June 9, 2020

Main Street Lending Program: Worth a 2nd Look!

The Main Street Lending Program has been largely dismissed by many businesses as the terms of the program were not attractive enough to get them off the sidelines. The FED, however, announced some noteworthy changes to the program yesterday, which include:

  • Minimum loan size has been decreased from $500,000 to $250,000
    • This brings many more businesses into the fold. Even if a small business wanted a $500K loan, they very well may not have qualified for it because of the 4x Adjusted EBITDA limitation
  • Maximum loan size has been increased
    • New loans: max $35M (previously $25M)
    • Priority loans: max $50M (previously $25M)
    • Expanded loans: max $300M (previously $200M)
  • The loan term has been extended from 4 years to 5 years
  • The repayment term has been pushed back to Year 3 though Year 5
    • No payments are due during Year 1. Interest payments begin during Year 2. 15% of principal must be repaid (with interest) during Year 2, another 15% must be repaid during Year 3 and the remaining 70% is due in Year 5.

So, if you originally thought you couldn't qualify for the Main Street Lending Program or that they weren't attractive enough for you, it's time for a second look.

In this second look, you'll need to understand what loan amount you would qualify for. The formula is as follows:

Adjusted EBITDA x4 = Max Loan Amount

Your maximum loan amount will then be reduced by any outstanding or undrawn available debt (think: line of credit), unless that available debt is used to finance receivables or inventory (which many businesses could substantiate).

Example: Company has Adjusted EBITDA of $200K and outstanding debt of $100K. Their max loan amount would be $700K ($200K x 4 = $800K - $100K).

In terms of how you arrive at Adjusted EBITDA, there are no hard and fast rules, but rather the guidance from the Fed states that the bank must use the same criteria it has used for the borrower most recently, and if the borrower is new, the criteria used for similarly situated borrowers. Many banks will look at a 3-year average of your prior 3 tax returns, removing the impacts of capital expenditures (and related depreciation), as well as adding back one-time expenses and the salary of any majority owner. Obviously, the "ITA" (Interest, Taxes, Amortization) of EBITDA will also be added back to the ordinary income of the business as well.

There very well could be additional modifications to the terms of the Main Street Lending Program, which will all depend on the demand for the loans. If demand is low, expect further favorable modifications to the terms. The Fed created this program to put up to $600 Billion in liquidity into the economy, so if the demand is low, there will be incentive to make the loans more attractive to accomplish this objective. Keep abreast on the program details directly from the Fed here.

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