The latest on loans: Main Street and PPP

May 6, 2020

UPDATE: On April 30 the Federal Reserve Board released new guidance. Please see:
Policy Tools – Main Street Lending Program
Main Street Lending Program FAQs – Effective April 30

In early April the Federal Reserve Board announced their Main Street Lending Program, designed to help small and midsize businesses get the relief they need to survive the current economic conditions as a compliment to other funding options like the SBA programs.

“The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity,” said Federal Reserve Board Chair Jerome H. Powell in the original release. Powell notes that the program was designed to “help ensure that the eventual recovery is as vigorous as possible.”

Based on feedback from the public, the Board recently announced expansions to the program, offering more options to more businesses. Below we update the details originally shared by Matt Garrett, CEO of TGG Accounting who answered questions we had about the Main Street Program after the first announcement.

Last updated: May 6, 2020

UPDATES: Main Street Lending Program

What is the Main Street Lending Program, and what does it offer?

The Main Street Lending Program is a new program from the Federal Reserve Board that offers loans for small and midsize businesses. Loan amounts range from $500,000 to $200 million. Depending on the loan type, they have a risk retention rate of 5-15%, which means for banks that they guaranteed by the federal government.

The Main Street Lending Program operates through three facilities:

Main Street New Loan Facility (MSNLF)
Main Street Priority Loan Facility (MSPLF)
Main Street Expanded Loan Facility (MSELF).

What these loans have in common are the same maturity, interest rate, deferral of principal and interest for one year, and ability for borrowers to prepay without penalty. How they differ is how they interact with existing existing debt, origination fees and the level of guarantee by the federal government.

Who qualifies?

To qualify for a loan, your business must have been established in the U.S. prior to March 13, 2020 and meet eligibility requirements, which includes having either a) less than $5 billion in 2019 revenues or b) less than 15,000 employees. This has been expanded from the original thresholds of 10,000 employees and $2.5 billion in revenue. A separate program is being evaluated for non-profits to meet their unique needs.

What are the loan terms?

The loans come with four-year terms and have an interest rate of LIBOR +3%. No payments are due for the first 12 months, and the amortization of principal and interest is also deferred for one year. Prepayment is permitted without penalty.

Is there a forgiveness provision?

No. Main Street Loans work like traditional commercial loans, and no forgiveness is available.

Where can I apply?

Any U.S. bank can lend you the money, regardless of whether you have an existing banking relationship. Note that there are fees associated with all of the loan types. And based on the guarantee varying, banks may access risk differently between the New Loan where it is 95% guaranteed by the government versus the Priority Loan program where the government guarantees 85%. In either case, banks are going to be competing for your business. You should apply to at least two banks to ensure that you get the best interest rate. (If you need help with your loan application, TGG offers a toolkit you can purchase.)

How much can I borrow?

The amount you can borrow is dependent on which loan, the chart below outlines the loan types and terms.

Main Street Lending Program Loan Options – updated 5/1/20

	MSNLF: New Loans	MSPLF: Priority Loans	MSELF: Expanded Loans
Term	4 years	4 years	4 years
Minimum loan size	$500,000	$500,000	$10,000,000
Maximum loan size	The lesser of $25M or an amount that, when added to outstanding and undrawn available debt, does not exceed 4.0x adjusted 2019 EBITDA	The lesser of $25M or an amount that, when added to outstanding and undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA	The lesser of $200M, 35% of existing outstanding and undrawn available debt, or an amount that, when added to outstanding and undrawn available debt, does not exceed 6.0x adjusted 2019 EBITDA
Risk retention	5%	15%	5%
Payment (year one deferred for all)	Years 2-4: 33.33% each year	Year 2: 15% Year 3: 15% Year 4: 70%	Year 2: 15% Year 3: 15% Year 4: 70%
Rate	LIBOR + 3%	LIBOR + 3%	LIBOR + 3%

Here are a few possible scenarios based on the terms above:

In the New Loan program, if you have no debt today and had at least $125,000 in EBITDA in 2019, you can borrow at $500,000.
In the Priority Loan Program, if you have no debt today and had at least $4.16 million in EBITDA in 2019, you can borrow $25 million.
For larger businesses that have no debt and with $33.3 million of EBITDA in 2019, you can borrow $200 Million.

