Changes by the Federal Reserve Board should draw greater interest to the new $600 billion Main Street Lending Program for small and mid-sized businesses hurt financially by the COVID-19 pandemic.
The Fed lowered the minimum loan size from $500,000 to $250,000, and increased the maximum amount for each of the three lending options in the Main Street Lending Program, extended loan terms from four to five years, and increased from one to two years the time before borrowers have to start making principal payments. The Federal Reserve will also now buy 95 percent of a loan from lenders, and soon plans to establish a lending option for nonprofit organizations.
“In my view, these changes signal the Fed’s sensitivity to the market and should increase the appeal of the program,” said attorney Seth Ashby, a partner in the business and corporate services practice at Varnum LLP in Grand Rapids.
As MiBiz reported this week, Ashby and others doubted whether the Main Street Lending Program would have a wide appeal for both prospective borrowers and lenders as originally structured.
The program offers three varying lending options.
The New Loan Facility allows an eligible business to borrow from $500,000 to $35 million, up from a previous maximum of $25 million. The maximum amount depends on a company’s existing debt. The New Loan Facility is still limited to four times a borrower’s 2019 adjusted EBITDA, according to the Federal Reserve.
Under the program’s Priority Loan Facility, eligible businesses can borrow $500,000 to $50 million, up from an earlier $25 million maximum, with a cap of six times 2019 EBITDA.
In the Expanded Loan Facility, businesses can now borrow $10 million to $300 million, up from the prior maximum of $200 million, with a cap of six times 2019 EBITDA, or 35 percent of existing, undrawn debt.
Mike Tierney, president and CEO of the Community Bankers of Michigan, called lowering the minimum loan amount to $250,000 “a big improvement and will allow many more companies to utilize the program.”
That’s important because changes enacted last week in the U.S. Small Business Administration’s Paycheck Protection Program to extend the loan maturity date to five years could make it “pretty much dead in the water,” according to Tierney.
“No lending institution will now be interested in making PPP loans after June 5 with last week’s changes to the program as the maturity can now go five years, which means you have a five-year loan at 1 percent and you will now have to recognize your SBA PPP loan processing fee income over five years while incurring all of your expenses in 2020,” Tierney wrote in an email to MiBiz. “We are lobbying to get these problems addressed because there is still $130 billion of funds available to help small businesses, but it has now become unlikely any lender will make these loans without changes to the interest rates and fees.”
During a Monday media conference call, SBA regional administrator Rob Scott said he believed changes would trigger a renewed interest and “huge uptick” in demand for PPP loans, as MiBiz reported.
In announcing the changes Monday afternoon in the Main Street Lending Program, the Federal Reserve said it has “extensively sought feedback and revised the Main Street program accordingly” to increase its appeal.
“Supporting small and mid-sized businesses so they are ready to reopen and rehire workers will help foster a broad-based economic recovery,” Federal Reserve Chair Jerome Powell said in a statement. “I am confident the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult period.”
In a statement, American Banking Association CEO Rob Nichols said that by adjusting loans terms for the Main Street Lending Program, “more creditworthy small and mid-sized businesses should be able to access this program and hopefully weather the economic challenges caused by COVID-19. We encourage the Fed to remain flexible as the needs of borrowers and lenders evolve.”