With the possibility of a second wave of coronavirus, many borrowers are running out of their Paycheck Protection Program (PPP) Loan proceeds and finding themselves needing additional funding to bridge the economic gap to get them back to their pre-pandemic status. To assist these borrowers, this article outlines additional funding options.
Additional funding options that are currently available to borrowers include the following:
- Small Business Administration (SBA) Express Loans, 504, and 7a Loans
- Main Street Lending Programs
Conventional lending is the most common option businesses look to for additional funding. Despite the uncertainty created by COVID-19, banks and lending institutions are still providing new conventional loans to borrowers to assist with their business needs for all kinds of uses including operations, payroll, and expansion. Some borrowers find it attractive to refinance existing loans or enter into a line of credit financing facility. However, there are new issues that have been created in conventional lending as a result of COVID-19, such as concerns relating to appraisals on real property collateral being undervalued due to the uncertainties and impact of COVID-19 and government stay at home orders. Additionally, conventional loans typically include higher down payments and some borrowers have experienced damage to their credit as a result of COVID-19 and government stay at home orders, which may impact their availability of receiving favorable loan terms.
SBA loans can be difficult to qualify for and include a slightly longer application process than conventional loans. However, favorable rates, longer loan terms, and lower down payments all make SBA loans desirable options to borrowers when looking for additional funding. Furthermore, there are no financial covenants to deal with. They are traditionally referred to as “you pay, you stay” loans. Additionally, as a result of Section 1112 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress has directed the SBA to use funds to make principal and interest payments, along with associated fees that may be owed on a covered loan, for a period of six months. See SBA Part Three for additional information on this six-month period in which payments are made by the SBA.
SBA Express Loans are an alternative to conventional loans when there is a collateral shortfall. Small businesses can receive loans that a bank would not normally issue because the bank receives a government-guarantee on a portion of the loan. Borrowers can normally be granted up to $350,000 of capital in the form of either a term loan or line of credit; however, under the CARES Act this loan amount has been raised to $1 million. These loans are obtained through a traditional lender authorized to issue SBA loans and have specific guidelines for issuance and some limitations on use.
Acceptable Uses for SBA Express Loan Proceeds:
- Long-term working capital.
- Accounts payable, purchasing inventory, and operational expenses.
- Short-term working capital.
- Seasonal financing, contract performance, construction financing, and/or export.
- Purchasing real estate.
- Purchasing equipment, furniture, machinery, supplies, and materials.
- Construction and/or renovation costs.
- Establishing or acquiring a new business, or expanding an existing business.
- Refinancing existing business debt.
Uses Not Permitted for SBA Express Loan Proceeds:
- Reimbursing an owner for any previous personal investments toward the business.
- Repaying any delinquent withholding taxes.
- Affecting any change or change of business ownership that will not have a positive effect on the business.
- Any purpose not deemed a “sound business purpose,” as determined by the SBA.
SBA Express loans have a term of approximately 10 years (depending on the individual loan) and the SBA guarantees 50 percent of the loan amount to third party lenders, making this option particularly enticing for borrowers who do not meet the lending criteria of conventional financing institutions or who are lacking credit history. Furthermore, as a result of Section 1112 the CARES Act, Congress has directed and provided funds to the SBA to make principal and interest payments, along with associated fees that may be owed on a covered loan, for a period of six months, so long as the loan is funded on or by Sept. 27, 2020. See SBA Part Three for additional information on this six-month period in which payments are made by the SBA.
SBA 504 Loans
SBA 504 loans are long-term commercial real estate financing for owner-occupied properties or borrowers looking to buy land, buildings, or major equipment. Loan terms include only a 10 percent down payment, fixed interest rates, no outside collateral, and a 10-25 year term and funding amounts range from $50,000 to $5.5 million.
SBA 7a Loans
Similarly, a SBA 7a loan is also commercial real estate financing. However, 7a loan proceeds can be used to buy a business or obtain working capital. 7a loans do not have a minimum loan amount and have a maximum loan amount of $5 million. The SBA guarantees 85 percent of the loan if it is less than $150,000 and 75 percent of the loan if it is more than $150,000, limiting guarantees to $3.75 million. Interest rates range from Prime + 2.25 percent to Prime + 4.75 percent depending on the loan size and if the loan is repaid in less or more than seven years.
