New Main Street Loan May Be Best Option for COVID-19 Financial Relief

By Linsey Lovell and Stevan Pardo

On March 27, 2020 President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act  (CARES Act), which authorized more than $2 trillion in stimulus, largely directed at small businesses and middle- and lower-income Americans. For businesses feeling the adverse effects of COVID-19, the CARES Act was a welcome sign of relief.  The following is a brief summary of two of the programs authorized under the CARES Act.

Among the relief authorized under the CARES Act was the $350 billion Paycheck Protection Program (PPP), designed to provide forgivable loans to small businesses for payroll, rent and utilities for eight weeks. When the initial funding for the PPP was exhausted in a matter of days, Congress rushed to pass a $310 billion second round of PPP funding, which became available on April 27. As of May 8, approximately $125 billion remained of that second round of funding.  Small businesses (those with fewer than 500 employees) affected by COVID-19 are eligible to apply for funding under the PPP, which will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent and utilities. At least 75 percent of the forgiven amount must be used for payroll. Payments on the loan are deferred for six months, and no collateral or personal guarantees are required. PPP loans have a maturity of two years and an interest rate of 1%.

If PPP is not a fit for your business, or if your business has needs that expand beyond what PPP provides, your business may have other options. For example, businesses that receive PPP are still eligible to receive a Main Street Loan. On April 9, the Federal Reserve announced it would purchase up to $600 billion in loans through the Main Street Lending Program, as part of an initiative to provide up to $2.3 trillion in loans to support the economy.  On April 30, the Fed released the criteria for eligibility for the three facilities under the Main Street Lending Program: the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Main Street Expanded Loan Facility.

Main Street Loans are available for for-profit U.S. businesses established before March 13, 2020 with 15,000 employees or fewer or 2019 revenues of $5 billion or less. It should be noted that while the CARES ACT required borrowers to have at least 500 employees, the Federal Reserve’s guidelines do not. These loans are designed to fill a gap for companies that do not access capital markets easily, but do not qualify for small business lending. The minimum loan amount is $500,000, while the maximum is four times EBITDA or six times EBITDA, depending on the chosen facility. While Main Street Loans are not forgivable, the loans have a four-year maturity, and principal and interest payments on the loans are deferred for one year. Unpaid interest will be capitalized. As a condition of the loan, borrowers are required to make commercially reasonable efforts to maintain their payroll and retain employees during the time that the loan is outstanding. More specifically, a borrower “should undertake good-faith efforts to maintain payroll and retain employees in light of its capacities, the economic environment, its available resources and the business’ need for labor.”

The Federal Reserve has not yet set a target start date for the Main Street Lending Program, but potential applicants can monitor the Federal Reserve’s website for updates. Once the program is operational, borrowers will need to apply with an eligible lender. The end date for the Main Street Lending Program is set for September 30, but that date may be extended depending on when the application process begins.

If you have any questions about the PPP, the Main Street Lending Program, or any other provisions in the CARES Act, your eligibility for assistance pursuant to the Act, or how Pardo Jackson Gainsburg, PL can help you navigate the legal impacts of the COVID-19 pandemic, please contact our office at info@nullpardojackson.com or call 305-358-1001.

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