What Clients Should Know About the Main Street Lending Program
Small-to-midsized companies in need of capital need to leave no stone unturned. Now that the Federal Reserve Bank (the Fed) is buying Main Street Loans, when should your clients consider applying for loans through the Main Street Lending Program (MSLP)?
Robert Berdanier, director of business restructuring services, BDO USA, co-authored this article.
With each interim financial statement release, accountants gain greater visibility into the COVID-19 impact on corporate balance sheets and the need for credit during a time when otherwise healthy businesses may face prolonged challenges.
So where should your clients look for needed capital? This article takes a deeper look into the MSLP as a viable option.
What is the Main Street Lending Program?
The MSLP was established by the Fed to provide healthy small-to-midsized businesses access to capital during the height of the pandemic, even if lending becomes more constrained through traditional lending sources. The MSLP was designed to support companies with sound financial standing pre-COVID that would otherwise be approved for loans through traditional underwriting.
Main Street loans have attractive features for companies re-capitalizing after emerging from the crisis, including:
1. No principal or interest payments in year 1
2. Interest-only payments in year 2
3. Up to 15 percent of principal repaid at the end of years 3 and 4
4. Principal balance repaid at end of year 5
5. Interest rate to float at 30- or 90-day London Interbank Offered Rate (LIBOR) + 300 basis points
Who Should Apply for the MSLP?
Critics have pointed out that the MSLP is only available to a small subset of businesses. Both size and solvency are critical to approval. Qualifying businesses must have fewer than 15,000 employees or revenues of $5 billion or less.
Unlike the Paycheck Protection Program (PPP), MSLP was not designed to serve distressed companies. In fact, participating lenders must use standard underwriting criteria to evaluate credit worthiness.
At the onset of the crisis, borrowers must have been evaluated in good fiscal health and deemed to remain so at both the inception of the loan as well as ninety days subsequent to origination. For this reason, we think of MSLP as a liquidity program providing an additional source of capital for COVID-impacted businesses.
Companies looking for capital infusions and the accountants that support them should take stock of all lending options. Consider the following:
1. Qualifications: Based on size and solvency, does the entity qualify for traditional bank loans, PPP or MSLP?
2. Covenants and conditions: What are the conditions that come with each of the borrowing alternatives? What are the repayment terms? Will the funds be forgiven? How much cash will be required to service the loan?
3. Use of funds: How does the entity intend to use the proceeds? Are the funds intended for employee retention or other qualifying expenses that would render a PPP loan forgivable?
4. Reputational risk: If Federally-sponsored money is accessed, is there a risk that the business is perceived by stakeholders to be struggling or unscrupulous?
As a matter of good fiscal planning, businesses that qualify for a PPP loan by meeting the Small Business Administration’s size standards, and that intend to use the funds for employee retention, should consider applying for PPP monies ahead of repayable debt since the grants are forgivable.
If the PPP program is not available or additional funding needs exist, an entity may explore alternatives for the source of funding, such as MSLP. While the Main Street Loan terms are borrower-friendly, the loans do come with covenants:
1. Federal Reserve Covenants
- Limitations or restrictions on the following may apply:
- Shareholder/partner distributions
- Equity transactions
- Use of funds
- Bank Covenants
2. Lending Institutions May Impose Additional Covenants
- Minimum EBITDA thresholds
- Fixed charge coverage ratios
- Leverage ratios in addition to those imposed by the program
Preparing for Lender Application
The MSLP application is similar to applying for a traditional commercial lending product. Depending on the lender and the loan size, required documentation may be extensive or minimal at the lending institution’s discretion.
However, the borrower should expect to produce a schedule of COVID fiscal impact, historical financial statements, projected revenue and the use of the proceeds. There is no Federal Reserve requirement that the financial statements be in accordance with U.S. GAAP unless statements are already prepared in that fashion, nor is there any requirement for any level of attestation on the submitted financial statements.
The lender, however, may impose those requirements. Once approved, the borrower should institute a formal loan compliance program that is continuously monitored for the life of the loan plus twelve months to ensure that none of the loan covenants are breached.
Borrowers will be required to submit quarterly financial statements to the lending institution for review, as well covenant compliance certificates. Covenant compliance certificates attest to both federal and lender-mandated covenants.
Four Steps to Reporting Readiness
Many of these mandates are detailed, and they require the borrower to gather records on a contemporaneous basis and subject them to controls for completeness and accuracy. Any time funds or benefits are allocated from the government, it is a best practice to plan for transparency, reporting and oversight.
Organizations should take the following steps for thorough recordkeeping:
1. Document the programs being participated in, including the internal approval and key terms of those programs
2. Develop processes and responsibility for recordkeeping and actions necessary to comply with the requirements under each program
3. Determine ongoing eligibility and compliance requirements that must be tracked and reported
4. Designate a senior leader with the charge to consider business impacts and to assess the conformity of business decisions with program requirements
As organizations document and develop processes, and assign responsibility for recordkeeping, they must ensure executive-level sponsorship and involvement. Given all of the complexity and inherent risk, companies may benefit from leveraging internal or external audit procedures and attestation to validate that the initial application conformed to the program requirements and that all covenants have been adhered to.
Finally, keep in mind that federal programs are under constant review and are subject to change. There is also a possibility that the program will be extended beyond the current September 30, 2020 end date. Accountants should keep apprised of new developments and refer to the Federal Reserve’s Main Street website for the latest program information.
Phillip serves as BDO’s National Managing Partner of Auditing. In this role, he oversees how we perform our public and private company audit and attestation services, including the technical support functions for the Nonprofit, EBP and SOC practice groups. He also chairs BDO’s Assurance Committee, which sets Firm policy governing the delivery...