up the program.

What’s the difference between PPP loans and Main Street Lending Program loans?

“Unlike PPP loans, which may be forgiven provided borrowers meet certain conditions (primarily related to keeping employees on the payroll), the MSLP functions more like a traditional loan, although it comes with significantly low-interest rates,” says INC. features editor Diana Ransom.

At the minimum a new MSLP loan amount of $100,000, and with no principal paid the first two years, you would be repaying a minimum of $15,000 of principal in years three and four and the remaining $70,000 in year five, plus capitalized interest.

Here are other differences between PPP and Main Street loans:

• Interest rates: The MSLP loan interest rate is the secured overnight financing rate (SOFR) plus 3%, while the PPP loans offer a 1% fixed interest rate.
• Loan amount: The smallest loan amount for new MSLP loans is $100,000 (previously, it was $250,000). The cap is the lesser of $35 million or four times an eligible borrower’s 2019 earnings before interest, taxes, depreciation, and amortization when added to the borrower’s outstanding and undrawn debt. There’s no minimum for PPP loans, but they do have a limit of $10 million ($2 million under the Consolidated Appropriations Act 2021).
• Loan forgiving: MSLP loans may not be forgiven, while PPP loans may be forgiven if businesses allot at least 60% of the loan to pay employees’ salary, and the rest for certain qualifying business expenses, including mortgage interest, rent, utilities, software, essential supplies, and personal protective equipment.
• Repayment terms: MSLP loan repayment term is five years, while the PPP loan term for loans made on or after June 5, 2020, is also five years. Lenders and borrowers can mutually agree to change the terms on PPP loans made prior to June 5, 2020, from two years to five years.

Review the latest rules for the Paycheck Protection Program.

What if you already applied for the PPP loan?

You will still get the PPP loan (paycheck protection loan) if you’re already approved. Lenders are required to make the first disbursement of funds no later than 10 calendar days after your approval.

If you applied for the PPP loan, work with your lender to check the application status.

Help with small business taxes

Do you have questions about the changing landscape and how it can affect your business?

Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Connect with us at blockadvisors.com.

Our small business tax professional certification is awarded by Block Advisors, a part of H&R Block, based upon successful completion of proprietary training. Our Block Advisors small business services are available at participating Block Advisors and H&R Block offices nationwide.