As another form of emergency funding as a result of the COVID-19 pandemic, the Federal Reserve (Fed)’s $600 billion Main Street Lending Program (MSLP) was released in April to keep credit flowing to small to mid-sized businesses and nonprofits, especially those ineligible to take advantage of Paycheck Protection Program (PPP) funding. Since the MSLP was introduced, there have been new changes and new insights about the program itself. Doeren Mayhew’s dedicated CPAs and advisors explore the updates to the MSLP as well as shed insights on whether it is an ideal loan option.

MSLP Background

Businesses who qualify for MSLP funding will benefit from low-interest rates as well as five-year maturity. Loans can range from $250,000 up to $300 million. Principal payments will be deferred for two years, while interest payments will be deferred for one year. Unlike the PPP, however, there are not any options for loan forgiveness for MSLP funding. Depending on certain lien priority requirements, MSLP loans may be secured or unsecured and the program allows for loans structured as either revolving credits or term loans. The MSLP is made up of five different loan facilities:

  • 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)
  • The Nonprofit Organization Expanded Loan Facility (NOELF)

Under the MSLP, the Fed purchases 95% of a loan from a bank if the loan is intended for businesses with fewer than 15,000 employees or if the business grosses less than $5 billion in annual revenue. Since the program was established in tandem with the Treasury Department (Treasury), if a borrower defaults on an MSLP loan, the Treasury will assist in covering losses with Coronavirus Aid, Relief, and Economic Security (CARES) Act funding. Originally due to expire on Sept. 30, 2020, the loan facilities have been extended to Dec. 31, 2020.

To apply for the loan, borrowers should contact an eligible lender. A list of registered lenders who are currently accepting new borrowers can be found here.

 For-Profit Changes

The MSLP FAQs were updated twice in July to reflect additional details and clarifications pertaining to for-profit businesses. Some of the more significant changes include:

  • Confirmation that when a borrower is acquired or merging into another company, the resulting entity must also comply with the agreements of the borrower’s MSLP loan. This makes acquiring new business partners with loans of this nature quite unappealing.
  • Guidance determining whether an eligible borrower who is a pass-through entity (a partnership or limited liability company) would be in accordance with CARES Act restrictions on capital distributions. For example, stock-based pay may be acceptable, but any distributions made from stock would be considered a prohibited distribution.
  • Guidance pertaining to Employee Stock Ownership Plans (ESOPs), specifically when sharing common stock with a borrower and the resulting CARES Act repercussions.
  • Clarity on the duration in which eligible lenders are required to hold their position in the credit facility underlying an MSELF Upsized Tranche. This is further explained in the updated FAQs, but the requirement pertains to investment purposes, not market-making purposes.
  • Guidance determining MSELF Upsized Tranche eligible lenders can purchase original loans from other lenders.
  • Borrowers may submit MSLP applications with other eligible lenders so long as the borrower alerts each lender they are applying elsewhere.
  • Tribal economic ventures separate from their related tribal governments may be considered an eligible business.

More Trouble Than It’s Worth?

The MSLP took the Fed nearly three months to launch and by the time it was ready, it was already deemed a flop by many. While the loan plan sounds as if it’s a new and promising option for businesses, it’s too large for many small companies, meaning participating banks are finding it difficult to find ideal candidates. If any of the following apply to your business, the MSLP is not the option you’ve been looking for:

  • 2019 was financially hard on your business, meaning it may not be able to support a high loan amount.
  • You’re not comfortable with the salary and/or distribution restrictions updated in the FAQs.
  • Your business cannot service the large debt burden in such a quick repayment window.

If all of the above do not apply to your business, there’s still the challenge of locating a bank willing to offer the funds. Banks still need to go through all the work of the full underwriting process, but they only benefit from holding 10% of the loan. For example, if the loan is $5 million, the bank only will receive interest on $500,000 of it. On top of this, banks are still preoccupied with navigating the aftershocks of PPP loans, particularly managing loan forgiveness requests that are starting to be submitted as well as bringing personnel up to speed with all of these recent changes.

Overall, the MSLP doesn’t seem to be a lifeline for small businesses in these times of economic turmoil, due to its complexity and restrictions. If you’re wondering if an MSLP loan is a plausible option for your business to find financial relief, contact Doeren Mayhew’s CPAs and advisors today for insights.