Main Street Lending Program
The Main Street Lending Program was authorized in April 2020 under Section 13(3) of the Federal Reserve Act, as announced by the U.S. Treasury Department and Federal Reserve Bank. This new lending program has undergone several iterations over the past two months and is now in the phase of registering participating lenders. There are three distinct loan programs within the Main Street Lending Program available for borrowers: (i) Main Street New Loan Facility, (ii) Main Street Expanded Loan Facility, and (iii) Main Street Priority Loan Facility. Each is designed to help small and mid-sized business that were impacted by COVID-19.
Many borrowers might not realize that if they obtained SBA PPP loans, then they are also potentially eligible for the Main Street Lending Program. Taft has assembled a CARES Act Title IV Task Force to assist borrowers in evaluating if this program is a good fit for them.
The following is the general eligibility criteria for participating in any of the facilities offered under the Main Street Lending Program:
- Business established prior to March 13, 2020.
- Not more than 15,000 employees OR not more than $5 billion in 2019 annual revenues.
- Business organized in the U.S. and have significant operations and a majority of its employees in the U.S.
- Must not be an ineligible industry under SBA rules.
- Can only participate in one of the loan facilities offered under the Main Street Lending Program.
- Cannot also participate in the Primary Market Corporate Credit Facility.
- Did not receive a direct loan for the airline and defense industries from U.S. Department of Treasury under the CARES Act.
- Any existing loan with the Main Street lender, as of Dec. 31, 2019, must have had a “pass” rating under Federal Financial Institutions Examinations Council risk rating system as of that date.
See Summary of the Federal Reserve Main Street Lending Program for additional information on all three facilities within the Main Street Lending Program and their eligibility requirements.
Main Street New Loan Facility
The Main Street New Loan Facility offers newly originated term loans with a minimum loan amount of $250,000 and a maximum loan amount of $35 million. Eligible borrowers must have a leverage ratio equal to or less than 4x 2019 (adjusted) EBITDA at the closing of the loan. The loan carries a term of five years with principal payments deferred until the end of the third year of the loan. Loans originated under the Main Street New Loan Facility do not require collateral.
Main Street Expanded Loan Facility
The Main Street Expanded Loan Facility offers a newly originated term loan tranche within an existing revolving or term loan facility. The minimum loan amount is $10 million and the maximum is $300 million. Eligible borrowers must have a leverage ratio equal to or less than 6x 2019 (adjusted) EBITDA at the closing of the loan. The new term loan tranche carries a term of five years with principal payments deferred until the end of the third year of the loan.
Main Street Priority Loan Facility
The Main Street Priority Loan Facility offers newly originated term loans with a minimum loan amount of $250,000 and a maximum loan amount of $50 million. Eligible borrowers must have a leverage ratio equal to or less than 6x 2019 (adjusted) EBITDA at the closing of the loan. Additionally, if the loan is secured, the borrower must have a minimum collateral coverage ratio equal to the lesser of 200 percent or the collateral coverage ratio for all of the borrower’s other secured debt (other than mortgage debt). The loan carries a term of five years with principal payments deferred until the end of the third year of the loan.
The Main Street Priority Loan Facility is the only Main Street Lending Program that permits the refinancing of exiting debt. Accordingly, this loan facility may be a particularly beneficial option for borrowers facing the following circumstances:
- Maturity date of an existing loan is coming up and borrower needs to refinance. Borrowers needing to refinance existing debt due to an upcoming maturity date can utilize the Main Street Priority Loan Facility if they are experience difficulty in obtained suitable refinancing credit elsewhere.
- Current debt service costs are too high given decreased economic performance. The Main Street Priority Loan facility offers an interest rate equal to the one or three month LIBOR rate plus 3 percent, and interest payments are deferred for 12 months. These terms could help borrowers conserve cash flow during the current economic downturn.
- Potential defaults are on the horizon (e.g., large principal payments coming up) and borrower does not anticipate cooperation from its current lender. During this period of economic uncertainty, existing lenders may be less likely to cooperate with respect to anticipated defaults. The Main Street Priority Loan Facility offers a borrower the ability to refinance into a stable term loan that defers interest payments for 12 months and principal payments for nearly three full years.
For further information on any of these options, please contact any member of Taft’s CARES Act Title IV Task Force or SBA Task Force. Our task force team members are able to discuss these different lending options and help determine which option might be best under a borrower’s fact specific circumstances.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus, SBA Loans and Main Street Lending Programs.