Looking for a low-interest loan to help your business through tough times? We strongly promoted recourse to the PPP loan program (the PPP Loan is potentially forgivable), but if your business was too big or was otherwise ineligible for the PPP (or if you got one and it just wasn’t enough), then you may want to consider the Main Street Lending Program.
The Main Street Lending Program is an effort by the Federal Reserve to make low-interest loans available to small and medium-sized US businesses that need financing. The loans are made by banks but then the Federal Reserve buys a significant chunk of the loan in order to mitigate the bank’s risk.
The Program is really five different programs:
- the Main Street New Loan Facility (MSNLF);
- the Main Street Priority Loan Facility (MSPLF);
- the Main Street Expanded Loan Facility (MSELF);
- the Nonprofit Organization New Loan Facility (NONLF); and
- the Nonprofit Organization Expanded Loan Facility (NOELF).
The latter two, for non-profits, are not appropriate for for-profit copmanies like those in the MARPA community. Terms sheets for the first three programs were issued on June 8 and they expanded the scope of the previous Main Street program. The MSELF is for increasing an existing loan or credit facility. For most of the for-profit members in the MARPA community who have not previously participated in the Main Street Loan Program, the two programs for which they may be eligible are the new loan program (MSNLF) and the priority loan program (MSPLF).
Basic Eligibility
For each of these two Main Street Loan Programs, there are six basic criteria of eligibility. An Eligible Borrower is a Business that meets all six criteria:
1. was established prior to March 13, 2020;
2. is not an Ineligible Business (see below);
3. meets at least one of the following two conditions:
(i) has 15,000 employees or fewer, or
(ii) had 2019 annual revenues of $5 billion or less;
Businesses must meet at least one of these conditions but are not required to meet both;
4. is created or organized in the United States or under the laws of the United States with significant operations in and a majority of its employees based in the United States;
5. does not also participate in any of the other Main Street Loan Programs, or the Primary Market Corporate Credit Facility; and
6. has not received specific support pursuant to the Coronavirus Economic Stabilization Act of 2020:
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- This is focused on payments under Subtitle A of Title IV of the CARES Act — e.g. your business has not received an air carrier worker support payment, air carrier contractor payment or repair station loan;
- PPP loans (including forgiven PPP loans) are under a different Title in the CARES Act so they are not a bar to this Main Street Loan Program.
In addition to these criteria, the Applicant must be able to make all of the certifications and covenants required under the applicable program.
Common Features
The MSNLF and the MSPLF both offer loans with five-year maturities in which principal payments are deferred for the first two years and interest payments are deferred (but capitalized) for the first year.
The repayment schedule will look something like this:
Year One: No payments (interest is capitalized);
Year Two: Interest payments only;
Year Three: 15% of the loan principal is repaid (plus interest);
Year Four: 15% of the loan principal is repaid (plus interest);
Year Five: The remaining interest and the remaining 70% of the loan principal is due in a balloon payment by the end of the fifth year.
This sort of schedule should be ideal for aviation businesses who are looking for help while the industry experiences a down cycle, but who expect industry profitability to return in the third through fifth year of the loan.
Interest rates for these loans are LIBOR (1 or 3 month) plus 300 basis points. As of today, that put interest rates between 3.17 and 3.27 percent.
Up to 95% of each loan issued under this program will be bought by the Federal Reserve, thus minimizing the exposure of the lender.
The smallest loan for these two Main Street New and Priority Loan Facilities (MSNLF and MSPLF) is $250,000. The maximum loans are described below.
Difference Between the New Loan Facility and the Priority Loan Facility
The MSNLF and the MSPLF are very similar. There appear to be three main substantive differences between them:
1. Under the priority program (MSPLF) a borrower may also refinance existing debt owed to a different lender at the time the MSPLF loan is originated;
2. The priority program (MSPLF) permits loans up to $50 million, while the cap on loans under the new loan program (MSNLF) is only $35 million; and
3. Notwithstanding item two, the maximum loan under the priority program (MSPLF) is capped at 6 times the borrower’s 2019 EBITDA, while the cap on loans under the new loan program (MSNLF) is only 4 times the borrower’s 2019 EBITDA;
Categories of Ineligible Businesses
The Applicant must not be an Ineligible Business, as that term is defined under the Small Business regulations (13 C.F.R. § 120.110 – this does not necessarily mean that the entity must be a small business). Non-profits and religious organizations are normally excluded as “Ineligible Businesses” but they appear to be specifically eligible for the Main Street Program. The SBA ineligible business categories that apply are:
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- Financial businesses primarily engaged in the business of lending, such as banks, finance companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances);
- Passive businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except Eligible Passive Companies under § 120.111);
- Life insurance companies;
- Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify);
- Pyramid sale distribution plans;
- Businesses deriving more than one-third of gross annual revenue from legal gambling activities;
- Businesses engaged in any illegal activity;
- Private clubs and businesses which limit the number of memberships for reasons other than capacity;
- Government-owned entities (except for businesses owned or controlled by a Native American tribe);
- Loan packagers earning more than one third of their gross annual revenue from packaging SBA loans;
- Businesses with an Associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude;
- Businesses in which the Lender or CDC, or any of its Associates owns an equity interest;
- Businesses which:
- Present live performances of a prurient sexual nature; or
- Derive directly or indirectly more than de minimis gross revenue through the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature;
- Unless waived by SBA for good cause, businesses that have previously defaulted on a Federal loan or Federally assisted financing, resulting in the Federal government or any of its agencies or Departments sustaining a loss in any of its programs, and businesses owned or controlled by an applicant or any of its Associates which previously owned, operated, or controlled a business which defaulted on a Federal loan (or guaranteed a loan which was defaulted) and caused the Federal government or any of its agencies or Departments to sustain a loss in any of its programs. For purposes of this section, a compromise agreement shall also be considered a loss;
- Businesses primarily engaged in political or lobbying activities; and
- Speculative businesses (such as oil wildcatting).
It appears that most of the companies within the MARPA community would pass this test, but you should check this list to ensure that there is nothing that would cause your business to be ineligible.
Additional Details
To borrow, the Applicant should apply through a participating bank. The Federal Reserve website maintains a list of lenders (by state) that are participating in the program (just click on your state and you will see a list).
The Federal Reserve Bank of Boston released the most recent set of Frequently Asked Questions (FAQ) on July 15, 2020 and these provide guidance to the banking community as to the specifications of the program.