As Many Small and Midsize Businesses Struggle, Where Are the Main Street Loans?

As small and midsize businesses in the United States struggle to survive the new COVID-19 economic reality, politicians continue to debate when and how they will provide a new round of aid to the lifeblood of the American economy. And while the Paycheck Protection Program is the most well-known and widely used program of the initial round of assistance, at least one critical program has been widely underutilized to date: the Main Street Lending Program.

The MSLP is one of the key economic programs created by Congress as part of the CARES Act. Similar to the PPP, the MSLP is intended to utilize the existing banking system to deliver aid to struggling businesses. Under the program, financial institutions can extend term loans to eligible borrowers and then sell 95% of such loans to the Federal Reserve. Financial institutions are expected to underwrite, service and retain 5% of such loans.

From a borrower’s perspective, the program provides attractive terms, including a low interest rate and favorable repayment terms with payments deferred during the first year, interest-only during the second year and amortization of the principal in years three to five (15%, 15%, 70%). Companies can borrow up to six times their adjusted EBITDA minus any other outstanding debt, depending on the facility type used. The
loans are intended to provide small- and mid-size businesses with an immediate influx of capital and sufficient time to weather the lingering effects of the pandemic.

Although it would seem that the favorable terms would make these loans attractive to borrowers and the 95% Federal Reserve participation would make them attractive to financial institutions, only $3.7 billion of the $600 billion available under the program has
been utilized to date.

So why is this case? There is no simple answer, as several factors are playing into the program’s slow start. To begin with, borrowers were skeptical of the restrictive features of the program (i.e. the strict compensation and distribution restrictions) and many did not qualify given the EBITDA and other requirements. As time passed and the adverse economic environment continued, many corporate clients determined that the benefits of the program outweighed the negatives. The issue, however, has been that many of those corporate clients have struggled to find financial institutions willing to extend them a MSLP loan.

Most financial institutions answered the call at the beginning of the pandemic, helping the government implement an unprecedented aid package via the PPP. Unfortunately, that process was anything but smooth. So when it came time to implement the MSLP, many financial institutions were wary of another constantly changing program. This, coupled with the uncertainty of potential regulatory review and criticism down the road, particularly with respect to the underwriting of the loans, have left many financial institutions on the sidelines. This lack of participation has left many businesses wondering how they can access the program and has left politicians complaining about the lack of assistance to these businesses.

Our law firm advises a variety of financial institution clients with respect to the program, and we can say firsthand that a majority have decided to either pass on the program or participate only selectively. There are, however, a few local financial institutions that are stepping up and using the program to help their small- and mid-size business clients. One such financial institution is our client FirstBank Florida, with whom we have worked to implement the MSLP. “At FirstBank, we believe that it is important to help the businesses in our community make it through this unprecedented time, and the MSLP provides us with another tool to help support these businesses,” noted Mahesh Pattabhiraman, Senior Vice President and Group Head of the Commercial Banking group at FirstBank.

Based on our discussions with bank executives, we recognize that further guidance and revisions to the program would help spur increased participation. Given the lack of use and the fast-approaching end-date of Dec. 31, we suspect that further revisions and guidance are on the horizon. As recently as Oct. 30, the Federal Reserve made several revisions to the program, including lowering the minimum loan amount from $250,000 to $100,000 with the goal of increasing program lending to small businesses. While these changes are helpful, we hope to see an extension of the program end-date and further guidance with respect to the future regulatory treatment of these loans. We believe that with a few key changes, clearer guidance and an end date extension, the MSLP can be transformed from a mere afterthought to a significant government aid program that leads the way in getting our small and mid-size businesses through the next phase of this pandemic.

Asnardo Garro, a partner with the Corporate and Financial Services Practice at Avila Rodriguez Hernandez Mena & Ferri, may be reached at agarro@arhmf.com.