Main Street Lending Program: A lender’s perspective
As we learn more about COVID-19 and its impact on individuals and businesses across the country, it’s clear the novel coronavirus is more than just a health crisis. Unfortunately, the pandemic has also created significant economic disruption for many industries and sectors, impacting organizations that are integral to the economy. Recognizing the challenges small- and medium-sized businesses face obtaining credit in this environment, the Federal Reserve (“Fed”) created the Main Street Lending Program.
What is the Main Street Lending program?
Many small- and medium-sized businesses were financially sound before COVID-19. However, the ongoing pandemic is making it increasingly difficult for some of these organizations to continue operations and meet operating demands. The Main Street Lending Program complements the Paycheck Protection Program (PPP) as another element of the CARES Act, designed to help improve credit flow to these companies. Its aim is to provide a financial safety net while affected businesses learn to navigate and operate in the post-COVID world. However, where PPP loans in many ways resembled a grant, Main Street loans are a true loan, making due diligence a greater factor for lenders.
Available loan options under the program are broad and designed to support varying business needs. Businesses can apply for five-year, floating-rate loans, ranging in size from $250,000 to $3 million. Interest payments are deferred for one year, with a two-year deferral period for principal repayment, providing much-needed flexibility for struggling organizations.
Eligibility for loans under the program, as determined by the Fed, hinges on the business being able to meet one of these conditions:
- No more than 15,000 employees, or
- Revenues in 2019 of $5 billion or less
How does the Main Street Lending program work?
Eligible lenders work with business applicants to determine whether the business meets minimum program requirements and the lender’s underwriting criteria.
As authorized by the Fed’s Board of Governors, the program operates through three facilities: The Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF) and the Main Street Expanded Loan Facility (MSELF). With loans originated using any of these facilities, the Fed purchases a 95% interest in the loan, participating its interest out to a special purpose vehicle (SPV) and the lender retains the remaining 5%.
Borrowers must sign a detailed certification and covenant document required by the Fed, and they must commit to making reasonable efforts to both retain employees and maintain payroll for the term of the loan.
How might lenders expect the program to change over time?
As the pandemic continues, it is possible that the Main Street Lending Program, which was announced on April 9, 2020, will be modified in the future to meet changing needs. In fact, the Fed already revised the program in June, expanding eligibility to more businesses.
Minimum loan size decreased from $500,000 to $250,000 and maximum loan amounts were increased to the lesser of $35 million or an amount that does not exceed four times adjusted EBITDA, when the loan amount is added to the business’s outstanding and available debt. These changes were in addition to more favorable repayment terms for businesses and greater participation by the Fed.
Currently, there is an open proposal to expand the program to small- and medium-sized non-profit organizations, which are excluded from eligibility under the program’s existing structure. If approved, this would create additional opportunities for lenders to serve both for-profit and non-profit organizations in their communities.
How do I apply to be a participating lender?
Lenders wishing to participate in the program must first register online with the Fed. Detailed registration instructions and a link to the registration portal, which is now live, are available on the Information for Lenders page.
When ready to apply, lenders should carefully review the Lender Registration Certifications and Covenants and Lender Wire Instructions to ensure they are willing and able to commit to the requirements set out in those forms. Lenders must also ensure that their loan agreements and other documents for loans participated to the SPV accurately reflect the Program’s Terms and Requirements. Lenders should also be aware that both the institution’s CEO and CFO must provide information during registration. The full registration process may take several days to complete.
Initial and ongoing help is available
For lenders and businesses alike, the Main Street Lending Program offers opportunities during this unprecedented time. The registration process can be complex, but help is available. We provide due diligence services and assistance with filing and lien management as well as maintaining compliance with ongoing program requirements. To learn more, contact us today.