The Federal Reserve launched the Main Street Lending Program several months ago and recently extended the program to Dec. 31. The MSLP, part of the coronavirus relief law known as the CARES Act, offers five-year loans of $250,000 to $300 million. The loan program is aimed at larger small businesses and also middle-market companies with up to $5 billion in annual revenue or fewer than 15,000 employees.
MSLP business loans (there are three types) charge interest rates pegged to the benchmark LIBOR rate, plus an additional 3%. At recent LIBOR rates, interest rates on MSLP lending would be about 3.162%. Payment of principal is deferred the first two years, while payment of interest is deferred the first year. In years three and four, 15% of the principal loan plus interest is due. The remaining 70% plus interest is due in the final year.
This is not a forgivable loan, such as what the Paycheck Protection Program offered small businesses. And it is not for everyone.
HOW IT DIFFERS
With so many companies in South Florida that do business globally, it is important to know the MSLP (because it is financed under the federal CARES Act) is open only to companies organized in the U.S. with the majority of their employees based in the U.S.
That back-loaded repayment creates a complexity for cash flow and will likely require refinancing, says Raju Mohandas, a Florida SBDC at FIU consultant who helps small businesses with cash flow and finance issues. But the MSLP seems designed to give businesses an opportunity to recover, such as a hotel owner in the hardest-hit hospitality industry who would need a couple of years to recover, said Roberto Castellon, an SBDC at FIU consultant who helps small businesses with access to capital.
Although the minimum loan for two of the loan programs is $250,000, most lenders are only willing to write loans of $1 million or more. That’s because of the costs involved, said the consultants, who offer their services to small businesses at no cost through SBDC at FIU.
Here are some more pluses and minuses for the loan program, according to the experts.
Its available during a pandemic. A Main Street loan comes with an attractive rate and could help businesses struggling with pandemic-related financial shortfalls. “They don’t care what you are doing in 2020, they care where you were before COVID. That is the beauty of the Main Street program,” Castellon said. In contrast, the popular 7(a), the 504 and other SBA loans do look at 2020 performance, he said.
The use of funds is wide. Unlike the PPP or EIDL loans, the loans can be used for a wide range of business purposes, including operations, payroll and even refinancing debt. In fact, the way the MSLP is structured, refinancing will be encouraged or required, said Castellon. You could even potentially use it to buy another company, adds Mohandas.
The repayment arrangements is favorable. All three Main Street loan facilities let borrowers defer repayment of the principal for two years and interest payments for one year.
Meeting the requirements will be a hurdle. Several requirements can make a Main Street loan out of reach or untenable for some companies. Borrowers are asked to make reasonable efforts to maintain payroll and retain employees during the loan term. Also, borrowers must abide by restrictions on compensation, stock repurchases and dividends that are listed in the CARES Act. Banks will ask for their own list of requirements as well. Personal guarantees will be required, depending on how the company is collatorized.
The repayment arrangement can be a minus, too. The 70% repayment in the fifth year could kill a business, if the debt is not managed correctly.
Borrowers will be public information. Names of Main Street borrowers and their loan amounts will become public, as they were with the PPP. That may be a concern to some companies.
THE PROGRAM MAY CHANGE
The Fed already has made some improvements since the Main Street loans were first introduced. The minimum loan amount dropped to $250,000, and the loan repayment term extended from four to five years, for example. And just last week, the Fed made it available to eligible nonprofit organizations. The Fed may make more changes in the weeks or months ahead.
Eighteen banks operating in Florida have registered to participate in the MSLP. City National has been one of the most active MSLP lenders in the country out of the gate. The Florida-based community bank funded half of the 118 loans made through the program through Aug. 31. The 59 loans funded by the bank ranged from $644,000 to $10.3 million,, according to data released Sept. 8 by the Federal Reserve.
As always, be sure to consult your lawyer and business advisor about your personal situation and whether it is right for your business. Small businesses can also get assistance from SBDC at FIU, the small business development center within the university’s College of Business.
Brian Van Hook, regional director of Florida SBDC at FIU, said the organization gets many questions about the alphabet soup of relief loans – PPP, EIDL and now MSLP. His team of consultants, including Castellon and Mohandas, can help small businesses navigate the choices and application processes.
“We want to help the small businesses work smarter, not harder, in navigating these programs,” Van Hook said. “We have all the options on the table, every tool in the toolbox, to help you find the best option for you.”
FIND OUT MORE: View a new SBDC at FIU Webinar on the Main Street Lending Program here: