The CARES Act came into effect on March 27, 2020. CARES is a stimulus package worth $2 trillion, intended to provide relief to businesses and individuals hit hard by COVID-19.
To fortify the initiative even further, the Main Street Lending Program was announced on April 9, 2020. This initiative releases $600 billion in funding for loans to small-to-medium-sized businesses with up to 10,000 employees or up to $2.5 billion in annual revenues from 2019. To be eligible under the program, the business must originate in the United States, maintain a majority of its workforce domestically, and do most of its business here. Although the CARES Act initially set out to provide loans for companies with a minimum of 500 employees, the new act states no minimums.
There are two parts to the loan program. The first is a $25 million unsecured facility for new loans initiated on or after April 8, 2020. The second is an extension of up to $150 million for existing loans as of that date.
As of this posting, there has been no indication as to whether SBA affiliation rules apply, whether there will be revenue caps on employee salaries, or how these will be determined.
Companies seeking funding under the act need to start compiling information and making projections as to their needs for the rest of this year. Consideration should be given to the restrictions and whether they will negatively impact any existing funding or operations.
Main Street Lending Program Terms
The terms for both loan programs are as follows:
Four-year loan maturity
All principal and interest payments are deferred for one year
Secured Overnight Finance Rate (SOFR) plus 2.5% to 4%
Minimum loan of $1 million
Maximum loan is the lesser of:
The lesser of (i) $25 million or (ii) a leverage amount no greater than 4x EBITDA for the new facility, and
The lesser of (i) $150 million, (ii) 30% of an existing undrawn amount or (iii) a leverage amount of no greater than 6x EBITDA for the extended facility
Under the program, there is no penalty for prepayment, although companies can expect to pay loan origination, upsizing, servicing, or facility fees.
Main Street Lending Program Differs From SBA Loans
Main Street Lending Program loans are not forgivable, a feature that differs significantly from SBA payroll loans. However, the financing is unsecured, at least concerning the new facility.
Though the payroll protection plan (PPP) and other federally-created lending programs are validated under the CARES Act, there are significant differences. Many aspects of the program are, as yet, unknown.
According to the information contained in the CARES Act and what has been offered by the Federal Reserve about the Main Street Lending Program, these rules are likely to be in force:
Loans will neither be available for repayment or refinancing of existing debt with the lender nor to repay any subordinate debt.
The borrowing party will need to prove that their financing request and needs are because of issues arising from COVID-19 and that they will be used to pay and retain workers.
There are salary caps for executives and certain employees, and businesses will have to comply with those rules, including restrictions on stock repurchases and dividend payments.
Borrowers will need to certify that there are no conflicts of interest with the coronavirus section of the CARES Act, specifically, section 4019(b).
Main Street Lending Program Availability
Based on currently available information, the lending program will be open for applications imminently and will be available to businesses through September 30, 2020.
Lending institutions will still require an application, but with the guidelines only just trickling in, many loans have been delayed as banks struggle to understand the finer points of the terms. The good news is, according to the treasury department, the money is there, and businesses should expect to receive their funding within the next two weeks.
As the program rolls out, we expect more information to be released as the situation evolves. The coming days and weeks will mark a turning point for many businesses. To support you with the most informed and timely guidance, we are following the updates very closely.
Our team is standing by to support our clients in evaluating the options with regard to financing, and to help you figure out what comes next.
To learn more about how we can help during the COVID-19 crisis, reach out to us directly.