What can I use the loan for?

You can use the loan to help with any financial hardship caused by COVID-19. Also, you must use the loan to make “reasonable efforts” to maintain payroll and retain your workforce.

What can’t I use the loan for?

You cannot use the loans to refinance or pay off existing debt, including a PPP loan. You also cannot use the loans to pay dividends or distributions to pay yourself, both during the life of the loan and for 12 months after the payoff.

What if I pay distributions to myself as a business owner?

You can pay distributions to make tax payments. There may be workarounds for taking distributions for other purposes. For example, you might be able to put yourself as a CEO on payroll. Talk to a financial advisor to explore your options.

If I get a Main Street Loan, can I also get a loan through the PPP?

Yes. The Federal Reserve Board designed the Main Street Lending Program to support small and midsize businesses that were unable to access the PPP or that require additional financial support after receiving a PPP loan. There are no restrictions, and you may qualify for both. In fact, we recommend that you apply for both and take advantage of the great interest rates.

UPDATES: Payment Protection Program

What are the current guidelines for loan forgiveness?

To qualify for forgiveness, you need to use at least 75% of a PPP loan for payroll costs. In other words, if you received a $100,000 loan, $75,000 of that loan has to go to payroll costs. Payroll costs include wages, benefits, insurance, severance commissions, payroll taxes at the state/local level, etc.

The remaining 25% is eligible for forgiveness if you use it for occupancy costs. Occupancy costs include rent, mortgage interest, utilities and so on. Any portion of the 25% that you do not use on occupancy costs is not forgivable. Note that the CARES Act cites “transportation” as an occupancy cost, but the Small Business Administration (SBA) has not yet defined what that means.

Other details about forgiveness are still unclear. For example, is it OK to pay people more than $100,000 annualized? Can you pay increased benefits? Could you make five payrolls in an eight-week period rather than four? These are all areas that still require clarification from the SBA, which we expect to receive more information in the coming weeks.

Update: Please see the updated guidance in the SBA’s frequently asked questions (FAQ) file it maintains in consultation with Treasury. New guidance is included in FAQs 40–45.

How are these guidelines different from the original guidelines?

At first, the loans limited how much a business could make a reduction in wages or a reduction in headcount. The updated guidance has taken that rule out, so the government is no longer going to try to measure whether you have a reduced workforce. You just have to make sure you spend 75% of the loan on payroll. If you don’t, you have to pay the loan back.

What happens after I’ve applied for a PPP loan?

Typically, when you submit your loan application, you will get a loan number from the bank. After the bank actually applies for the loan with the SBA, you will receive an SBA number. When you are approved for the loan, you will have to sign the SBA approval form. Once you’ve done that, you will be placed in the queue to get paid. It takes anywhere from two to five business days to get paid.

Do I have to use funds from my PPP loan by June 1?

No. You have to use the funds in the eight-week period after you receive them. In other words, the clock starts ticking when the funds are deposited in your bank account.

What else should I know?

When the money from the PPP loan goes into your bank account, it’s like putting a drop of water into a pool. You can’t take the drop back out. So, make sure that you’re accounting for how you’re using the PPP loan, separate from your other spending.

Establish a payroll tracker to track funds and expenses so you can see what forgiveness will potentially look like.

In addition to these two options, there are other funding options from the SBA for small businesses. While they may not have forgiveness components like the PPP, they offer alternatives to help infuse businesses with cash needed to maintain and grow.

The latest on loans: Main Street and PPP

UPDATES: Main Street Lending Program