Main Street Lending Program serves as an alternative to PPP funds

June 22, 2020 : H&R Block

Editor’s Note: This article was originally published on April 27, 2020.

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 June 8, 2020, the Fed expanded the program’s support to small and medium-sized businesses. 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 businesses, 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.

MSLP applicantYet, 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 depleted. While funds were recently added, there are millions of applicants nationwide and a limited amount of funds.

Recently, the Federal Reserve 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 is a financial program sponsored by the Federal Reserve intended to assist small- to medium-sized businesses that were previously in good financial standing prior to the coronavirus pandemic. This program provides another option for enterprises who didn’t receive a loan through the Paycheck Protection Program. Although, if you happen to be approved for both, you can receive both types of loans.

The 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 (previous maturity was four years and principal deferment was one year). Interest payments may be deferred for one year.

Main Street Lending Program eligibility for new loans

U.S. businesses established prior to March 13, 2020, who meet one of these conditions may be considered eligible* for the Main Street Lending Program:

  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 $250,000 (previously it was $500,000). 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 own underwriting standards; borrowers will not automatically qualify for Main Street Lending Program.

*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 steps involved:

To start the program, a reserve bank creates a special 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 CARES Act?

The Main Street Lending program 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 Main Street Lending Program functions more like a traditional loan, although it comes with significantly low interest rates,” says INC. features editor Diana Ransom.

At the minimum new Main Street loan amount of $250,000, and with no principal paid the first two years, you would be repaying a minimum of $37,500 of principal in years three and four and the remaining $175,000 in year five plus capitalized interest.

Here are other differences between PPP and Main Street loans:

  • Interest rates: The Main Street 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 Main Street loans is $250,000. The cap is the lessor 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.
  • Loan forgiving: Main Street loans may not be forgiven, while PPP loans may be forgiven if businesses allot at least 60% of the loan to pay employees’ salary, rent, and qualifying utilities.
  • Repayment terms: Main Street loans repayment term is five years, while the PPP loan term for loans made on or after June 5, 2020, is 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 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 businesses taxes

We know you may have questions about the changing landscape and how it can affect your business. That’s why H&R Block is here for you. Lean on our knowledgeable tax pros to answer your personal and business-related tax questions. Learn more about H&R Block small business services.

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