In addition to the Payment Protection Program (PPP) and the Economic Injury Disaster Loan Program, the Federal government through the Federal Reserve has unveiled details about an additional program to assist in getting loans to small and medium-sized businesses. This program, called the Main Street Lending Program (MSLP), was part of the approved funding outlined in the historic CARES Act past in late March and carved out $600 Billion dollars to support American businesses. The final details regarding the program specifics are expected to be announced by the Federal Reserve in the coming days.

Main Street Lending Program Details

The Main Street Lending Program comes at an opportune time when funds to the PPP Facility have been depleted. Unlike PPP, which is a part of the Small Business Association, this new program is being overseen by the Federal Reserve.  This is notable because the Federal Reserve operates in a different capacity compared to the SBA or other government agencies, and the Fed is rarely involved in such direct programs..

Once a business is approved for the MSLP loan through a traditional lender, the program outlines that the Fed will purchase 95% of the loan from the bank, while the direct lender retains 5% of the loan value.  Unlike the PPP loans with a 2 year term, the Main Street Lending loans are set to have up to a 4 year repayment period, with interest rates between 2.5-4%. Based on the current program specifics, the size of the loan for a business will range from $1 million to $25 million, and loan repayment doesn't need to commence for the first year. The Fed has authority under the CARES Act to purchase up to $600 Billion of these MSLP loans.  

Who is Eligible?

While the Payment Protection Program is geared towards, and intended for, small businesses with less than 500 employees, the MSLP was developed at the same time to address the challenges of the current crisis facing small to medium sized businesses. Any businesses with fewer than 10,000 employees, or revenues of less than $2.5 Billion can apply, but the loan is approved by a local bank or lender. As we have seen with the difficulty many businesses faced getting approved for PPP loans, we expect there may be similar challenges with the Main Street Program.

Once a business has been granted a loan, the MSLP outlines several requirements that must be followed to stay in compliance with the loan terms.  

1. The company must do as much as they can to maintain existing payroll and retain workers through the current economic downturn.
2. The program addresses that a business must meet the same restrictions on compensation, stock repurchase, capital distributions and dividends for the term of the loan that apply to all direct loans under the CARES Act.  
3. Funds from a loan in these programs cannot be used to pay for existing debt, or to restructure debt of the business or business owner.
4. Any employee with total compensation greater than $425,000 during the 2019 tax year is not allowed to have a compensation increase above their previous 2019 amount for any 12 month period for the duration of the loan plus an additional year. This means many highly compensated employees could be capped out from receiving any salary or other compensation increase for up to 5 years from the date of the loan.
5. In addition, it appears that any individual who earned more than $3 million in 2019, cannot receive compensation greater than $3 million plus 50% above the amount over the $3 million, in any 12 month period. For example, if someone earned $5 million in 2019, they would only be able to receive $4 million in compensation during any 12 month period of the loan terms—$3 million + 50% of the $2 million amount above $3 million, for a total of $4 million. It is worth noting that an individual should consider consulting their CPA or attorney for their professional advice before applying for one of these programs.

How to Apply

Like the process of applying for a conventional loan, PPP or otherwise, the loans that businesses obtain through the Main Street Lending Program have to go through the approval process of a local bank.  A business in need of a loan will have to apply for the MSLP through their local lender, likely with an existing business relationship.  Lenders are also permitted to use this program to add on to existing loans for clients.  Please contact your local lender to apply.  

As recently as this past weekend (4/19) banking associations and lenders submitted their commentary to the Federal Reserve regarding the Main Street Lending Program.  The Fed sought the feedback of the banking institutions in an attempt to pave the way and quicken the process of getting these loans in the hand of main street businesses. This included the potential for smaller minimum loan sizes under the current $1 million minimum, and potentially extended repayment periods.  The Federal Reserve will review the submissions from the banking institutions and the final details of the program are expected to be released by the Fed in the coming days.

Please feel free to call one of us at Charlesworth & Rugg for any further questions, or for assistance connecting to a local lender.  We have attached a direct link to the Federal Reserve website with some of the program’s current details.

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https://www.federalreserve.gov/monetarypolicy/mainstreetlending.html