Is Main Street Lending the new PPP? Your business might benefit from changes
Originally made for midsized businesses, this program widens its reach to fill in the gap in stimulus.
Small businesses can now borrow as little as $100,000 through the Main Street Lending Program and pay reduced fees. It also won’t count Paycheck Protection Program (PPP) debt under $2 million against the maximum loan amount. That’s according to new rules the Federal Reserve announced Friday.
This stimulus has been far less popular than the PPP, thanks to high minimum loan sizes and less-flexible repayment terms. But with no new stimulus bill on the horizon, the Federal Reserve has moved to make these funds available to smaller businesses that have run out of PPP funding.
Who should pay attention
The flexible terms of the Main Street Lending Program makes it best for businesses that have been affected by the outbreak but are not in industries that are bearing the brunt of state shutdowns. Repayments are low enough to give cushion for the current economic uncertainty, and it offers fully-deferred repayments for one year. But the cost could potentially be higher than a PPP, especially at the end of the term.
So a restaurant that’s barely able to pay its bills might not get much from this loan program. But an online retailer that’s seen a spike in sales might want to take advantage of this program. There are no prepayment penalties, so business owners who are doing well can pay it off early to save on interest.
How the new and improved Main Street Lending Program works
The Main Street Lending Program was created with the CARES Act as a source of low-cost stimulus financing for small and midsized businesses — including nonprofits. Businesses can apply to take out a new loan or refinance and increase the size of an existing loan.
It offers loans starting at $100,000 — down from $250,000 before Friday. The Federal Reserve The Federal Reserve caps loans based on your earnings in 2019, so the limit can vary.
The Main Street Lending Program subtracts outstanding debt to your earnings before interest, taxes, depreciation and amortization, commonly known as EBITDA, when calculating your maximum loan amount. But as of Friday, it doesn’t count PPP loans under $2 million against the maximum your business can borrow.
Rates and fees
And unlike other federal assistance programs, the interest rate is variable, set at the LIBOR rate plus 3%. This means that businesses will pay more in interest as the international economy recovers.
Businesses also pay an origination fee of 1% loans over $250,000 and 2% on loans under that amount.
Businesses have five years to pay it back, and it’s a little less flexible than the PPP. Instead, it’s designed to be repaid in full as the economy recovers.
This program defers principal payments for two years and interest payments for one. But deferred interest gets added to the loan balance, so making interest-only payments at first will make your loan less expensive. It also offers reduced repayments for the first four years. Businesses can pay or refinance the remaining 70% balloon payment left at the end of the term.
What businesses qualify
Main Street Lending Program requirements are a little more relaxed than the PPP. To qualify, your business must meet the following criteria at a minimum.
- Established before March 13, 2020
- Either has no more than 150,000 employees or an annual revenue of $5 billion or less in 2019
- Established and primarily operates in the US, with most employees based in the US
- Didn’t receive CARES Act assistance outside of the PPP or Economic Injury Disaster Loan (EIDL) program
- Not already receiving pandemic assistance through other Federal Reserve programs
Both for-profit and nonprofit businesses can apply. But they must meet the industry requirements for a PPP loan.
How to apply
These loans are available through participating lenders, mostly national and regional banks. You can find a lender by searching on the Federal Reserve Bank of Boston website.
If you have a banking relationship with a lender, it might speed up your application. But since it’s not as competitive as the PPP, you might not have as much trouble getting approved at a large national bank as other small businesses did in April.
Main Street Lending not for you? Consider these alternatives
Main Street Lending isn’t a one-for-one substitute for the PPP. If your business has been forced to shut down, taking on debt can worsen the financial situation.
Local governments and private organizations have been offering small business grants on a rolling basis. You can usually find out what’s available through local business organizations — and even some lenders.
Even if your business is doing well, the Main Street Lending Program might not be able to get you the funds you need in time. For loans under $100,000 and financing that you’d rather have sooner than later, an online lender might offer a more favorable solution.
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